Question 1

Assume cash paid to suppliers for the current year is $350,000, merchandise inventory increased by $5,000 during the year, and accounts payable decreased by $10,000 during the year. What was the cost of goods sold for the current year?

Accepted Answer

The answer of Assume cash paid to suppliers for the...

Question 2

A firm purchased $20,000 worth of investments classified as securities available for sale. At the end of the year, the investments were worth $23,000. What is the correct presentation of these events in the statement of cash flows prepared under the direct method?

Accepted Answer

The purchase of investments is an investing cash outflow of $20,000. Under the direct method, changes in fair value of available-for-sale securities are not included in the cash flow statement.

Question 3

Assume cash paid to suppliers for 2011 is $420,000, that merchandise inventory increased by $20,000 during the year, and that cost of goods sold was $415,000 for the year. During 2011, accounts payable must have

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The answer of Assume cash paid to suppliers for 2011...

Question 4

The following information for Wilbur Company is available at December 31, 2011, and for the year then ending:
  
The following information is available for specific accounts and transactions:
1. On February 2, 2011, Wilbur issued a 10 percent stock dividend to shareholders of record on January 15, 2011. Market price per share of the common stock on February 2, 2011, was $15.
2. On March 1, 2011, Wilbur issued 3,800 shares of common stock for land. The common stock had a current market value of approximately $40,000 on March 1, 2011.
3. On April 15, 2011, Wilbur repurchased its long-term bonds payable with a face value of $50,000 for cash.
4. On June 30, 2011, Wilbur sold for $19,000 cash equipment having a book value of $23,000 and an original cost of $53,000.
5. On September 30, 2011, Wilbur declared and paid a 4 cent per share cash dividend to shareholders of record on August 1, 2011.
6. On October 1, 2011, Wilbur purchased land for $85,000 cash.
Required:
Prepare a statement of cash flows for Wilbur Company for the year ending December 31, 2011, using the indirect method.

Accepted Answer

The answer of The following information for Wilbur Company is...

Question 5

Use the following information to compute the cash flow from operating activities under (1) the U.S. approach, and (2) the U.K. approach.

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The answer of Use the following information to compute the...

Question 6

At the beginning of the year, a firm leased equipment on a capital lease, capitalizing $60,000 in both its lease liability and leased assets accounts. The contract calls for payments each December 31 of $15,000. The lessee's annual reporting period ends December 31 and the contract reflects 10% interest. The lessee made the first payment as required. Which of the following should be reflected on the statement of cash flows under the indirect method for the first year of the contract (ignoring noncash disclosures)?

Accepted Answer

The lease payments of $15,000 are split between financing cash outflows (the portion related to interest expense) and operating cash outflows (the portion related to reducing the lease liability). To determine the interest portion of the payment, multiply the lease liability balance at the beginning of the year ($60,000) by the interest rate (10%), which equals $6,000. Subtracting this amount from the lease payment of $15,000 leaves $9,000, which represents the reduction in the lease liability and is classified as an operating cash outflow. Therefore, the correct answer is C: $6,000 operating cash outflow; $9,000 financing cash outflow.

Question 7

Which of the following items is included on a statement of cash flows as a noncash exchange?

Accepted Answer

Noncash exchanges are significant investing and financing activities that do not involve cash. The retirement of long-term debt by issuing preferred stock is an example of a noncash financing activity, as it involves exchanging one form of financing (debt) for another (equity) without the use of cash.

Question 8

Jackson Company began the current year with the following:

During the current year, the following events occurred:

At the end of the current year, the company showed a balance in gross accounts receivable (before the allowance for doubtful accounts) of $16,800.
What amount would be shown as an operating cash inflow in the statement of cash flows under the indirect method?

Accepted Answer

The answer of Jackson Company began the current year with...

Question 9

How should the sale of $3,000 worth of cash equivalents costing $2,500 be reflected on the statement of cash flows prepared under the indirect method?

Accepted Answer

The sale of cash equivalents is a cash inflow and is classified as an operating activity in the statement of cash flows under the indirect method. The difference between the sale proceeds ($3,000) and the cost of the cash equivalents ($2,500) is the cash inflow amount, which is $500 ($3,000 - $2,500). Therefore, the correct choice is A.

Question 10

A firm sold an investment in securities available for sale originally costing $30,000, for $28,000. At the beginning of the year, the investment had a valuation allowance of $3,000, debit. What is the correct disclosure for these events in the statement of cash flows prepared under the direct method, assuming this is the only investment in securities available for sale?

Accepted Answer

Under the direct method, the sale of securities available for sale is reported as an investing cash inflow. The amount reported is the cash proceeds received from the sale, which in this case is $28,000.

The valuation allowance is a contra-asset account that is used to reduce the carrying value of an asset to its market value. Since the investment was sold for less than its original cost, it implies that the carrying value was higher than the market value at the time of sale. Therefore, the valuation allowance is no longer needed and should be reversed.

The amount of the reversal is the difference between the original valuation allowance and the amount needed to adjust the carrying value of the investment to its selling price. In this case, the carrying value of the investment is $30,000 - $3,000 = $27,000, and the selling price is $28,000. Therefore, the reversal of the valuation allowance is $1,000 ($28,000 - $27,000).

The reconciliation of earnings and net operating cash flow is used to adjust net income to cash flows from operating activities. The reversal of the valuation allowance is a non-cash adjustment that increases net income but does not affect operating cash flows. Therefore, it should be added back to net income in the reconciliation. The correct amount to add back is $1,000.

Therefore, the correct disclosure is $28,000 investing cash inflow; add $2,000 in the reconciliation of earnings and net operating cash inflow (option B).

Question 11

If a company issues both a balance sheet and an income statement with comparative figures from last year, a statement of cash flows:

Accepted Answer

A statement of cash flows should be issued for each period for which an income statement is presented, regardless of whether a balance sheet and income statement with comparative figures from last year are also issued. The statement of cash flows provides important information on a company's cash inflows and outflows during a period, which is not always apparent from the other two financial statements.

Question 12

A company's income statement disclosed $45,000 of investment revenue on equity method investments. The company did not purchase or dispose of any such investments during the year, yet the equity method investments account increased $30,000 during the year. What is the complete disclosure of these events in the statement of cash flows prepared under the indirect method?

Accepted Answer

The answer of A company's income statement disclosed $45,000 of...

Question 13

Daniels Company reported sales of $800,000, bad debt expense of $30,000, and an increase in net accounts receivable of $120,000 during the current year. What is the amount of cash collected from customers for the current year if the company did not record any write-offs during the current year?

Accepted Answer

Cash collected from customers = Sales + Increase in net accounts receivable - Bad debt expense= $800,000 + $120,000 - $30,000= $650,000

Question 14

A firm purchased $20,000 worth of investments classified as trading securities. At the end of the year, the investments are worth $23,000. What is the correct disclosure of these events in the statement of cash flows prepared under the direct method?

Accepted Answer

The correct disclosure would be an operating cash outflow of $20,000 to show the purchase of the trading securities. Since the value of the securities increased by $3,000, this would need to be subtracted in the reconciliation of earnings and net operating cash flow. Therefore, the correct answer is C, which includes both parts of the disclosure. Option A is incorrect as it only reflects the increase in value and does not account for the initial purchase. Option B is incorrect as it does not indicate whether the $17,000 is an inflow or outflow. Option D is also incorrect as disclosure is required to accurately reflect the company's cash flows.

Question 15

What is the effect of the sale of $3,000 worth of cash equivalents at cost in the statement of cash flows prepared under the direct method?

Accepted Answer

Cash equivalents are considered part of cash and cash equivalents in the cash flow statement, so their sale at cost does not affect the cash flow statement under the direct method.

Question 16

A loss on the sale of machinery in the ordinary course of business should be presented in a statement of cash flows as a(n):

Accepted Answer

The loss on the sale of machinery in the ordinary course of business is included as an adjustment to reconcile net income to net cash provided by operating activities in the statement of cash flows. This is because the loss is included in the determination of net income but does not involve an outflow of cash.

Question 17

The conversion of nonparticipating preferred stock into common stock should be presented in a statement of cash flows as a(n)

Accepted Answer

The conversion of nonparticipating preferred stock into common stock is considered a noncash exchange and should be disclosed in the statement of cash flows as a noncash investing and financing activity, not as an operating, investing, or financing activity that affects cash flow.

Question 18

The records of George Company provided the following information for the year ended December 31, 2011:
  
Additional Information:
1. Sold the long-term investment at cost, for cash. The securities were classified as available-for-sale. The market value had not changed since acquisition.
2. Declared and paid a cash dividend of $28,000.
3. Purchased operational assets that cost $68,000 by giving a $48,000 long-term note payable and by paying $20,000 cash.
4. Paid a $16,000 long-term note payable by issuing common stock having a market value of $16,000.
5. Issued a stock dividend of $44,000.
Required:
Prepare a statement of cash flows using the direct method for George Company for the year ending December 31, 2011.

Accepted Answer

The answer of The records of George Company provided the...

Question 19

Which of the following need not be disclosed in a statement of cash flows as a noncash exchange?

Accepted Answer

A stock dividend, or the payment of a dividend in the form of additional shares of stock, is not considered a noncash exchange and therefore does not need to be disclosed in the statement of cash flows as such. It is simply a reclassification of equity accounts and has no impact on the cash flows of the company. Choices B, C, and D all involve the exchange of one form of asset or liability for another, which would need to be disclosed as noncash exchanges in the statement of cash flows.

Question 20

A company sold an investment in trading securities originally costing $30,000, for $28,000. At the beginning of the year, the investment had a valuation allowance of $3,000, debit. What is the correct disclosure for these events on the statement of cash flows prepared under the direct method, assuming that this is the only investment in trading securities?

Accepted Answer

Under the direct method, the sale of trading securities is reported as an operating cash inflow in the operating activities section. The cost of the investment is not relevant for the cash flows, only the proceeds received. Therefore, the operating cash inflow is $28,000.
However, the valuation allowance of $3,000, debit, needs to be added back to reconcile earnings to net operating cash flow. In addition, the loss of $2,000 ($28,000 proceeds - $30,000 cost) also needs to be added back. Therefore, the total adjustment to reconcile earnings to net operating cash flow is $5,000 ($3,000 + $2,000). The correct disclosure is thus $28,000 operating cash inflow; add $33,000 in the reconciliation of earnings and net operating cash flow.

Quiz 21: Statement of Cash Flows Revisited