Exam 12: How Is the Statement of Cash Flows Prepared and Used

Exhibit 12-3 Stalwart Inc. accounting records show the following changes during the company's most recent fiscal year. 1.Gain on sale of 2.Loss on sale of long-term investments 3.Decrease in prepaid expenses 4.Increase in accounts receivable 5.Decrease in merchandise inventory 6.Decrease in wages payable 7.Increase in accounts payable 8.Payment of cash dividends 9.Purchase of machinery 10.Payments of principal on bonds payable 11.Proceeds from sale of long-term investments -Refer to Exhibit 12-3.Which of these would be added to net income as part of the operating activities section,when using the indirect method of preparing the statement of cash flows?

Operating cash flow ratios are always greater than 1.0.

Where would cash payments for insurance appear in the statement of cash flows?

The following selected financial statement information is for Palmer and Associates. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { December } 31$ 2017 2016 Bonds payable \ 500,000 \ 400,000 Common stock 850,000 740,000 Retained earnings 600,000 520,000 The following activities occurred during 2017: Issued bonds for $100,000 cash. Issued common stock for $110,000 cash. Earned net income totaling $88,000. Paid cash dividends totaling $8,000. (1)Prepare the financing activities section of the statement of cash flows for Palmer and Associates for the year ended December 31,2017. (2)Explain the change in each noncurrent liability and owners' equity account.

The capital expenditure ratio is calculated as:

Most companies prefer to use the indirect method when preparing a statement of cash flows.

The following selected financial statement information is for Abel Inc. Abel Inc. Income Statement For the Year Ended December 31, 2017 Sales \ 2,600,000 Cost of goods sold 1,640,000 Gross margin 960,000 Selling and administrative expenses 356,000 Depreciation expense 84,000 Operating income 520,000 Gain on sale of equipment 6,400 Income before taxes 526,400 Income tax expense 184,240 Net income -342,160 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { December } 31$ 2017 2016 Current Assets Cash \ 160,000 \ 128,000 Accounts receivable 40,000 32,000 Merchandise inventory 50,000 64,000 Prepaid expenses 16,000 10,800 Current Liabilities Accounts payable 18,000 14,800 Income tax payable 8,800 7,200 Using the indirect method,prepare the operating activities section of the statement of cash flows for Abel Inc.for the year ended December 31,2017.

Exhibit 12-5 Myers Inc.uses the indirect method to prepare the statement of cash flows.The following amounts are shown in its December 31,2017,financial statements. December 31, 2017 December 31,2016 Accourts receivable \ 442,000 \ 502,000 Cost of goods sold \ 1,200,000 Sales reveruse \ 1,600,000 Accourts payable \ 170,000 \ 210,000 Irventory \ 180,000 \ 130,000 Salaries payable \ 30,000 \ 38,000 Salaries expense \ 110,000 \ 96,000 -Refer to Exhibit 12-5.How will the change in accounts receivable be reported in the operating activities section of the statement of cash flows?

The following selected financial information is for Javier Inc. Javier Inc. Income Statement For the Year Ended December 31, 2017 Sales \ 3,000,000 Cost of goods sold 2,400,000 Gross margin 600,000 Selling and administrative expenses 324,000 Depreciation expense 126,000 Operating income 150,000 Gain on sale of equipment 9,000 Income before taxes 159,000 Income tax expense 47,700 Net income \ 111,300 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { December } 31$ 2017 2016 Current Assets Cash \ 60,000 \ 42,000 Accounts receivable 30,000 18,000 Merchandise inventory 75,000 90,000 Prepaid expenses 12,000 10,200 Current Liabilities Accounts payable 27,000 21,000 Income tax payable 7,200 4,800 Using the direct method,prepare the operating activities section of the statement of cash flows for Javier Inc.for the year ended December 31,2017.

Using the indirect method for preparing the statement of cash flows,which of the following would not be included as an adjustment to net income?

The beginning and ending balances of long-term debt for the most recent fiscal year are $43,850 and $27,000,respectively.During the year,cash payments for long-term debt amounted to $23,450.How much new long-term debt was issued during the year?

Exhibit 12-2 Carr Company has the following cash flows to account for: (1)Cash receipts for the sale of common stock. (2)Cash payments for the purchases of merchandise. (3)Cash receipts from the collection of accounts receivable. (4)Cash receipts from the collection of principal on loans made to others. (5)Cash payments to shareholders for dividends. (6)Cash payments for the purchase of machinery. -Refer to Exhibit 12-2.Which of these items would appear in the operating activities section of the statement of cash flows?

The bottom of the statement of cash flows shows a net increase in cash of $350,000.What is this increase linked to elsewhere in the financial statements?

When preparing the operating activities section of the statement of cash flows using the indirect method,decreases in current liabilities are deducted from net income.

A capital expenditure ratio greater than 1.0 indicates the company was able to generate enough operating cash to cover investments in property,plant and equipment.

The end goal of preparing the statement of cash flows is to show what caused the change in cash from the beginning of the period to the end of the period.

Firms with significant net income always have significant cash generated from operating activities.

Exhibit 12-1 Ellie Inc.has the following cash flows to account for: (1)Cash receipts from the sale of long-term bonds. (2)Cash receipts from the sale of equipment. (3)Cash payments for income taxes. (4)Cash receipts from the sale of stock. (5)Cash payments for the purchase of a factory building. -Refer to Exhibit 12-1.Which of these items would appear in the investing activities section of the statement of cash flows?

With respect to the statement of cash flows,activities that affect common stock accounts are referred to as:

Exhibit 12-1 Ellie Inc.has the following cash flows to account for: (1)Cash receipts from the sale of long-term bonds. (2)Cash receipts from the sale of equipment. (3)Cash payments for income taxes. (4)Cash receipts from the sale of stock. (5)Cash payments for the purchase of a factory building. -Refer to Exhibit 12-1.Which of these items would appear in the financing activities section of the statement of cash flows?