Test Bank Docx Statement Of Cash Flows Chapter 13

Chapter 13

Statement of Cash Flows

Chapter Learning Objectives

1. Categorize cash activities as operating, investing, or financing. (Unit 13.1)

Operating activities are undertaken to accomplish the company’s primary business purpose. They include selling inventory or providing services, paying employees, purchasing inventory, and paying operating costs.

Investing activities involve investments in assets, other than current operating assets. These activities include buying or selling property, making or collecting loans, and buying or selling investments in other businesses.

Financing activities involve funding from external sources. They include issuing or repaying debt, issuing or retiring stock, and paying dividends.

1. Calculate cash flows provided (used) by operating activities using the indirect method. (Unit 13.2)

The indirect method begins with net income, which is adjusted for non-cash expenses, losses and gains on the sale of property and investments, and the early extinguishment of debt. Adjustments are also made for increases and decreases in current assets and current liabilities. The calculation is as follows:

Net income

+ Depreciation, amortization, and bad debt expense

− Losses on the sale of property and investments or on the early extinguishment of debt

− Gains on the sale of property and investments or on the early extinguishment of debt

− Increases in current assets

+ Decreases in current assets

+ Increases in current liabilities

− Decreases in current liabilities

= cash flows provided (used) by operating activities

1. Calculate cash flows provided (used) by investing activities. (Unit 13.3)

Once investing activities have been identified in the non-operating asset accounts, their amounts must be added together to arrive at cash flows provided by investing activities. Only cash flows should be included, so non-cash investing activities, such as purchasing a building with debt, should not be included. Likewise, when an asset is sold, the cash amount of the sale, not the book value of the asset, should be reported.

1. Calculate cash flows provided (used) by financing activities. (Unit 13.3)

Once financing activities have been identified in the non-operating liability and equity accounts, their amounts must be added together to arrive at cash flows provided by financing activities. Only cash flows should be included, so non-cash financing activities, such as issuing debt to purchase a building, should not be included. Likewise, dividends that have been declared but not paid should not be reported as a

use of cash.

1. Construct a statement of cash flows. (Unit 13.4)

The statement of cash flows follows this basic format:

Cash flows provided (used) by operating activities

+ Cash flows provided (used) by investing activities

+ Cash flows provided (used) by financing activities

= Change in Cash

+ Cash, beginning balance

= Cash, ending balance

1. Analyze a statement of cash flows. (Unit 13.4)

The statement of cash flows shows how well a company generates and uses cash. When you review a statement of cash flows, ask the following questions:

• Is the company generating cash from its operations?
• What are the primary sources and uses of cash from operations?
• Do investing activities suggest that the company is expanding (purchasing assets) or retracting (selling assets)?
• Is the company continually borrowing money? If so, are the extra funds needed for asset growth or for the payment of operating costs?

1. Calculate cash flows provided (used) by operating activities using the direct method. (Appendix)

The direct method calculates cash flows as follows:

Collections from customers

− Payments to suppliers

− Payments to employees

− Payments for operating expenses

− Payments for income taxes

= Cash flows provided (used) by operating activities

TRUE-FALSE STATEMENTS

1. Operating activities are those that affect a company’s investments in assets other than current operating assets.
2. The two approaches to presenting cash flows provided by operating activities in the statement of cash flows are the internal approach and the external approach.
3. The operating activities shown on the statement of cash flows reflect items on the income statement, and thus the amounts will be identical to those on the accrual basis income statement.
4. The statement of cash flows explains the change in the cash account balance between the beginning and the end of the period and shows how cash was generated and used.
5. Examining a company’s statement of cash flows helps in evaluating a company’s liquidity, but because it reflects activity that already occurred, does not aid in predicting future cash flows.
6. Creditors are interested in determining the likelihood that a company will be able to meet future obligations, but shareholders are rarely interested in this information.
7. Uses of cash are activities that require cash disbursements always decrease the amount of cash on hand.
8. The statement of cash flows is organized into three sections: operating activities, investing activities, and financing activities.
9. One may expect a company’s primary source of cash is from borrowing and investor contributions.
10. The sources and uses of cash provided by operating activities represent the cash effect of the revenues and expenses reported on the income statement.
11. There are two approaches to presenting cash flows provided by operating activities: the direct method and the indirect method.
12. Activities that affect a company’s investments in assets other than current operating assets are called financing activities.
13. Activities that involve external funding are called financing activities.
14. On the cash flow statement, issuing new debt is an example of a use of cash.
15. On the cash flow statement, buying inventory on account is not a use of cash.
16. On the cash flow statement, paying a cash dividend to stockholders is a financing activity.
17. On the cash flow statement, the gain on the sale of a delivery truck is an investing activity.
18. Most companies use the direct method to prepare the statement of cash flows.
19. Preparing the statement of cash flows using the indirect method starts with net income and converts it to cash flows provided by operating activities.
20. When preparing the statement of cash flows using the indirect method, a non-cash expense such as amortization is added to net income to arrive at cash flows from operating activities.
21. When preparing the statement of cash flows using the indirect method, losses from investing activities are deducted from net income to arrive at cash flows from operating activities.
22. When preparing the statement of cash flows using the indirect method, gains from financing activities are added to net income to arrive at cash flows from operating activities.
23. A decrease in accounts payable is added to net income when using the indirect method of calculating cash flows provided by operating activities.
24. A decrease in accounts receivable is added to income when using the indirect method of calculating cash flows provided by operating activities.
25. Investing activities include purchases and sales of property and equipment, loans made and collected, and purchases and sales of another company’s stock.
26. When an asset is sold at a gain or loss, the book value of the asset is reported as a sale in the investing section of the statement of cash flows.
27. Financing activities include issuing and repaying debt, loans made and collected, issuing and repurchasing stock, and paying dividends.

LO: 4, Bloom: C, Unit: 13-3, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Dividends declared is not a cash flow.
2. In interpreting a statement of cash flows, the first thing a manager should examine is the company’s ability to generate cash from operations.
3. In interpreting a statement of cash flows, excessive sales of property, plant and equipment combined with a lack of cash from financing activities may indicate that the company is selling productive assets to raise cash to cover operating expenses which, in the long run, will limit future growth.

Answers to True-False Statements

MULTIPLE-CHOICE QUESTIONS

1. The statement of cash flows does not include cash inflows and outflows for which of the following activities?
   1. Financing activities
   2. Investing activities
   3. Operating activities
   4. Revenue activities
2. Which of the following is considered a source of cash on the statement of cash flows?
   1. Payments from customers
   2. Purchase of equipment
   3. Payment of accounts payable invoices
   4. Payment of dividends to stockholders
3. Which of the following is considered a source of cash on the statement of cash flows?
   1. Purchase of equipment
   2. Receipt of interest income
   3. Payments of accounts payable invoices
   4. Payment of dividends to stockholders
4. Which of the following is considered a financing activity and a source of cash on the statement of cash flows?
   1. Purchase of treasury stock
   2. Sale of land
   3. Borrowing on a long-term basis
   4. Payment from customers
5. Which of the following is considered an investing activity and a source of cash?
   1. Purchase of equipment
   2. Sale of Amazon’s stock held as an investment
   3. Issuance of corporate stock
   4. Receipt of interest on savings account
6. Which of the following is considered a use of cash on the statement of cash flows?
   1. Purchase of equipment
   2. Sale of Amazon’s stock held as an investment
   3. Issuance of corporate stock
   4. Receipt of interest on savings account
7. Which of the following is not a source of cash?
   1. Dividends received on investment
   2. Borrowing $5,000 on short-term note
   3. Gain on sale of warehouse
   4. Payments to suppliers
8. Which of the following is not a source of cash?
   1. Gain on sale of investment
   2. Interest received on investment
   3. Issuing long-term bonds
   4. Payment of interest on a note payable
9. Which of the following is a use of cash?
   1. Interest received on investment
   2. Issuing long-term bonds
   3. Dividends paid to stockholders
   4. Loss on sale of investment
10. Which of the following is a use of cash?
    1. Purchasing equipment for cash
    2. Purchasing supplies on account
    3. Declaring a dividend
    4. Collecting receivable payments from customers
11. Which of the following is a use of cash?
    1. Exchanging old auto for new auto and taking a note for sales price due
    2. Paying employees’ monthly payroll
    3. Issuing long-term bonds
    4. Writing off an uncollectible account
12. Which of the following is not a use of cash?
    1. Purchasing supplies for cash
    2. Repayment of bonds payable
    3. Paying dividends to stockholders
    4. Buying inventory on account
13. Which of the following cash flows results from an operating activity?
    1. Paying dividends to stockholders
    2. Repaying a note payable
    3. Receiving interest on an investment
    4. Purchasing equipment for cash
14. Which of the following cash flows results from an operating activity?
    1. Paying employees’ monthly payroll
    2. Declaring a dividend of $5 per share
    3. Selling an investment in another company
    4. Purchasing a new delivery truck
15. Which of the following cash flows results from an operating activity?
    1. Purchasing an investment in another company
    2. Issuing common stock
    3. Receiving dividends on investment in another company
    4. Repaying long-term debt
16. Which of the following cash flows results from a financing activity?
    1. Receiving dividends on investment in another company
    2. Repaying long-term debt
    3. Purchasing an investment in another company
    4. Receiving payment from a customer
17. Which of the following cash flows results from a financing activity?
    1. Borrowing money from the bank
    2. Receiving a cash dividend of $3 per share
    3. Paying income taxes at end of year
18. Which of the following is a cash flow resulting from a financing activity?
    1. Purchasing an automobile by borrowing money from the bank
    2. Receiving a cash dividend on an investment in another company
    3. Declaring a dividend on common stock
    4. Issuing 1,000 shares of preferred stock
19. Which of the following cash flows results from an investing activity?
    1. Making a payment on a loan
    2. Receiving a cash dividend on an investment in another company
    3. Selling an investment in another company
    4. Receiving payment from a customer for last month’s accounts receivable
20. Which of the following cash flows results from an investing activity?
    1. Paying rent on a forklift to be used to move inventory
    2. Purchasing inventory for cash
    3. Purchasing a new forklift for cash
    4. Purchasing 5% of the company’s own outstanding common stock
21. The two approaches of reporting cash flows provided by operating activities are the
    1. direct and indirect methods.
    2. basic and standard methods.
    3. gross margin and contribution margin methods.
    4. liquidity and profitability methods.
22. Which of the following methods of reporting cash flows provided by operating activities does the Financial Accounting Standards Board recommend?
    1. The indirect method
    2. The direct method
    3. An option of either indirect method or the direct method
    4. FASB does not state a preference.
23. According to the 2011 edition of Accounting Trends and Techniques, approximately what percentage of companies use the indirect method to report cash flows provided by operating activities?
    1. 2%
    2. 33%
    3. 67%
    4. 98%
24. According to the 2011 edition of Accounting Trends and Techniques, approximately what percentage of companies use the direct method to report cash flows provided by operating activities?
    1. 2%
    2. 33%
    3. 67%
    4. 98%
25. In preparing cash flows provided by operating activities using the indirect method, which of the following is deducted from net income?
    1. Losses on investing transactions
    2. Increases in current asset balances
    3. Increases in current liability balances
    4. Non-cash expenses such as depreciation
26. In preparing cash flows provided by operating activities using the indirect method, which of the following items is deducted from net income?
    1. Non-cash expenses such as amortization
    2. Increases in current asset balances
    3. Losses on investing and financing transactions
    4. Increases in current liability balances
27. In preparing cash flows provided by operating activities using the indirect method, which of the following items is deducted from net income?
    1. Non-cash expenses such as amortization
    2. Losses on investing and financing transactions
    3. Decreases in current liability balances
    4. Decreases in current asset balances
28. In preparing cash flows provided by operating activities using the indirect method, which of the following items is added to net income?
    1. Non-cash expenses such as depreciation
    2. Gains on investing and financing transactions
    3. Increases in current asset balances
    4. Decreases in current liability balances
29. In preparing cash flows provided by operating activities using the indirect method, which of the following items is added to net income?
    1. Non-cash expenses such as depreciation
    2. Decreases in current liability balances
    3. Gains on investing and financing transactions
    4. Increases in current asset balances
30. In preparing cash flows provided by operating activities using the indirect method, which of the following items is added to net income?
    1. Cash received from the sale of property, plant and equipment
    2. Losses on investing and financing transactions
    3. Increases in current asset balances
    4. Decreases in current liability balances
31. Brandon, Inc. had a $1,000 decrease in accounts receivable during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. Add $1,000 to net income in order to arrive at net cash provided by operating activities.
    2. Deduct $1,000 from net income in order to arrive at net cash provided by operating activities.
    3. Deduct $1,000 to arrive at net cash flows from investing activities.
    4. Do not include the $1,000 in the statement of cash flows but show it in an accompanying schedule of non-cash transactions.
32. Brandon, Inc. had a $1,000 increase in accounts payable during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. Do not include the $1,000 in the statement of cash flows but show it in an accompanying schedule of non-cash transactions.
    2. Add $1,000 to net income in order to arrive at net cash provided by operating activities.
    3. Deduct $1,000 from net income in order to arrive at net cash provided by operating activities.
    4. Deduct $1,000 to arrive at net cash flows from investing activities.
33. A company’s inventory account decreased by $1,000 during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. An addition under investing activities
    2. A deduction under investing activities
    3. An addition under operating activities
    4. A deduction under operating activities
34. A company’s salaries payable account decreased by $1,000 during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. An addition under investing activities
    2. A deduction under investing activities
    3. An addition under operating activities
    4. A deduction under operating activities
35. A company’s prepaid insurance account decreased by $1,000 during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. An addition under investing activities
    2. A deduction under investing activities
    3. An addition under operating activities
    4. A deduction under operating activities
36. A company’s unearned revenue account increased by $1,000 during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. An addition under financing activities
    2. A deduction under financing activities
    3. An addition under operating activities
    4. A deduction under operating activities
37. A company’s taxes payable account decreased by $1,000 during the year. Which of the following will appear on the statement of cash flows prepared using the indirect method?
    1. An addition under investing activities
    2. A deduction under investing activities
    3. An addition under operating activities
    4. A deduction under operating activities
38. Which of the following items is added to net income when using the indirect method of calculating cash flows provided by operating activities?
    1. An increase in accounts payable
    2. An increase in prepaid expenses
    3. A decrease in accrued revenues
    4. A decrease in taxes payable
39. Which of the following items is added to net income when using the indirect method of calculating cash flows provided by operating activities?
    1. A decrease in accounts payable
    2. A decrease in prepaid expenses
    3. A decrease in accrued expenses
    4. A decrease in taxes payable
40. Which of the following items is subtracted from net income when using the indirect method of calculating cash flows provided by operating activities?
    1. Depreciation expense
    2. Repayment of bonds payable
    3. A gain on the sale of land
    4. A loss on the sale of equipment
41. Which of the following items is subtracted from net income when using the indirect method of calculating cash flows provided by operating activities?
    1. A decrease in accounts receivable
    2. Depreciation expense
    3. A decrease in salaries payable
    4. A loss on the sale of equipment
42. Which of the following items is subtracted from net income when using the indirect method of calculating cash flows provided by operating activities?
    1. A gain on the sale of equipment
    2. Repayment of notes payable
    3. Receipt of cash dividends
    4. Declaration of cash dividends
43. Which of the following items is not included in the calculation of cash flows provided by operating activities using the indirect method?
    1. An increase in accounts receivable
    2. An increase in salaries payable
    3. Receipt of cash dividends
    4. Repayment of a 2-year note payable
44. Which of the following items is not included in the calculation of cash flows provided by operating activities using the indirect method?
    1. Repayment of long-term debt
    2. Net income
    3. Depreciation expense
    4. Gain on the sale of equipment
45. Michael’s Industries reported net income of $10,000 and paid cash dividends of $2,000. Changes in balance sheet accounts for the year were as follows:

What is the amount of net cash provided by operations?

• 1. $1,000
  2. $14,000
  3. $19,000
  4. $30,000

1. Monroe’s Industries reported net income of $18,000 and paid cash dividends of $2,000. Changes in balance sheet accounts for the year were as follows:

Based on the above information, what is the amount of net cash provided by operations?

• 1. $1,000
  2. $15,000
  3. $21,000
  4. $30,000

1. Jordan Corporation reported net income of $20,000 and paid cash dividends of $7,000. Changes in balance sheet accounts for the year were as follows:

Based on the above information, what is the amount of net cash provided by operations?

• 1. $3,000
  2. $11,000
  3. $19,000
  4. $35,000

1. Investing activities involve
   1. borrowing and repaying of debt.
   2. sale of inventory.
   3. receipt of interest.
   4. investments in assets other than current assets.
2. Investing activities include
   1. purchases and sales of property and equipment.
   2. loans made and collected.
   3. purchase and sales of another company’s stock.
3. Investing activities include all of the following except
   1. loans made to others and collected.
   2. purchases and sales of another company’s stock.
   3. issuing and repaying debt.
   4. purchases and sales of property and equipment.
4. The safest way to make sure that all investing activities have been identified is to
   1. examine a company’s balance sheet line by line.
   2. examine a company’s income statement line by line.
   3. examine all purchase orders processed during the period.
   4. identify any invoices received for property and equipment acquisitions.
5. When a company sells equipment for cash, which of the following amounts is reported in the investing section of the statement of cash flows?
   1. Book value
   2. Gain on sale of equipment
   3. Depreciation expense
   4. Amount of cash received
6. When a company sells equipment for cash, which of the following is the correct reporting on the statement of cash flows?
   1. Gain or loss in operating section, amount of cash received in operating section
   2. Gain or loss in operating section, amount of cash received in investing section
   3. Gain or loss in investing section, amount of cash received in operating section
   4. Gain or loss in investing section, amount of cash received in investing section
7. When a company retires its bonds, which of the following is the correct reporting on the statement of cash flows?
   1. Gain or loss in operating section, amount of cash paid in investing section
   2. Gain or loss in financing section, amount of cash received in operating section
   3. Gain or loss in operating section, amount of cash paid in financing section
   4. Gain or loss in investing section, amount of cash received in operating section
8. Which of the following is classified as a financing activity?
   1. Receipt of dividend income
   2. Receipt of interest on loan receivable
   3. Payment of dividends
   4. Investment in another company’s stock
9. When a company issues new shares of common stock, which of the following is the correct reporting on the statement of cash flows?
   1. A source of cash in the financing section
   2. A use of cash in the financing section
   3. A source of cash in the investing section
   4. A use of cash in the investing section
10. When a company repurchases its own stock, which of the following is the correct reporting on the statement of cash flows?
    1. A source of cash in the financing section
    2. A use of cash in the financing section
    3. A source of cash in the investing section
    4. A use of cash in the investing section
11. When a company declares a cash dividend, which of the following is the correct reporting on the statement of cash flows?
    1. A use of cash in the operating section
    2. A use of cash in the investing section
    3. A use of cash in the financing section
    4. As a significant non-cash financing and investing activity
12. During the current year, XYZ Corporation purchased land for $5,000 and sold a piece of factory machinery with a book value of $15,000 for $12,000 cash. What is XYZ’s net cash flows provided by investing activities for the year?
    1. ($7,000)
    2. ($10,000)
    3. $7,000
    4. $10,000
13. During the current year, ABC Corporation did not purchase any property, plant and equipment, but sold land with a book value of $6,000 for $12,000 cash and sold a delivery truck with a cost of $18,000, depreciation of $16,000, and an appraised value of $5,000 for $4,000. What is ABC’s net cash flows provided by investing activities for the year?
    1. $8,000
    2. $11,000
    3. $16,000
    4. $24,000
14. During the current year, ABC Corporation purchased a warehouse for $1,200,000. In order to pay for the warehouse, ABC sold its investment in another company’s common stock costing $900,000 for $1,400,000. What amount is reported in ABC’s investing section of its statement of cash flows?
    1. $0
    2. $1,200,000
    3. $900,000
    4. $200,000
15. During the current year, ABC Corporation purchased land for $40,000. ABC also sold equipment with a book value of $2,000 for $10,000. What amount is reported in ABC’s investing section of its statement of cash flows?
    1. $0
    2. $30,000 net cash used by investing activities
    3. $38,000 net cash provided by investing activities
    4. $38,000 net cash used by investing activities
16. For the past two years, Monroe Corporation’s statement of cash flows has shown net cash provided by investing activities. Which of the following choices could explain this result?
    1. Collection of accounts receivable balances
    2. Sales of factory equipment
    3. Receipt of cash dividends from investments in other company’s stock
    4. Issuance of long-term debt
17. For the past two years, Monroe Corporation’s statement of cash flows has shown net cash used by investing activities. Which of the following choices could explain this result?
    1. Selling of inventory on credit in excess of collections from customers
    2. Sales of factory equipment
    3. Purchasing investments in other company’s stock
    4. Issuance of long-term debt
18. For the past two years, Monroe Corporation’s statement of cash flows has shown net cash provided by financing activities. Which of the following choices could explain this result?
    1. Collection of accounts receivable balances
    2. Sales of factory equipment
    3. Receipt of cash dividends from investments in other company’s stock
    4. Issuance of long-term debt
19. For the past two years, Monroe Corporation’s statement of cash flows has shown net cash used by financing activities. Which of the following choices could explain this result?
    1. Repayment of debt
    2. Purchase of land
    3. Receipt of cash dividends from investments in other company’s stock
    4. Issuance of long-term debt
20. For the past two years, Monroe Corporation’s statement of cash flows has shown net cash used by financing activities. Which of the following choices could explain this result?
    1. Collection of accounts receivable balances
    2. Purchase of stock in another company
    3. Issuance of bonds payable
    4. Payment of cash dividends to stockholders
21. On January 1 of the current year, Bratton Manufacturing borrowed $1,000,000 from the First National Bank. On June 30 and December 31, Bratton made principal payments of $10,000 each. How will these transactions be reported in the statement of cash flows?
    1. $1,000,000 source of cash and $20,000 use of cash, both shown in the financing section
    2. $1,000,000 source of cash in the financing section and $20,000 use of cash in the operating section
    3. $1,000,000 source of cash in the investing section and $20,000 use of cash in the operating section
    4. $1,000,000 source of cash and $20,000 use of cash, both shown in the investing section
22. On July 31 of the current year, Bridges Industries borrowed $60,000 from the First National Bank. The $60,000 was used to pay dividends of $40,000 to stockholders and purchase a $20,000 piece of equipment. How will these transactions be reported in the statement of cash flows?

1. On July 31 of the current year, Bridges Industries issued $80,000 of bonds payable. The $80,000 was used to purchase $30,000 of equipment and $50,000 to purchase stock in another company. How will these transactions be reported in the statement of cash flows?

1. On July 31 of the current year, Bridges Industries borrowed $50,000 from the First National Bank. On December 31, the company made its first payment of $1,000, of which $900 was applied to principal and $100 was interest. How will these transactions be reported in the statement of cash flows?

1. During the current year, Maddox Industries sold a delivery truck with a book value of $5,000 for $15,000, declared and paid cash dividends of $8,000 and borrowed $50,000 from First National Bank. Maddox’s net cash flows provided by financing activities is
   1. $0
   2. $27,000
   3. $42,000
   4. $50,000
2. During the current year, Maddox Industries sold a delivery truck with a book value of $5,000 for $15,000, declared and paid cash dividends of $8,000 and borrowed $50,000 from First National Bank. Maddox’s net cash flows provided by investing activities is
   1. $5,000
   2. $15,000
   3. $42,000
   4. $50,000
3. During the current year, Maddox Industries sold a delivery truck with a book value of $5,000 for $15,000, declared and paid cash dividends of $6,000 and borrowed $40,000 from First National Bank. Maddox’s net cash flows provided by financing activities is
   1. $15,000
   2. $44,000
   3. $34,000
   4. $46,000
4. During the current year, Jamison Manufacturing had net income of $15,000 and paid dividends of $8,000. Jamison also borrowed $50,000 on January 1 and repaid $5,000 of the note during the year. Jamison’s net cash flows provided by financing activities is
   1. $37,000
   2. $42,000
   3. $50,000
   4. $65,000
5. Which of the following transactions is not classified as a source or use of cash in the operating, investing or financing sections of the statement of cash flows?
   1. Issuing stock for cash
   2. Asset swaps
   3. Payment of dividends
   4. Payoff of a long-term debt
6. Which of the following does the statement of cash flows not help managers evaluate?
   1. A company’s ability to generate cash from operations
   2. How well a company manages its assets
   3. The quality of a company’s assets
   4. A company’s use of debt and equity
7. Burton Company purchased a new crane costing $47,000 from Heavy Equipment Corporation. To pay for the crane, Burton traded in an old piece of machinery worth $10,000 and signed a note for the balance of $37,000. How will this transaction be reported on the statement of cash flows?
   1. As a use of cash in the investing section and a source of cash in the financing section
   2. As a source of cash in the investing section and a source of cash in the financing section
   3. As a use of cash in the operating section and a source of cash in the financing section
   4. As a non-cash investing and financing transaction
8. Michael’s Industries purchased some land in exchange for 1,000 shares of Michael’s voting common stock with a market value of $15 each. How will this transaction be reported on the statement of cash flows?
   1. As a non-cash investing and financing transaction
   2. As a non-cash financing transaction
   3. As a non-cash investing transaction
   4. As a use of cash in the investing section and a source of financing in the financing section
9. Myers Real Estate Company exchanged an acre of land in exchange for five hundred shares of stock in the Midland Corporation. The land is worth $22,000 and the stock is worth $40 per share. How will this transaction be reported on the statement of cash flows?
   1. As a source of cash in the investing section, a use of cash in the financing section, and an adjustment to net income in the operating section for the loss
   2. As a source of cash in the investing section and a use of cash in the financing section
   3. As a non-cash investing and financing transaction
   4. As a use of cash in the investing section and a source of cash in the financing section
10. Using the direct method of preparing the statement of cash flows, which of the following is not an activity generating operating cash flows?
    1. Collections from customers
    2. Payments to suppliers
    3. Payments for income taxes
    4. Payments of dividends
11. Using the direct method of preparing the statement of cash flows, which of the following is not an activity generating operating cash flows?
    1. Payments to employees
    2. Payments to suppliers
    3. Repayment of debt
    4. Payments for utilities expenses
12. Using the direct method of preparing the statement of cash flows, which of the following is not an activity generating operating cash flows?
    1. Collections from customers
    2. Collection of notes receivable
    3. Payments for income taxes
    4. Payments to employees
13. Using the direct method of preparing the statement of cash flows, which of the following is not an activity generating operating cash flows?
    1. Issuance of notes payable
    2. Payments to suppliers
    3. Payments for income taxes
    4. Payments for operating expenses
14. Using the direct method of preparing the statement of cash flows, which of the following information is used to adjust reported revenues and expenses?
    1. The income statement only
    2. The balance sheet only
    3. Both the income statement and the balance sheet
    4. Neither the income statement nor the balance sheet
15. Using the direct method of preparing the statement of cash flows, to determine the cash effects of operating activities, which of the following must be adjusted?
    1. Dividends declared
    2. Reported revenues and expenses
    3. Long-term assets and liabilities from the balance sheet
    4. Equity as reported in the balance sheet
16. Using the direct method of preparing the statement of cash flows, to determine the cash effects of operating activities, a gain on the sale of equipment is
    1. added to operating expenses.
    2. deducted from payments for operating expenses.
    3. deducted from sales revenue.
    4. ignored because a gain is not a cash flow.
17. Which of the following items is relevant when deciding whether to prepare the statement of cash flows using the direct method versus the indirect method?
    1. Operating activities only
    2. Investing activities only
    3. Financing activities only
    4. Investing and financing activities only
18. Monroe Corporation reported a decrease in inventories of $30,000 and a decrease in accounts payable of $15,000. Cost of goods sold totaled $110,000. Monroe uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the cost of goods sold adjusted to a cash basis?
    1. $65,000
    2. $105,000
    3. $95,000
    4. $155,000
19. Maddox Industries reported an increase in inventories of $20,000 and a decrease in accounts payable of $10,000. Cost of goods sold totaled $120,000. Monroe uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the cost of goods sold adjusted to a cash basis?
    1. $90,000
    2. $110,000
    3. $120,000
    4. $150,000
20. Maddox Industries reported sales of $170,000 on its income statement. During the year, accounts receivable decreased by $25,000 and accounts payable decreased by $35,000. Maddox uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the amount of sales revenue adjusted to a cash basis for the year?
    1. $110,000
    2. $160,000
    3. $185,000
    4. $195,000
21. Myers Industries reported sales of $220,000 on its income statement. During the year, accounts receivable increased by $25,000 and accounts payable decreased by $15,000. Maddox uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the amount of sales revenue adjusted to a cash basis for the year?
    1. $170,000
    2. $195,000
    3. $205,000
    4. $210,000
22. Walker Corporation reported total operating expenses of $120,000 on the income statement. During the year, accounts payable increased by $7,000, accrued liabilities increased by $5,000, prepaid expenses decreased by $1,000, and inventory increased by $10,000. Walker uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the amount of operating expenses adjusted to a cash basis?
    1. $114,000
    2. $116,000
    3. $120,000
    4. $124,000
23. Willow Industries reported total operating expenses of $160,000 on the income statement. During the year, accounts payable decreased by $8,000, accrued liabilities decreased by $4,000, prepaid expenses increased by $1,000, and accounts receivable decreased by $6,000. Walker uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. What is the amount of operating expenses adjusted to a cash basis?
    1. $143,000
    2. $149,000
    3. $165,000
    4. $162,000

Answers to Multiple-Choice Questions

MATCHING

1. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

1. g – Statement of cash flows
2. f– Sources of cash
3. d – Investing activities
4. c –Indirect method
5. b –Financing activities
6. h– Uses of cash
7. e –Operating activities
8. a – Direct method

BRIEF EXERCISES

1. Classify each of the following items from City Hospital’s statement of cash flows as an operating, investing, or financing activity.

1. Complete the following table by identifying each item as a source or use of cash.

1. Burton Company’s current asset and liability balances for the past two years are as follows. Net income for the year was $120,000 and depreciation expense was $15,000.

Required:

Using the indirect method, prepare the cash flows provided by operating activities section of the statement of cash flows.

1. Benton Corporation’s current asset and liability balances for the past two years are as follows. Net income for the year was $150,000, depreciation expense was $22,000, and gain on sale of land was $28,000.

Required:

Using the indirect method, prepare the cash flows provided by operating activities section of the statement of cash flows.

1. Snow Manufacturing Company engaged in the following activities during the year:

• Purchased land at a cost of $300,000
• Sold equipment that cost $25,000 for $10,000
• Sold 100 shares of stock for $18 each
• Received a dividend totaling $12,000 from a company in which Snow owned stock

Required:

Prepare the cash flows provided by investing activities section of Snow’s statement of cash flows.

1. Spivey Industries engaged in the following activities during the year:

• Borrowed money from City Bank for $200,000
• Sold equipment that cost $125,000 for $40,000
• Sold 100 shares of stock for $20 each
• Paid dividends to stockholders totaling $12,000

Required:

Prepare the cash flows provided by financing activities section of Spivey’s statement of cash flows.

1. The following information was gathered from Brandon Corporation's financial records:

Required:

Using the indirect method, prepare a statement of cash flows for Brandon Corporation. Omit the statement heading.

1. The following information was gathered from Burton Company's financial records:

Required:

Using the indirect method, prepare a statement of cash flows for Burton Company.

1. Patterson Company’s has provided the following financial information for last year.

Required:

Using the direct method, prepare the cash flows provided by operating activities section of the statement of cash flows.

Collections from customers $235,000

Payments to suppliers (163,000)

Payments for operating expenses (43,000)

Net cash provided by operating activities $ 29,000

1. Panella Company’s has provided the following financial information for last year.

Required:

Using the direct method, prepare the cash flows provided by operating activities section of the statement of cash flows.

Collections from customers $323,000

Payments to suppliers (225,000)

Payments for operating expenses (44,000)

Net cash provided by operating activities $ 54,000

EXERCISES

1. Classify each of the following items as a source or use of cash. Then classify each item as a cash flow provided by an operating, investing, or financing activity. Place an X in each appropriate column. Assume all transactions involve cash unless otherwise stated.

1. Classify each of the following items as a source or use of cash by placing an X in each appropriate column. Assume transactions involve cash.

1. Classify each of the following items as a source or use of cash by placing an X in each appropriate column. Assume all transactions involve cash.

1. Complete the following table by identifying the section of the statement of cash flows for each of the following activities. Assume all transactions involve cash.

1. Classify each of the following items as a source or use of cash. Then classify each item as a cash flow provided by an operating, investing, or financing activity. Place an X in each appropriate column. Assume transactions involve cash unless otherwise stated.

1. The following balances were gathered from Newport Industries general ledger.

Required:

Using the indirect method, prepare the cash flows provided by operating activities section of Newport’s statement of cash flows for 2021.

Net income = $320,000 − $140,000 − $72,000 − $6,000 − $22,000 = $80,000

1. The following balances were gathered from Brannon Corporation’s general ledger.

Required:

Using the indirect method, prepare the cash flows provided by operating activities section of Brannon’s statement of cash flows for 2021.

Net income = $380,000 − $210,000 − $82,000 + $6,000 − $17,000 = $77,000

1. The following balances were gathered from Brandon Company’s general ledger.

Required:

Using the indirect method, prepare the cash flows provided by operating activities section of Brandon’s statement of cash flows for year ending June 30, 2021.

Net income = $430,000 − $270,000 − $112,000 + $26,000 − $17,000 = $72,000

1. Berry Corporation reported the following cash transactions for last year.

Required:

• 1. Prepare the investing section of Berry’s statement of cash flows.
  2. Prepare the financing section of Berry’s statement of cash flows.

1. Purchase of bonds ($50,000)

Purchase of equipment (12,000)

Net cash used by investing activities ($62,000)

1. Issuance of common stock $180,000

Dividend payment (60,000)

Bank loan 25,000

Repayment on bank loan (4,000)

Net cash provided by financing activities $141,000

1. Marcello Industries reported the following cash transactions for last year.

Required:

• 1. Prepare the investing section of Marcello’s statement of cash flows.
  2. Prepare the financing section of Marcello’s statement of cash flows.

1. Loan to supplier ($ 80,000)

Purchase of bonds (20,000)

Purchase of factory machinery (240,000)

Net cash used by investing activities ($340,000)

1. Issuance of common stock $200,000

Dividend payment (42,000)

Bank loan 25,000

Repurchase of Marcello stock (150,000)

Net cash provided by financing activities $ 33,000

1. Morris Industries reported the following cash transactions for last year.

Required:

• 1. Prepare the investing section of Morris’s statement of cash flows.
  2. Prepare the financing section of Morris’s statement of cash flows.

1. Proceeds from sale of investment $ 20,000

Collection on note receivable 22,000

Sale of factory equipment 10,000

Net cash provided by investing activities $52,000

1. Proceeds from bank loan $100,000

Proceeds from sale of stock 50,000

Repurchase of common stock (5,000)

Payment of dividends (8,000)

Net cash provided from financing activities $137,000

1. The following items were gathered from Rankin Corporation’s general ledger:

Required:

Using the indirect method, prepare Rankin’s statement of cash flows in good form.

1. The following items were gathered from Ledbetter Company’s general ledger:

Required:

Using the indirect method, construct Ledbetter’s statement of cash flows.

1. Parnell Corporation provided the following financial information:

Required:

Using the direct method, prepare the operating activities section of Parnell’s statement of cash flows. Omit the statement heading.

1. Parker Corporation provided the following financial information:

Required:

Using the direct method, prepare the operating activities section of Parnell’s statement of cash flows.

PROBLEMS

1. You are provided with the following transactions Martinez and Co., during a recent year.

Required:

Assuming the indirect method is used, complete the table by first indicating whether each transaction was a source (S), use (U), or non-cash transaction (NC), and then indicating which section of the statement of cash flows in which it is reported by inserting an X under the appropriate column.

1. Alma Ortiz prepared Carlee Instruments’ balance sheet and income statement for 2021. Before she could complete the statement of cash flows, she had to leave town to attend to a family emergency. Because the full set of statements must be provided to the auditors today, Carlee’s president, Mike Lymon, has asked you to prepare the statement of cash flows. Lymon has provided the balance sheet and income statement that Ortiz prepared, as well as some notes she made:

• Equipment with an original cost of $35,000 was sold for $20,300. The book value of the equipment was $19,400.
• On June 1, 2021, the company purchased new equipment for cash at a cost of $18,500.
• At the end of the year the company issued notes payable for $10,500 cash. The note will mature on December 31, 2024.
• The company paid $20,200 in cash dividends for the year.

Required:

Using the indirect method, prepare Carlee Instruments’ statement of cash flows for 2021.

1. Wil Wheaton, Kirk Enterprises’ controller, is preparing the financial statements for 2021 as follows.

He has gathered this additional information:

• On December 31, 2021, Kirk sold a piece of equipment with an original cost of $25,000 for $10,000 cash. The equipment had a book value of $13,000.
• On February 1, 2021, Kirk issued $60,000 of common stock to raise cash in anticipation of the purchase of a new building later in the year.
• On February 2, 2021, Kirk took out a ten-year $110,000 long-term loan to provide the remaining funds needed to purchase the building.
• On May 15, 2021, Kirk paid $162,000 for the new building.
• The company paid a cash dividend of $9,500.

Required:

Using the indirect method, prepare Kirk Enterprises’ statement of cash flows for 2021.

1. Wil Wheaton, Kirk Enterprises’ controller, is preparing the financial statements for 2021 as follows.

He has gathered this additional information:

• On December 31, 2021, Kirk sold a piece of equipment with an original cost of $25,000 for $10,000 cash. The equipment had a book value of $13,000.
• On February 1, 2021, Kirk issued $60,000 of common stock to raise cash in anticipation of the purchase of a new building later in the year.
• On February 2, 2021, Kirk took out a ten-year $110,000 long-term loan to provide the remaining funds needed to purchase the building.
• On May 15, 2021, Kirk paid $162,000 for the new building.
• The company paid a cash dividend of $9,500.

Required:

Using the direct method, prepare Kirk Enterprises’ statement of cash flows for 2021.

^aCollections from customers: $269,700 + $1,070,000 − $287,200

^bPayments to suppliers: $120,000 + ($125,000 − $95,000 + $700,000) − $103,000

^cPayments to employees: $30,000 + $175,000 − $27,000

^dPayment for other expenses: $25,000 + $16,000 + $7,400 − $20,000

^ePayments for income taxes: $20,000 + $63,400 − $17,600

1. Alma Ortiz prepared Carlee Instruments’ balance sheet and income statement for 2021. Before she could complete the statement of cash flows, she had to leave town to attend to a family emergency. Because the full set of statements must be provided to the auditors today, Carlee’s president, Mike Lymon, has asked you to prepare the statement of cash flows. Lymon has provided you with the balance sheet and income statement that Ortiz prepared, as well as some notes she made:

• Equipment with an original cost of $35,000 was sold for $20,300. The book value of the equipment was $19,400.
• On June 1, 2021, the company purchased new equipment for cash at a cost of $18,500.
• At the end of the year the company issued notes payable for $10,500 cash. The note will mature on December 31, 2024.
• The company paid $20,200 in cash dividends for the year.

Required:

Using the direct method, prepare Carlee Instruments’ statement of cash flows for 2021.

^aCollections from customers: $5,500 + $127,900 − $6,800

^bPayments to suppliers: $4,900 + ($33,700 + $69,800 − $34,200) − $3,400

^cPayments to employees: $1,500 + $20,000 − $1,900

^dPayment for other expenses: $700 + ($13,000 + $8,000 + $4,000) − $500

^ePayments for income taxes: $2,600 + $800 − $2,100

• 1. List the three sections used to classify activities in the statement of cash flows.
  2. Give one example of a use of cash for each of the three activities.
  3. Give one example of a source of cash for each of the three activities.

1. The three sections are operating activities, investing activities, and financing activities.
2. Operating: payment for inventory, payment of salaries, payment of operating expenses such as utilities, rent, insurance, supplies, interest and taxes

Investing: payment to dispose of property and equipment, payment to buy investments, loans made to customers or employees

Financing: retirement of stock for cash, repayment of debt, payment of cash dividends

1. Operating: collections from customers, receipt of dividends, receipt of interest

Investing: sale of property or equipment, sale of investments, collection of notes receivable

Financing: issuance of stock, issuance of debt

• 1. In which balance sheet accounts are investing activities reported?
  2. In which balance sheet accounts are financing activities reported?
  3. When a gain or loss is recorded on the sale of an asset, what amount is shown in the investing section of the statement of cash flows?

1. Investing activities involve investments in assets other than current operating assets. The related balance sheet accounts are property and equipment, loans receivable, and investments in another company’s stock.
2. Financing can be obtained through either debt or equity. The related balance sheet accounts are loans or note payable, bonds payable, common stock, preferred stock, treasury stock, and dividends declared and payable.
3. The amount of cash (proceeds) received is recorded in the investing section. Any gain or loss is shown in the operating activities section with a gain subtracted and a loss added.

1. When using the indirect method, the calculation of cash flows provided by operating activities begins with net income.

Required:

Indicate whether the following items are added to or deducted from net income to arrive at cash flow from operating activities.

1. What is the basic form of the statement of cash flows?

1. The direct method of preparing the statement of cash flows lets users know exactly how cash was generated and used in operations. Specifically, cash flows from operating activities are generated by five major activities.

Required:

List the five activities.

1. Collections from customers
2. Payments to suppliers
3. Payments to employees
4. Payments for operating costs
5. Payments for income taxes

ESSAY

1. Assume your friend has taken an accounting course in high school and is familiar with the balance sheet and income statement. However, she is not so familiar with the statement of cash flows.

Required:

Explain to your friend why the statement of cash flows is an important financial statement just like the balance sheet and income statement. In addition, explain to her how the information is presented in the statement of cash flows.

Although the income statement may show a nice profit, a company’s cash flow position may be poor. The statement of cash flows helps in evaluating the company’s liquidity and in predicting its future cash flows. The statement of cash flows explains the change in the cash account balance between the beginning and end of the period by showing how cash was generated and spent. Shareholders and creditors are interested in determining the likelihood that a company will be able to meet future cash obligations. The statement helps financial statement users to understand the differences between the company’s net income and the cash generated by its operations.

The statement is classified into three categories: operating activities, investing activities, and financing activities. Each section shows a company’s sources of cash and uses of cash during the period. Operating activities are the activities that accomplish the company’s purpose for being in business – primarily selling goods or providing services. The sources and uses of cash provided by operating activities represent the cash effect of the revenues and expenses reported on the income statement. There are two approaches to presenting cash flows provided by operating activities. The indirect method, the most popular method, starts with net income and adjusts for non-cash items. The direct method reports the specific operating activities that provide and use cash, such as inventory purchases and collections from customers.

Investing activities are those activities that affect a company’s investments in assets other than current operating assets. Examples of investing activities are acquiring or selling property and equipment and investing in other companies’ stock.

Financing activities are activities that involve external funding. Borrowing money and selling new shares of stock are sources of cash while repaying borrowed money and repurchasing shares of the company’s own stock and paying dividends are uses of cash.

1. You are on a team responsible for addressing cash flow problems with other managers in your corporate division. Your accounting department has provided the statement of cash flows prepared using the indirect method. At your first meeting, some of the managers have expressed concerns about the statement’s understandability and do not view the statement as anything other than a “rearranged income statement”. The managers have requested that your team explain to them how the statement is constructed.

Required:

• 1. Explain to your managers why the indirect method is a useful approach to reporting cash flows from operating activities.
  2. Explain to your managers why increases in current assets are subtracted from net income and increases in current liabilities are added to net income to calculate the cash flow provided by operating activities.
  3. Explain to your managers any differences between the indirect method and the direct method of preparing the investing and financing sections of the statement of cash flows.

1. The indirect method, which starts with net income and converts it to cash flows provided by operating activities, appeals to users of financial statements who want to know why cash differs from net income.
2. Increases in current assets are subtracted from net income because of how the change impact cash. For example, accounts receivable increases by the amount of sales and decreases by cash collections. If the accounts receivable ending balance is greater than the beginning balance, then the amount collected must have been less than the amount of sales included in net income. To convert from sales to collection, we must reduce net income by the increase in accounts receivable. Using the same logic, we adjust net income for changes in each current asset balance.

For current liabilities, the opposite is true. Consider accrued liabilities, which increases when operating expenses are incurred and decreases when operating expenses are paid. If the ending balance in accrued liabilities is greater than the beginning balance, then the amount of cash paid was less than the amount of operating expense included on the income statement. To convert from operating expenses to cash payments for operating expenses, then, we must increase net income by the increase in accrued liabilities.

1. There is no difference between the direct method and the indirect method in preparing the investing or financing sections of the statement of cash flows.
2. You are on a team responsible for addressing cash flow problems with other managers in your corporate division. Your accounting department has provided your team with the statement of cash flows prepared using the indirect method. At your first meeting, some of the managers have expressed concerns about the statement’s understandability and do not view the statement as anything other than a “rearranged income statement”. The managers have requested that your team explain to them how the statement is constructed.

Required:

• 1. What types of items are reported in the investing section of the statement of cash flows?
  2. How is the book value of a plant asset shown on the statement of cash flows?
  3. What types of items are reported in the financing section of the statement of cash flows?

1. Investing activities involve investments in assets other than current operating assets. These activities include purchases and sales of property and equipment, loans made and collected, and purchases and sales of another company’s stock.
2. Book value is the cost of an asset less accumulated depreciation. When an asset is sold, the difference in the proceeds and the book value is recorded as a gain or loss. Although the “book value” does not appear on the statement of cash flows, the depreciation and gain or loss is shown in the operating section as an adjustment to net income when using the indirect method. The cash flows from investing activities reports only the cash effect of transactions.

Financing can be obtained through either debt or equity. Financing activities include issuing and repaying debt, issuing and repurchasing stock, and paying dividends. Balance sheet accounts in the non-operating liability and equity accounts are used to record financing activities.

1. You have been assigned to a team responsible for evaluating the company results based on the statement of cash flows. One of your responsibilities is to determine how much cash should be kept on hand. On the statement of cash flows your team has identified the following issues:

• Operating activities did not generate a positive cash flow.
• Cash was generated primarily from the sale of plant assets.
• Additional shares of stock were sold during the year.
• No loans were taken out during the year, and a substantial portion of debt was retired.

Required:

• 1. Why is it important for a company to generate cash from operating activities on a consistent basis?
  2. What might a trend toward providing cash through investing activities suggest about a business?
  3. What factors might influence how much cash should be kept on hand?

1. Over the long run, a company must generate a positive cash flow from operating activities in order to remain in business. If the cash flow from operating activities remains negative over several periods, the company will likely be forced to raise cash by borrowing, which will place additional strains on cash flow as the principal and interest payments come due.
2. As assets wear out or become obsolete, they should be replaced, creating a use of cash in the investing section. Purchases of equipment of roughly the amount of depreciation expense indicate that the company is providing for continued productive capacity. Excessive sales of property, plant and equipment combined with a lack of cash from financing activities may indicate that a company is selling productive assets to raise cash to cover operating expenses, perhaps due to an inability to borrow additional funds. In the long run, such actions will limit future growth.
3. The amount of cash to keep on hand will likely depend on how readily the company can borrow money, as well as on the interest rate at which the company can borrow. If the company has easy access to cash, then less cash will need to be kept on hand.
   1. How is the cash flows provided by operating activities calculated using the direct method?
   2. What are the major activities that generate cash flows from operations?
   3. Explain how to determine the actual cash payments made to suppliers when using the direct method.
4. The direct method reports the specific operating activities that provided and used cash, such as inventory purchases and collections from customers. The direct method indicates the amounts of cash inflows and outflows generated and used by specific sources and uses.
5. Cash flows are generated by five major activities: collections from customers, payments to suppliers, payments to employees, payments for operating costs and payments for income taxes.
6. First determine the amount of inventory purchased during the period by determining the difference between beginning and ending inventory and subtracting cost of goods sold (beginning inventory + “X” – cost of goods sold = ending inventory). Start with beginning accounts payable, add inventory purchases, subtract ending accounts payable, and the result is the payments for inventory.