Deck 22: The Statement of Cash Flows

Question 1

Which of the following events would be classified as an operating activity in a statement of cash flows?

A)receipt of cash dividend on an equity-method investment
B)sale of a long-term investment
C)issuing notes payable
D)payment of cash dividends

Answer 1

A

Question 2

Which of the following would be added to net income in computing cash flows from operating activities?

A)an increase in accounts receivable
B)an increase in inventories
C)a decrease in deferred taxes payable
D)a decrease in prepaid expenses

Answer 2

D

Question 3

In a statement of cash flows, which of the following events would be classified as a financing activity?

A)purchase of a trading security
B)payment of interest on a loan
C)payment of cash dividends to stockholders
D)all of these

Answer 3

C

Question 4

A company sold equipment for $5, 000.The equipment originally cost $15, 000 and had accumulated depreciation of $11, 000.Which of the following statements is correct regarding the statement of cash flows prepared using the indirect method to report operating activities?

A)$5, 000 will be added to net income.
B)Investing activities will reflect proceeds of $4, 000 from the sale.
C)$1, 000 will be added to net income.
D)$1, 000 will be deducted from net income.

Question 5

In a statement of cash flows, the payment of a cash dividend on common stock outstanding should be classified as cash outflows for

A)operating activities
B)investing activities
C)lending activities
D)financing activities

Question 6

Which of the following events would be classified as an investing activity on a statement of cash flows?

A)payment of interest on a loan
B)receipt of cash dividends on an available-for-sale investment
C)purchase of treasury stock
D)sale of an office building at a gain

Question 7

Information regarding the Martin Company in 2010 appears below: $\begin{array}{ll}\text { Net income } & \$ 140,000 \\\text { Dividends paid } & 20,000 \\\text { Decrease in inventory } & 15,000\\\text { Increase in accounts payable } & 30,000 \\\text { Proceeds from issue of common stock } & 70,000 \\\text { Depreciation expense } & 10,000\end{array}$ What was Martin's net increase in cash?

A)$190, 000
B)$225, 000
C)$245, 000
D)$255, 000

Question 8

The following information relates to the Jordan, Inc: $\begin{array}{ll}\text { Depreciation expense } & \$ 500 \\\text { Increase in salaries payable } & 50 \\\text { Purchased operating equipment } & 700\\\text { Net income } & 3,000 \\ \text { Paidlong term note payable } & 600 \\\text { Paid dividends } & 900 \\\text { Increase in accmuntereceivahle } & 400\end{array}$
What is the net cash provided by operating activities?

A)$2, 100
B)$2, 650
C)$3, 200
D)$3, 150

Question 9

Which of the following statements is true regarding the Financial Accounting Standards Board (FASB)and reporting operating activities on the statement of cash flows?

A)The direct method is required of large companies.
B)The FASB prefers the indirect method.
C)The FASB prefers the direct method.
D)The FASB did not express a preference for either the direct or indirect method.

Question 10

Selected accounting information regarding the Jabbar Corporation in 2010 follows: $\begin{array}{ll}\text {Net cash provided by operating activities }&\$900,000\\\text {Common stock issued as a result of a stock dividend.}\\\text { (fair value) } & 100,000 \\\text { Common stock issued for cash } & 400,000 \\\text { Proceeds from sale of building } & 300,000\end{array}$ In 2010, Jabbar should report a net increase in cash of

A)$1, 100, 000
B)$1, 200, 000
C)$1, 600, 000
D)$1, 700, 000

Question 11

Which statement best defines a company's operating cash inflows?

A)collections from customers and stockholders
B)collections from customers and stockholders and earnings from investments
C)collections from customers and earnings from investments
D)collections from customers

Question 12

In a statement of cash flows, which of the following events would not be classified as an operating activity?

A)purchase of a trading security
B)receipt of a cash dividend
C)payment of interest on a bond issue
D)proceeds from the sale, at a gain, of an available-for-sale security

Question 13

The following information relates to the Stockton Company: $\begin{array}{lc}\text { Paid note payable } & \$ 150 \\\text { Bought equipment } & 260 \\\text { Depreciation expense } & 500\\\text { Net income } & 6,000 \\\text { Paid dividends } & 500 \\\text { Issued bonds payable } & 1,100 \\\text { Issued common stock } & 900 \\\text { Sold.1and } & 2,400\end{array}$ What is the net cash provided by financing activities?

A)$1, 350
B)$1, 850
C)$2, 350
D)$5, 850

Question 14

Which of the following events would not result in a cash inflow?

A)sale of preferred stock
B)common stock issued as a stock dividend
C)reissuance of treasury stock
D)loss of building destroyed by fire but partially reimbursed by insurance

Question 15

The content of the statement of cash flows would not include which one of the following items?

A)stock dividends
B)purchase of capital stock
C)redemption of long-term debt
D)issuance of long-term debt

Question 16

Which statement is not true? Current GAAP

A)requires that the cash flows from extraordinary items be reported as investing or financing activities and not be included in net cash flow from operating activities
B)states that cash flow per share must not be reported in a company's financial statements
C)states that under the indirect method, a company must report its operating cash inflows separately from its operating cash outflows
D)requires that the cash inflows and cash outflows for related investing activities as well as related financing activities be shown separately and not netted against each other

Question 17

In a statement of cash flows, increases or decreases in noncurrent assets are most closely associated with

A)operating activities
B)investing activities
C)financing activities.
D)investing or financing activities

Question 18

According to current GAAP, cash flow per share statistics

A)should be disclosed only if EPS information is disclosed
B)should not be disclosed
C)should not be disclosed if EPS information is disclosed
D)should be disclosed in all situations

Question 19

The Robinson Company reported net income of $90, 000 in 2010.Additional information follows: $\begin{array}{ll}\text { Depreciation expense } & \$ 18,000 \\\text { Loss on sale of equipment } & 10,000 \\\text { Gain on sale of land } & 17,000\end{array}$
Given just this information, what was the Robinson Company's net cash provided by operating activities in 2010?

A)$ 79, 000
B)$100, 000
C)$101, 000
D)$115, 000

Question 20

What is the primary purpose of a company's statement of cash flows?

A)to provide information about the company's operations
B)to provide information about the company's dividend policy
C)to provide information about the company's financing and investing activities
D)to provide information about the company's cash receipts and cash payments during the period

Question 21

In a statement of cash flows prepared by the indirect method, an increase in accounts receivable should be

A)deducted from net income in the operating activities section
B)added to net income in the operating activities section
C)reported as an inflow in the investing activities section
D)reported as an inflow in the financing activities section

Question 22

Which statement is not true?

A)Salaries expense + Decrease in salaries payable = Cash payments to employees
B)Other revenues + Increase in unearned revenues - Gains on disposal of assets - Equity investment income = Other operating cash receipts
C)Sales revenue - Increase in accounts receivable = Cash collections from customers
D)Other expenses + Decrease in prepaid expenses - Depreciation expense + Losses on disposal of assets - Equity investment loss = Other operating cash payments

Question 23

Exhibit 22-1 Walters Company provided the following information relating to patents for 2010:
$\begin{array}{ll}\text { Balance, } 1 / 1 / 2010 & \$ 4,800 \\\text { Purchase of } 10 \text {-year life patent for cash } & 2,000 \\\text { Sale of patent at book value } & (1,400)\\\text {Amortization of patents}&(290)\\\text {Balance, 12/31/2010}&\$5,110\end{array}$



-Refer to Exhibit 22-1.The Cash Flows from Investing Activities section would include a net change related to patents of

A)$(600)
B)$(310)
C)$ 310
D)$ 600

Question 24

Exhibit 22-3 The balance sheet accounts and other information related to those accounts are presented below for Tony Company:
Additional information related to 2011 activities:
1. Net loss for 2011 was $\$ 40,000$ .
2. Cash dividends of $\$ 12,000$ were declared and paid in 2011.
3. 4,000 shares of comunon stock were issued to bonchalders converting bonds payable into common stock.
4. A long-term investment was sold for $\$ 100,000$ cash
5. Equipment costing $\$ 100,000$ and having accumulated depreciation of $\$ 30,000$ was sold for $\$ 50,000$ cash


- Refer to Exhibit 22-3.Net cash provided (used)in the investing activities section of Tony's 2011 statement of cash flows was

A)$ 0
B)$(150, 000)
C)$ (50, 000)
D)$ 150, 000

Question 25

In a statement of cash flows prepared by the indirect method, which of the following events would be deducted from net income?

A)equity-method investment income in excess of dividends received
B)loss on the sale of an available-for-sale investment
C)proceeds from the sale of plant assets
D)amortization expense on a patent

Question 26

Exhibit 22-2 The Rollins Corporation reported $11, 000 of net income for the current year.The following additional information relates to Rollins for the year:
$\begin{array}{ll}\text {Subsidiary gain included in investment }\\\text {income under the equity method}& \$ 370\\\text {Decrease in inventory}&80\\\text {Lose on disunsal of eauirment}&900\\\text { Proceeds from disposal of equipment } & 1,400 \\\text { Depreciation expense } & 1,200 \\\text { Acquisition of treasury stock } & 650 \\\text { Increase in ac counts payable } & 290 \\\text { Acquisition of new securities (accounted for using the } &\\\text { ecquity method) } & 500 \\\text { Decrease in deferred income taxes } & 210 \\\text { Early retirement of bonds payable at book value } & 1,000 \\\text { Increace in interect receivahle } & 3 n\end{array}$


-Refer to Exhibit 22-2.What is Rollins' net cash provided by operating activities?

A)$11, 540
B)$12, 210
C)$12, 860
D)$14, 800

Question 27

Exhibit 22-2 The Rollins Corporation reported $11, 000 of net income for the current year.The following additional information relates to Rollins for the year:
$\begin{array}{ll}\text {Subsidiary gain included in investment }\\\text {income under the equity method}& \$ 370\\\text {Decrease in inventory}&80\\\text {Lose on disunsal of eauirment}&900\\\text { Proceeds from disposal of equipment } & 1,400 \\\text { Depreciation expense } & 1,200 \\\text { Acquisition of treasury stock } & 650 \\\text { Increase in ac counts payable } & 290 \\\text { Acquisition of new securities (accounted for using the } &\\\text { ecquity method) } & 500 \\\text { Decrease in deferred income taxes } & 210 \\\text { Early retirement of bonds payable at book value } & 1,000 \\\text { Increace in interect receivahle } & 3 n\end{array}$



-Refer to Exhibit 22-2.What is Rollins' net cash provided by investing activities?

A)$ 250
B)$ 900
C)$2, 170
D)$3, 370

Question 28

In a statement of cash flows prepared by the indirect method, which of the following events would be added to net income?

A)receipt of dividends on an available-for-sale investment
B)equity-method income from an investment in excess of dividends
C)proceeds from the sale of an available-for-sale investment
D)loss on the sale of plant assets

Question 29

Which of the following items would be deducted from net income to determine net cash provided by operating activities using the indirect method?

A)loss on sale of plant assets and amortization of bond payable discount
B)amortization of bond payable premium and gain on sale of equipment
C)amortization expense and gain on sale of equipment
D)decrease in income taxes payable and amortization of goodwill

Question 30

Which of the following items would be deducted from net income to determine the net cash provided by operating activities using the indirect method?

A)gain on sale of noncurrent assets and amortization of discount on investment in bonds
B)amortization of bonds payable premium and amortization of intangibles
C)loss on sale of noncurrent assets and amortization of investment credit
D)gain on sale of noncurrent assets and amortization of premium on investment in bonds

Question 31

Exhibit 22-3 The balance sheet accounts and other information related to those accounts are presented below for Tony Company:
Additional information related to 2011 activities:
1. Net loss for 2011 was $\$ 40,000$ .
2. Cash dividends of $\$ 12,000$ were declared and paid in 2011.
3. 4,000 shares of comunon stock were issued to bonchalders converting bonds payable into common stock.
4. A long-term investment was sold for $\$ 100,000$ cash
5. Equipment costing $\$ 100,000$ and having accumulated depreciation of $\$ 30,000$ was sold for $\$ 50,000$ cash


-Refer to Exhibit 22-3.Net cash provided (used)in the financing activities section of Tony's 2011 statement of cash flows was

A)$ 0
B)$(12, 000)
C)$(52, 000)
D)$(32, 000)

Question 32

The following information relates to the Fowler Company for 2010: $\begin{array}{ll}\text { Sales discounts } & \$ 700 \\\text { Beginning accounts receivable } & 5,000 \\\text { Collections on accounts receivable } & 20,000 \\\text { Total sales seported on income statement } & 82,500 \\\text { Ending accountsreceivable } & 7,000\end{array}$ What was the amount of cash sales?

A)$61, 200
B)$59, 800
C)$63, 800
D)$65, 200

Question 33

Selected information for Mercer Company during 2010 follows: $\begin{array}{lll}&\text { Jan } 1 & \text { Dec. } 31\\\text { Accounts payable } & \$ 45 & \$ 52 \\\text { Accounts receivable } & 60 & 68 \\\text { Common stock } & 400 & 412 \\\text { Patent amortization } & 30 & 27 \\\text { Inventory } & 70 & 60\end{array}$ If Mercer reported net income of $320, what was the net cash provided by operating activities for 2010?

A)$329
B)$330
C)$332
D)$342

Question 34

Exhibit 22-1 Walters Company provided the following information relating to patents for 2010:
$\begin{array}{ll}\text { Balance, } 1 / 1 / 2010 & \$ 4,800 \\\text { Purchase of } 10 \text {-year life patent for cash } & 2,000 \\\text { Sale of patent at book value } & (1,400)\\\text {Amortization of patents}&(290)\\\text {Balance, 12/31/2010}&\$5,110\end{array}$


- Refer to Exhibit 22-1.The Cash Flows from Operating Activities section prepared using the indirect method would include which of the following deductions or add-back amounts related to patents?

A)$(310)
B)$(290)
C)$ 290
D)$ 600

Question 35

Exhibit 22-2 The Rollins Corporation reported $11, 000 of net income for the current year.The following additional information relates to Rollins for the year:
$\begin{array}{ll}\text {Subsidiary gain included in investment }\\\text {income under the equity method}& \$ 370\\\text {Decrease in inventory}&80\\\text {Lose on disunsal of eauirment}&900\\\text { Proceeds from disposal of equipment } & 1,400 \\\text { Depreciation expense } & 1,200 \\\text { Acquisition of treasury stock } & 650 \\\text { Increase in ac counts payable } & 290 \\\text { Acquisition of new securities (accounted for using the } &\\\text { ecquity method) } & 500 \\\text { Decrease in deferred income taxes } & 210 \\\text { Early retirement of bonds payable at book value } & 1,000 \\\text { Increace in interect receivahle } & 3 n\end{array}$



-Refer to Exhibit 22-2.What is Rollins' net cash used ( )by financing activities?

A)$(1, 240)
B)$(1, 650)
C)$(1, 860)
D)$(2, 150)

Question 36

When preparing a statement of cash flows under the indirect method, an increase in ending accounts receivable over beginning accounts receivable will result in an adjustment to net income in the operating activities section because

A)cash was increased since accounts receivable is a current asset
B)the accounts receivable increase was a revenue included in net income, but it was not a source of cash
C)the net increase in accounts receivable decreases net sales and represents an assumed use of cash
D)all changes in noncash accounts must be disclosed on the cash flow statement

Question 37

Magnolia Company's statement of cash flows showed net cash provided by operating activities of $47, 000 in 2010.Magnolia reported an increase in accounts payable of $6, 000, an increase in inventory of $2, 000, depreciation expense of $3, 000, and dividends paid of $8, 000.Magnolia's net income for 2010 was

A)$48, 000
B)$40, 000
C)$39, 000
D)$32, 000

Question 38

Bertrand, Inc.prepares a statement of cash flows.In 2010, Bertrand had net income of $45, 000.In addition, the following information is available: $\begin{array}{ll}\text { Gain on sale of land } & \$ 16,000 \\\text { Decrease in inventories } & 10,000 \\\text { Amortization of patents } & 4,000 \\\text { Increase in prepaid expenses } & 3,000\end{array}$
What net cash provided by operating activities should Bertrand report in 2010?

A)$46, 000
B)$72, 000
C)$40, 000
D)$50, 000

Question 39

Angelina Heating Co.reported $72, 000 of net income.Additional information is listed below: $\begin{array}{ll}\text { Account }&\text { Change }\\\text { Prepaid assets } & \$ 400 \text { increase } \\\text { Inventory } & 700 \text { decrease } \\\text { Accounts payable } & 250 \text { decrease } \\\text { Dividends payable } & 50 \text { increase }\end{array}$ The net cash provided by operating activities was

A)$72, 150
B)$72, 100
C)$71, 900
D)$71, 850

Question 40

The following information relates to the Red Rocket Company: $\begin{array}{ll}\text { Increase in accounts receivable } & \$ 80 \\\text { Increase in bonds payable } & 1,000 \\\text { Decrease in inventory } & 75 \\\text { Net income } & 10.000\\\text { Amortization of premium on bonds payable } & 260 \\\text { Increase in income taxes payable } & 60 \\\text { Depreciation expense } & 2,000 \\\text { Decrease in accounts payable } & 380\end{array}$
What is the net cash provided by operating activities?

A)$ 9, 065
B)$11, 415
C)$11, 935
D)$12, 415

Question 41

The IFRS categories of cash flows are

A)long-term changes and short-term changes
B)operating and other
C)operating, investing, and financing
D)operating and nonoperating

Question 42

One area of difference between GAAP and IFRS cash flow reporting is the

A)treatment of losses on sale of equipment
B)general categories required for various types of cash flows
C)use of the direct or indirect method of reporting operating cash flows
D)allowed classifications of dividend and interest paid or received

Question 43

The statement of cash flows classifies cash inflows and outflows into three different activities: operating, investing, and financing.
Required:
Describe the types of transactions that would be included under each of the statement of cash flow activities.

Question 44

Companies are allowed to report cash flow per share under $\begin{array}{lll} & \text { IFRS} & \text { GAAP}\\\text { I. } & \text { Yes } & \text { No } \\\text { II. } & \text { Yes } & \text { Yes } \\\text { III. } & \text { No } & \text { No } \\\text { IVI } & \text { No } & \text { Yee }\end{array}$

A)I
B)II
C)III
D)IV

Question 45

Current GAAP permits two methods of calculating and reporting a company's net cash flow from operating activities on its statement of cash flows.
Required:
Identify the two methods.Which method does the FASB prefer? Which method do most companies use and why?

Question 46

On its January 1, 2010, balance sheet, Dilbert Company reported equipment of $50, 000 and accumulated depreciation of $20, 000.During 2010, Dilbert sold equipment with an original cost of $5, 000.Selected information from Dilbert's 2010 statement of cash flows follows:
$\begin{array}{ll}\text { Net income } & \$ 20,000 \\\text { Depreciation expense on equipment } & 2,000\\\text { Gain on sale of equipment } & 600 \\\text { Proceeds from sale of equipment } & 1,500 \\\text { Purchase of equipment } & 8,000\end{array}$ Required:
Compute the amount of equipment and accumulated depreciation that should appear on Dilbert's December 31, 2010, balance sheet.

Question 47

Treatments of items in the cash flow statement that differ between IFRS and GAAP include all of the following except the allowed treatment of

A)any cash outflows for development costs that were capitalized as intangible assets
B)losses on the early retirement of bonds
C)bank overdrafts
D)income taxes related to financing and investing activities

Question 48

A company had an increase in interest payable during the year and also amortized discount on bonds payable.Under the direct method, the amount of interest paid during the year to be reflected in the statement of cash flows is

A)interest expense plus the increase in interest payable minus the discount amortization
B)interest expense plus the increase in interest payable plus the discount amortization
C)interest expense minus the increase in interest payable minus the discount amortization
D)interest expense minus the increase in interest payable plus the discount amortization

Question 49

The statement of cash flows, along with other financial and operating information, enables investors, creditors, and other users to assess a company's liquidity, financial flexibility, and operating capability.Distinguish between liquidity, financial flexibility, and operating capability.

Question 50

Exhibit 22-3 The balance sheet accounts and other information related to those accounts are presented below for Tony Company:
Additional information related to 2011 activities:
1. Net loss for 2011 was $\$ 40,000$ .
2. Cash dividends of $\$ 12,000$ were declared and paid in 2011.
3. 4,000 shares of comunon stock were issued to bonchalders converting bonds payable into common stock.
4. A long-term investment was sold for $\$ 100,000$ cash
5. Equipment costing $\$ 100,000$ and having accumulated depreciation of $\$ 30,000$ was sold for $\$ 50,000$ cash


- Refer to Exhibit 22-3.Net cash provided (used)in the operating activities section of Tony's 2011 statement of cash flows was

A)$(40, 000)
B)$ 50, 000
C)$ 52, 000
D)$ 56, 000

Question 51

When reading the Cash Inflows from Operating Activities portion of the statement of cash flows using the direct method, you would expect to find which of the following? I. Collections from customers
II. Interest and dividends collected
III. Other operating receipts
IV. Receipts from stockholders

A)I
B)I and IV
C)I, II, and III
D)I, II, III, and IV

Question 52

Which of the following should be presented in a statement of cash flows? $\begin{array}{lll}& \text { Stock Dividends}& \text { Stock Splits}\\\text { I. } & \text { Yes } & \text { Yes } \\\text { II. } & \text { Yes } & \text { No } \\\text { III. } & \text { No } & \text { Yes } \\\text { IVI } & \text { No } & \text { No }\end{array}$

A)I
B)II
C)III
D)IV

Question 53

A cash flow statement is one of the basic financial statements that is required under $\begin{array}{lll} & \text { IFRS} & \text { GAAP}\\\text { I. } & \text { No } & \text { Yes } \\\text { II. } & \text { No } & \text { No } \\\text { III. } & \text { Yes } & \text { No } \\\text { IV } & \text { Yes } & \text { Yes }\end{array}$

A)I
B)II
C)III
D)IV

Question 54

Several items to be considered in converting net income to the net cash flow from operating activities under the indirect method are listed below:
Required:
Fill in the blanks by using a plus sign (+)or a minus sign (-)to indicate whether each item should be added to or subtracted from net income to arrive at the net cash flow from operating activities.

Question 55

The following information relates to the Davenport Company: $\begin{array}{ll}\text { Accrued interest payable, begining of period }&\$60\\\text { Prevaidinterest end of period.}&40\\\text { Accrued interest payable, end of period } & 10 \\\text { Total interest expense reported on the income statement } & 750 \\\text { Prepaid interest, beginning of period } & 70\end{array}$
What was the amount of cash payments for interest?

A)$720
B)$730
C)$750
D)$770

Question 56

When preparing a statement of cash flows using a worksheet, it is best to begin the worksheet with

A)a trial balance
B)an adjusted trial balance
C)a balance sheet
D)a balance sheet and an income statement

Question 57

A statement of cash flows contains the following sections:
a. net cash flow from operating activities
b. cash flows from investing activities
c. cash flows from financing activities
d. investing and financing activities not affecting cash A list of items that appear on the statement is provided below:
Required:
In the space provided, using the letters (a-d), indicate in which section(s)of the statement of cash flows (or accompanying schedule)the preceding items would most likely be classified.After each item affecting cash, indicate with a plus sign (+)or a minus sign (-)whether the item would be reported as an increase (inflow)or a decrease (outflow).

Question 58

When reading the Cash Outflows from Operating Activities portion of the statement of cash flows, you would expect to find which of the following? I. Payments to suppliers
II. Payments to customer:
III. Payments to employees
IV. Payments of interest
V. Payments for income tax
VI. Other operating payments

A)I, II, III, and V
B)I, III, IV, and VI
C)I, II, III, IV, V, and VI
D)I, III, IV, VI, and V

Question 59

A company's unearned rental revenue account increased from the beginning to the end of the year.In the statement of cash flows using the direct method, the cash collected from tenants would be

A)rent revenue plus unearned rent revenue at the beginning of the year
B)rent revenue plus the increase in unearned rent revenue during the year
C)rent revenue minus the increase in unearned rent revenue during the year
D)equal to rental revenue on the income statement

Question 60

Unlike GAAP, IFRS encourage the disclosure of all of the following except

A)reconciliation of net income to operating cash flows when the direct method is used in the cash flow statement
B)undrawn borrowing capacity available for operating activities
C)separation of cash flows that increase operating capacity from those that maintain operating capacity
D)operating, investing, and financing activities by segment