Test bank managerial accounting by kieso weygandt 5e ch13

CHAPTER 13 STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT 6 6 2 C C K C K K K K 103 104 105 106 107 108 109 110 111 112 113 114 115 a 116 a 117 a 118 a 119 a 120 a 121 a 122 a 123 a 124 3,6 3,6 3,6 3,6 3,6 3,6 3,6 3,6 3,6 4 5 6 6 6 K AP C C C C C C C C K C AP C C C C K AP AP AP AP 152 153 AP AP Item SO BT K C K K True-False Statements 1 1 1 K K K K K C C K 10 11 12 13 14 15 16 2 2 2 2 K K C C C C C C 17 18 19 20 21 22 23 24 3 3 4 C C C C C C K K a 25 26 a 27 a 28 a 29 a 30 sg 31 sg 32 a sg 33 34 a,sg 35 a,sg 36 sg Multiple Choice Questions 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 1 1 1 1 1 2 2 2 2 2 2 K K C C C K K C K K K C K C C C C C K C K C 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 2 2 2 2 2 3 3 3 3 3 C C K K K K AP AP AP AP AP AP AP AP AP AP AP K K AP K C 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 3 3 3 3 3 3 3 3 3 3 3 C C C C AP AP K C C K K C C C C C C C C AP C C a 125 126 a 127 a 128 a 129 a 130 a 131 a 132 a 133 a 134 a 135 sg 136 sg 137 st 138 sg 139 sg 140 sg 141 sg 142 3,6 a,sg 143 a,sg 144 a.sg 145 a AP AP AP C AP AP C AP AP AP AP K K K K C K AP AP AP K Brief Exercises 146 147 sg st a C AP 148 149 3 AP AP 150 151 3 K K This question also appears in the Study Guide This question also appears in a self-test at the student companion website This topic is dealt with in an Appendix to the chapter a a 154 155 6 AP AP 13 - Test Bank for ISV Managerial Accounting, Fourth Edition SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 156 157 158 159 160 2 2 C C C AP AP 161 162 163 164 165 3 3,4 3 AP C AP AP AP 166 167 a 168 a 169 a 170 6 AP AP AP AP AP a 171 172 a 173 a 174 a 175 a 6 6 AP AP AP AP AP a 6 K AN K a 176 AP 189 K Completion Statements 177 178 179 2 K K K 180 181 182 3 K K K 183 184 a 185 K K K a 186 187 a 188 a SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type TF TF TF TF TF TF 10 11 12 13 14 TF TF TF TF TF TF TF 15 16 17 31 32 33 47 TF TF TF TF TF TF MC 18 19 20 21 22 34 70 71 72 73 TF TF TF TF TF TF MC MC MC MC 74 75 76 77 78 79 80 81 82 83 MC MC MC MC MC MC MC MC MC MC 23 24 TF TF 113 114 MC MC a 25 35 a TF TF a 116 117 a MC MC Item Type Item Type Item Study Objective TF 39 MC 42 37 MC 40 MC 43 38 MC 41 MC 44 Study Objective 48 MC 55 MC 62 49 MC 56 MC 63 50 MC 57 MC 64 51 MC 58 MC 65 52 MC 59 MC 66 53 MC 60 MC 67 54 MC 61 MC 68 Study Objective 84 MC 94 MC 104 85 MC 95 MC 105 86 MC 96 MC 106 87 MC 97 MC 107 88 MC 98 MC 108 89 MC 99 MC 109 90 MC 100 MC 110 91 MC 101 MC 111 92 MC 102 MC 112 93 MC 103 MC 141 Study Objective 115 MC 163 Ex 184 153 BE 167 Ex Study Objective a5 a 118 MC a168 Ex a 145 MC Type Item Type Item Type MC MC MC 45 46 MC MC MC MC MC MC MC MC MC 69 136 137 138 139 140 146 MC MC MC MC MC MC BE 156 157 158 159 177 178 Ex Ex Ex Ex C C MC MC MC MC MC MC MC MC MC MC 142 147 148 149 150 151 152 160 161 162 MC BE BE BE BE BE BE Ex Ex Ex 163 164 165 166 179 180 181 182 183 Ex Ex Ex Ex C C C C C C Statement of Cash Flows a a a a 26 TF 27 TF a 28 TF a 29 TF a 30 TF a 36 TF a 104 MC 105 106 a 107 a 108 a 109 a 110 a 111 MC MC MC MC MC MC MC a 112 119 a 120 a 121 a 122 a 123 a 124 a Note: TF = True-False MC = Multiple Choice Study Objective a6 MC a125 MC a132 MC a126 MC a133 MC a127 MC a134 MC a128 MC a135 MC a129 MC a143 MC a130 MC a144 MC a131 MC a154 MC MC MC MC MC MC BE BE = Brief Exercise Ex = Exercise a 155 169 a 170 a 171 a 172 a 173 a 174 a BE Ex Ex Ex Ex Ex Ex a 175 176 a 185 a 186 a 187 a 188 a 189 a 13 - Ex Ex C C C C C C = Completion The chapter also contains two sets of ten Matching questions and five Short-Answer Essay questions CHAPTER STUDY OBJECTIVES Indicate the usefulness of the statement of cash flows The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period Distinguish among operating, investing, and financing activities Operating activities include the cash effects of transactions that enter into the determination of net income Investing activities involve cash flows resulting from changes in investments and long-term asset items Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items Prepare a statement of cash flows using the indirect method The preparation of a statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree Analyze the statement of cash flows The statement of cash flows can be used for cashbased ratio analysis Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of additional dividends or for expansion It is calculated as cash from operations less capital expenditures and cash dividends a Explain how to use a worksheet to prepare the statement of cash flows using the indirect method When there are numerous adjustments, a worksheet can be a helpful tool in preparing the statement of cash flows Key guidelines for using a worksheet are (1) List accounts with debit balances separately from those with credit balances (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits (3) Do not enter reconciling items in any journal or account, but use them only to help prepare the statement of cash flows 13 - Test Bank for ISV Managerial Accounting, Fourth Edition The steps in preparing the worksheet are (1) Enter beginning and ending balances of balance sheet accounts (2) Enter debits and credits in reconciling columns (3) Enter the increase or decrease in cash in two places as a balancing amount a Prepare a statement of cash flows using the direct method The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities TRUE-FALSE STATEMENTS The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions A statement of cash flows indicates the sources and uses of cash during a period In preparing a statement of cash flows, cash equivalents are subtracted from cash in order to compute the net change in cash during a period Cash equivalents are highly-liquid investments that have maturities of less than three months The use of cash to purchase highly liquid short-term investments (cash equivalents) would be reported on the statement of cash flows as an investing activity In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt Noncash investing and financing activities must be reported in the body of a statement of cash flows 10 The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities 11 The sale of land for cash would be classified as a cash inflow from an investing activity 12 Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income 13 The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities Statement of Cash Flows 13 - 14 The payment of interest on bonds payable is classified as a cash outflow from operating activities 15 Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities 16 The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash 17 All major financing and investing activities affect cash 18 Cash provided by operations is generally equal to operating income 19 Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations 20 Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations 21 A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method 22 In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity 23 Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations 24 Free cash flow equals cash provided by operations less capital expenditures and cash dividends a 25 The use of a worksheet to prepare a statement of cash flows is optional a 26 During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $3,000; therefore, the cash paid for income taxes was $27,000 a 27 In preparing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis a 28 Using the direct method, major classes of investing and financing activities are listed in the operating activities section a 29 During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers a 30 Operating expenses + an increase in prepaid expenses – a decrease in accrued expenses payable = cash payments for operating expenses 13 - Test Bank for ISV Managerial Accounting, Fourth Edition Additional True-False Questions 31 The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities 32 Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed 33 The adjusted trial balance is the only item needed to prepare the Statement of Cash Flows 34 Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash a 35 The reconciling entry for depreciation expense in a worksheet is a credit to Accumulated Depreciation and a debit to Operating-Depreciation Expense a 36 Under the direct method, the formula for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable Answers to True-False Statements Item Ans T F F T F T Item 10 11 12 Ans F T F F T F Item 13 14 15 16 17 18 Ans F T F T F F Item 19 20 21 22 23 24 Ans T F T F T T Item a 25 a 26 a 27 a 28 a 29 a 30 Ans Item Ans T T T F F F 31 32 33 34 a 35 a 36 F T F F T F MULTIPLE CHOICE QUESTIONS 37 The statement of cash flows should help investors and creditors assess each of the following except the a entity's ability to generate future income b entity's ability to pay dividends c reasons for the difference between net income and net cash provided by operating activities d cash investing and financing transactions during the period 38 The statement of cash flows a must be prepared on a daily basis b summarizes the operating, financing, and investing activities of an entity c is another name for the income statement d is a special section of the income statement Statement of Cash Flows 13 - 39 Which one of the following items is not generally used in preparing a statement of cash flows? a Adjusted trial balance b Comparative balance sheets c Current income statement d Additional information 40 The primary purpose of the statement of cash flows is to a provide information about the investing and financing activities during a period b prove that revenues exceed expenses if there is a net income c provide information about the cash receipts and cash payments during a period d facilitate banking relationships 41 If a company reports a net loss, it a may still have a net increase in cash b will not be able to pay cash dividends c will not be able to get a loan d will not be able to make capital expenditures 42 In addition to the three basic financial statements, which of the following is also a required financial statement? a the "Cash Budget" b the Statement of Cash Flows c the Statement of Cash Inflows and Outflows d the "Cash Reconciliation" 43 The statement of cash flows will not report the a amount of checks outstanding at the end of the period b sources of cash in the current period c uses of cash in the current period d change in the cash balance for the current period 44 Cash equivalents not include a short-term corporate notes b treasury bills c money market funds d 2-year certificates of deposit 45 Which of the following characteristics does not apply to cash equivalents? a Short-term b Highly-liquid c Readily convertible into cash d Sensitive to interest rate changes 46 Cash equivalents are generally investments with maturities of a $1,000 or more b three months or less c at least six months d one year or the operating cycle, whichever is less 13 - Test Bank for ISV Managerial Accounting, Fourth Edition 47 The best measure of a company's ability to generate sufficient cash to continue as a going concern is net cash provided by a financing activities b investing activities c operating activities d processing activities 48 The acquisition of land by issuing common stock is a a noncash transaction which is not reported in the body of a statement of cash flows b a cash transaction and would be reported in the body of a statement of cash flows c a noncash transaction and would be reported in the body of a statement of cash flows d only reported if the statement of cash flows is prepared using the direct method 49 The order of presentation of activities on the statement of cash flows is a operating, investing, and financing b operating, financing, and investing c financing, operating, and investing d financing, investing, and operating 50 Financing activities involve a lending money b acquiring investments c issuing debt d acquiring long-lived assets 51 Investing activities include a collecting cash on loans made b obtaining cash from creditors c obtaining capital from owners d repaying money previously borrowed 52 Generally, the most important category on the statement of cash flows is cash flows from a operating activities b investing activities c financing activities d significant noncash activities 53 The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a cash flows from operating activities b cash flows from investing activities c cash flows from financing activities d usually different from year to year 54 Cash receipts from interest and dividends are classified as a financing activities b investing activities c operating activities d either financing or investing activities Statement of Cash Flows 13 - 55 Each of the following is an example of a significant noncash activity except a conversion of bonds into common stock b exchanges of plant assets c issuance of debt to purchase assets d stock dividends 56 If a company has both an inflow and outflow of cash related to property, plant, and equipment, the a two cash effects can be netted and presented as one item in the investing activities section b cash inflow and cash outflow should be reported separately in the investing activities section c two cash effects can be netted and presented as one item in the financing activities section d cash inflow and cash outflow should be reported separately in the financing activities section 57 Of the items below, the one that appears first on the statement of cash flows is a noncash investing and financing activities b net increase (decrease) in cash c cash at the end of the period d cash at the beginning of the period 58 Which of the following transactions does not affect cash during a period? a Write-off of an uncollectible account b Collection of an accounts receivable c Sale of treasury stock d Exercise of the call option on bonds payable 59 Significant noncash transactions would not include a conversion of bonds into common stock b asset acquisition through bond issuance c treasury stock acquisition d exchange of plant assets 60 In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in a the financing section b the "extraordinary" section c a separate schedule or note to the financial statements d the stockholders' equity section Use the following information for questions 61–64 For each of the following transactions, indicate where, if at all, it would be classified on the statement of cash flows Assume the indirect method is used 61 Decrease in income taxes payable a Operating activities section b Investing activities section c Financing activities section d Does not represent a cash flow 13 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition 62 Issued common stock for cash a Operating activities section b Investing activities section c Financing activities section d Does not represent a cash flow 63 Purchased land for cash a Operating activities section b Investing activities section c Financing activities section d Does not represent a cash flow 64 Purchased land and building with a mortgage a Operating activities section b Investing activities section c Financing activities section d Does not represent a cash flow Use the following information for questions 65–66 Joy Elle’s Vegetable Market had the following transactions during 2008: Issued $25,000 of par value common stock for cash Repaid a year note payable in the amount of $11,000 Acquired land by issuing common stock of par value $50,000 Declared and paid a cash dividend of $1,000 Sold a long-term investment (cost $3,000) for cash of $3,000 Acquired an investment in IBM stock for cash of $6,000 65 What is the net cash provided by financing activities? a $13,000 b $25,000 c $14,000 d $9,000 66 What is the net cash provided by investing activities? a $6,000 b $16,000 c ($3,000) d $3,000 67 Miller Company purchased treasury stock with a cost of $15,000 during 2008 During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $816,000 Cash flows from financing activities for 2008 total a $796,000 net cash inflow b $811,000 net cash inflow c $5,000 net cash outflow d $781,000 net cash inflow Statement of Cash Flows a Solution 168 (cont.) Statement of Cash Flows Effects Operating activities Net income Depreciation expense Loss on sale of land Increase in accounts receivable Increase in inventory Decrease in accounts payable Investing activities Sale of land Purchase of equipment Financing activities Issuance of common stock Retirement of bonds Payment of dividend (a) 26,000 (f) 14,000 (g) 5,000 (c) 18,000 (d) 20,000 (e) 3,000 (g) 55,000 (h) 14,000 (j) 10,000 220,000 Increase in cash 220,000 a 13 - 39 (i) 15,000 (b) 15,000 195,000 (k) 25,000 220,000 Ex 169 Dolan Company's income statement showed revenues of $250,000 and operating expenses of $160,000 Accounts receivable decreased by $60,000 and accounts payable increased by $40,000 during the year Instructions Compute (a) cash receipts from customers and (b) cash payments for operating expenses using the direct method a Solution 169 (5 min.) (a) Cash receipts from customers = $310,000 ($250,000 + $60,000) (b) Cash payments for operating expenses = $120,000 ($160,000 – $40,000) a Ex 170 Banner Company had total operating expenses of $140,000 in 2008, which included Depreciation Expense of $20,000 Also, during 2008, prepaid expenses increased by $5,000 and accrued expenses decreased by $6,700 Instructions Calculate the amount of cash payments for operating expenses in 2008 using the direct method 13 - 40 Test Bank for ISV Managerial Accounting, Fourth Edition a Solution 170 (5-8 min.) Operating expenses Less: Noncash depreciation expense Add: Increase in prepaid expenses Add: Decrease in accrued liabilities Cash payments for operating expenses a $140,000 (20,000) 5,000 6,700 $131,700 Ex 171 The general ledger of Lopez Company provides the following information: Accounts Receivable Inventory Accounts Payable End of Year $ 55,000 350,000 40,000 Beginning of Year $ 94,000 210,000 65,000 The company's net sales for the year was $2,100,000 and cost of goods sold amounted to $1,500,000 Instructions Compute the following: (a) Cash receipts from customers (b) Cash payments to suppliers a Solution 171 (8-12 min.) (a) Cash receipts from customers Sales + Decrease in Accounts Receivable $2,100,000 + $39,000 = $2,139,000 (b) Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending inventory Cost of goods sold $ 210,000 ? ? 350,000 $1,500,000 $210,000 + Purchases – $350,000 = $1,500,000 Purchases = $1,640,000 Amount of cash payments to suppliers = Purchases + Decrease in accounts payable = $1,640,000 + $25,000 = $1,665,000 Statement of Cash Flows a 13 - 41 Ex 172 The income statement of Redman Inc for the year ended December 31, 2008, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income $600,000 360,000 240,000 60,000 $180,000 Redman's balance sheet contained the following comparative data at December 31: 2008 $50,000 35,000 6,000 Accounts receivable Accounts payable Income taxes payable 2007 $40,000 50,000 3,000 Redman has no depreciable assets Accounts payable pertains to operating expenses Instructions Prepare the operating activities section of the statement of cash flows using the direct method a Solution 172 (9-14 min.) REDMAN INC Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Cash receipts from customers ($600,000 – $10,000) Cash payments: For operating expenses ($360,000 + $15,000) For income taxes ($60,000 – $3,000) Net cash provided by operating activities a $590,000 $375,000 57,000 432,000 $158,000 Ex 173 The income statement of Haslett Company is shown below: HASLETT COMPANY Income Statement For the Year Ended December 31, 2008 Sales Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expense Depreciation expense Amortization expense Net income $8,000,000 5,400,000 2,600,000 $500,000 700,000 90,000 30,000 1,320,000 $1,280,000 13 - 42 Test Bank for ISV Managerial Accounting, Fourth Edition a Ex 173 (cont.) Additional information: Accounts receivable increased $500,000 during the year Inventory increased $250,000 during the year Prepaid expenses increased $200,000 during the year Accounts payable to merchandise suppliers increased $150,000 during the year Accrued expenses payable increased $180,000 during the year Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2008, for Haslett Company, using the direct method a Solution 173 (15-20 min.) HASLETT COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash provided by operations $7,500,000 (1) $5,500,000 (2) 1,220,000 (3) (1) Sales Deduct: Increase in accounts receivable Cash receipts from customers $8,000,000 500,000 $7,500,000 (2) Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers $5,400,000 250,000 5,650,000 150,000 $5,500,000 (3) Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses $1,200,000 200,000 (180,000) $1,220,000 6,720,000 $ 780,000 Statement of Cash Flows a 13 - 43 Ex 174 The financial statements of Larkin Company appear below: LARKIN COMPANY Comparative Balance Sheet December 31 2008 2007 $ 43,000 26,000 25,000 50,000 (20,000) $124,000 $ 23,000 34,000 15,000 78,000 (24,000) $126,000 $ 17,000 13,000 7,000 41,000 46,000 $124,000 $ 23,000 8,000 33,000 24,000 38,000 $126,000 Assets Cash Accounts receivable Merchandise inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total LARKIN COMPANY Income Statement For the Year Ended December 31, 2008 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income $360,000 280,000 80,000 $20,000 16,000 36,000 44,000 4,000 40,000 12,000 $ 28,000 The following additional data were provided: Dividends declared and paid were $20,000 During the year, equipment was sold for $12,000 cash This equipment cost $28,000 originally and had a book value of $12,000 at the time of sale All depreciation expense is in the selling expense category All sales and purchases are on account Accounts payable pertain to merchandise suppliers All operating expenses except for depreciation were paid in cash Instructions Prepare a statement of cash flows for Larkin Company using the direct method 13 - 44 Test Bank for ISV Managerial Accounting, Fourth Edition a Solution 174 (22-28 min.) LARKIN COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Cash receipts from customers ($360,000 + $8,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes ($12,000 – $5,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Net cash provided by investing activities Cash flows from financing activities Redemption of bonds payable Issuance of common stock Payment of cash dividend Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period (1) Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers (2) Operating expenses Less: Depreciation expense Cash payments for operating expenses $368,000 $296,000 (1) 24,000 (2) 4,000 7,000 331,000 37,000 12,000 12,000 (26,000) 17,000 (20,000) (29,000) 20,000 23,000 $ 43,000 $280,000 10,000 290,000 6,000 $296,000 $36,000 (12,000)* $24,000 *$24,000 – $16,000 = $8,000 balance in accumulated depreciation after sale Ending balance, $20,000 – $8,000 = $12,000 depreciation expense Statement of Cash Flows 13 - 45 + Ex 175 Condensed financial data of Stiner Company appear below: STINER COMPANY Comparative Balance Sheet December 31 2008 2007 $ 71,000 85,000 120,000 19,000 90,000 315,000 (65,000) $635,000 $ 35,000 53,000 132,000 25,000 75,000 250,000 (60,000) $510,000 $ 93,000 29,000 130,000 245,000 138,000 $635,000 $ 75,000 24,000 160,000 170,000 81,000 $510,000 Assets Cash Accounts receivable Inventories Prepaid expenses Investments Plant assets Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total STINER COMPANY Income Statement For the Year Ended December 31, 2008 Sales Less: Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Income taxes Interest expense Loss on sale of plant assets Net income $470,000 $280,000 60,000 17,000 15,000 18,000 3,000 393,000 $ 77,000 Additional information: New plant assets costing $90,000 were purchased for cash in 2008 Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000 Bonds with a face value of $30,000 were converted into $30,000 of common stock A cash dividend of $20,000 was declared and paid during the year Accounts payable pertain to merchandise purchases Instructions Prepare a statement of cash flows for the year using the direct method 13 - 46 Test Bank for ISV Managerial Accounting, Fourth Edition a Solution 175 (25–30 min.) STINER COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Cash receipts from customers ($470,000 – $32,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period $438,000 $250,000 (1) 49,000 (2) 15,000 18,000 (15,000) (90,000) 10,000 (95,000) 45,000 (20,000) 25,000 36,000 35,000 $ 71,000 Noncash investing and financing activities Conversion of bonds payable into common stock a (1) Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers (2) Operating expenses Deduct: Decrease in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses 332,000 106,000 $ 30,000 $280,000 (12,000) 268,000 (18,000) $250,000 $60,000 (6,000) (5,000) $49,000 Ex 176 The income statement for Javier Company showed cost of goods sold of $95,000 and operating expenses of $50,000 The comparative balance sheets for the year show that inventory decreased $3,000, prepaid expenses increased $7,000, accounts payable increased $4,000, and accrued expenses payable decreased $5,000 Instructions Compute (a) cash payments to suppliers and (b) cash payments for operating expenses using the direct method Statement of Cash Flows a Solution 176 (5 min.) (a) Cash payments to suppliers = $88,000 ($95,000 – $3,000 – $4,000) (b) Cash payments for operating expenses = $62,000 ($50,000 + $7,000 + $5,000) 13 - 47 13 - 48 Test Bank for ISV Managerial Accounting, Fourth Edition COMPLETION STATEMENTS 177 A statement of cash flows summarizes the operating, , and _ activities of an entity 178 The cash effects of selling goods and services appears in the activities section of a statement of cash flows 179 The operating activities section of the statement of cash flows may be prepared using the method or the method 180 Net income from operations is generally not the same as cash provided from operations because revenues and expenses are recognized in the income statement on the basis 181 Using the indirect approach, noncash charges in the income statement are to net income and noncash credits are to compute cash provided by operations 182 If accounts receivable increase during a period, revenues on an accrual basis are than revenues on a cash basis 183 The sale of equipment at less than its book value is a(n) of cash that is reported in the activities section 184 Free _ equals cash provided by operations less capital expenditures and cash dividends a 185 Under the direct method, noncash charges, such as depreciation, are _ in the statement of cash flows a 186 Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash and cash _ a 187 Cost of goods sold for the year amounted to $150,000, and during the year, accounts payable by $8,000 and inventory by $7,000 resulting in cash paid to suppliers of $135,000 a 188 In computing cash payments for operating expenses, a decrease in prepaid expenses is and an increase in accrued expenses payable is to (from) operating expenses, exclusive of depreciation a 189 In computing cash payments for income taxes, a decrease in income taxes payable is to (from) income tax expense Answers to Completion Statements 177 178 179 180 181 182 183 investing, financing operating indirect, direct (or vice versa) accrual added, deducted higher (greater) inflow, investing 184 185 a 186 a 187 a 188 a 189 a cash flow not reported receipts from customers, payments to suppliers increased, decreased deducted, deducted added Statement of Cash Flows 13 - 49 MATCHING Set — Indirect Method 190 For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method A B C D E F G Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Decrease in accounts payable during a period Declaration and payment of a cash dividend Loss on sale of land Decrease in accounts receivable during a period Redemption of bonds for cash Proceeds from sale of equipment at book value Issuance of common stock for cash Purchase of a building for cash Acquisition of land in exchange for common stock 10 Increase in merchandise inventory during a period Answers to Matching B E A A E 10 D F C G B 13 - 50 Test Bank for ISV Managerial Accounting, Fourth Edition Set — Direct Method a 191 For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method A B C D E F G H I J Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown Decrease in accounts payable during a period Declaration and payment of a cash dividend Decrease in accounts receivable during a period Depreciation expense Conversion of bonds payable into common stock Decrease in merchandise inventory during a period Sale of equipment for cash at book value Issuance of preferred stock for cash Purchase of land for cash 10 Loss on sale of a plant asset Answers to Matching C G A J I 10 D F H E J Statement of Cash Flows 13 - 51 SHORT-ANSWER ESSAY QUESTIONS S-A E 192 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows Solution 192 The information used to prepare the statement of cash flows usually comes from three sources These sources are (1) a comparative balance sheet, (2) current income statement, and (3) additional information The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses which have not yet been paid for in cash These noncash revenues and noncash expenses not affect the cash balance Therefore, the noncash revenues and noncash expenses must be eliminated to determine the net cash provided by operating activities S-A E 193 Cash flows from operating activities can be calculated using the indirect or direct method Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities Solution 193 The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by operating activities There are two types of adjustments: (1) changes in current assets and current liabilities and (2) noncash charges and credits For example, an increase in accounts receivable is deducted from net income and an increase in accounts payable is added to net income Similarly, a noncash charge for depreciation expense is added to net income The adjustments are the difference between net income and the net cash provided by operating activities Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis Within the operating activities section, only major classes of operating cash receipts and cash payments are reported The classes include cash receipts from customers and cash payments to suppliers The difference between these major classes is the net cash provided by operating activities S-A E 194 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? 13 - 52 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 194 A net loss means that accrual-based expenses exceeded accrual-based revenues for the period However, if you eliminate the effect of (add back) such noncash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss S-A E 195 (Ethics) Flint Hills Company's most recent financial statements showed dismal performance There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories The company president called all the managers together and asked them to all they could to make sure the next quarter's performance was better Mel Law, manager of the manufacturing division, sold off old manufacturing equipment He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack This saved the company money, since part-time workers not have the same insurance and other benefits as full-time workers John Reed, financial manager, immediately suspended payments on all accounts except those on which interest would accrue He also instituted aggressive collection procedures Required: Were Mel Law's actions ethical? Explain Were John Reed's actions ethical? Explain Were the company president's actions ethical? Explain Solution 195 There is a valid question as to whether Mel Law's actions are ethical or not Either answer could be considered correct On the one hand, he was probably within his legal rights to reclassify the workers He also might be commended for allowing more workers to have a job than was previously the case On the other hand, however, he has removed a very real benefit from the former full-time workers, and he has done it fairly arbitrarily He may have harmed morale, and harmed the company if the workers quit and new workers have to be hired John Reed's actions all appear to be ethical The company president may have placed undue pressure on the employees to show better results The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits S-A E 196 (Communication) You are the accountant for a small manufacturing firm Your company is privately held, so there is no current requirement to issue financial statements using GAAP You were hired four years ago, and at that time you instituted a cash budgeting system Presently, you present a schedule of predicted cash sources and cash needs at the end of each week for the following week Statement of Cash Flows 13 - 53 S-A E 196 (cont.) Ken Harmon, the company's president, has asked whether a statement of cash flows would also be useful Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing Solution 196 TO: Ken Harmon FROM: Nancy Jenks RE: Statement of Cash Flows vs Cash Sources and Needs You asked whether a Statement of Cash Flows would be useful, in addition to the Cash Sources and Needs statement In my opinion, the statement of cash flows would be extremely useful It gives different information than the Cash Sources and Needs does A Statement of Cash Flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds It is a summary of our performance The Cash Sources and Needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained One is our plan, the other is our result Please let me know if you'd like more details about the Statement of Cash Flows (signed) ...13 - Test Bank for ISV Managerial Accounting, Fourth Edition SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 156 157... 13 - Test Bank for ISV Managerial Accounting, Fourth Edition 47 The best measure of a company's ability to generate sufficient cash to continue as a going concern is net cash provided by a financing... paid 5,000 Taxes paid 4,000 Net cash provided by operating activities $180,000 3,000 183,000 179,000 $ 4,000 13 - 30 Test Bank for ISV Managerial Accounting, Fourth Edition Ex 160 Pierce Company