Question 1

During the year,the Abbot Company had the following changes in account balances:
1)The Accumulated Depreciation account had a beginning balance of $25,000 and an ending balance of $35,000.The increase was due to depreciation expense.
2)The long-term Notes Payable account had a beginning balance of $40,000 and an ending balance of $15,000.The decrease was due to repayment of debt.
3)The Accounts Receivable account had a beginning balance of $60,000 and an ending balance of $50,000.
4)The Equipment account had a beginning balance of $25,000 and an ending balance of $92,500.The increase was due to the purchase of equipment for cash.
5)The Long-Term Investments account (marketable securities)had a beginning balance of $18,000 and an ending balance of $12,500.The decrease was due to the sale of investments at cost.
6)The amount of cash dividends declared and paid during the year was $22,000.
7)The Interest Payable account had a beginning balance of $2,250 and an ending balance of $1,250.
What is the net cash flow from investing activities?

Accepted Answer

The net cash flow from investing activities includes the cash used to purchase equipment ($67,500 outflow) and the cash received from the sale of investments ($5,500 inflow), resulting in a net cash outflow of $62,000.

Question 2

Which section of the statement of cash flows may be prepared using either the direct method or the indirect method?

Accepted Answer

The operating activities section of the statement of cash flows may be prepared using either the direct method or the indirect method. However, the investing activities and financing activities sections must be prepared using the indirect method. D is incorrect because the investing and financing activities sections cannot be prepared using both the direct and indirect methods.

Question 3

The only difference between the cash flow statement prepared under the indirect method as opposed to the direct method is the manner in which the:

Accepted Answer

The only difference between the cash flow statement prepared under the indirect method as opposed to the direct method is the manner in which the cash flows from operating activities are presented. The indirect method begins with net income and adjusts for non-cash items, while the direct method reports actual cash inflows and outflows from operating activities. The presentation of cash flows from financing and investing activities and noncash items remains the same under both methods.

Question 4

The income statement for Year 2 of Winter Co.reported wages expense of $160,000.At December 31,Year 1,the balance sheet showed a balance in wages payable of $16,000.At December 31,Year 2,the balance sheet showed a balance in wages payable of $22,000.What amount of cash was paid for wages during the year?

Accepted Answer

$154,000. To calculate the cash paid for wages, start with the wages expense of $160,000, add the decrease in wages payable (Year 1's $16,000 - Year 2's $22,000 = -$6,000), resulting in $154,000 ($160,000 - $6,000).

Question 5

During the year,the Abbot Company had the following changes in account balances:
1)The Accumulated Depreciation account had a beginning balance of $25,000 and an ending balance of $35,000.The increase was due to depreciation expense.
2)The long-term Notes Payable account had a beginning balance of $40,000 and an ending balance of $15,000.The decrease was due to repayment of debt.
3)The Accounts Receivable account had a beginning balance of $60,000 and an ending balance of $50,000.
4)The Equipment account had a beginning balance of $25,000 and an ending balance of $92,500.The increase was due to the purchase of equipment for cash.
5)The Long-Term Investments account (marketable securities)had a beginning balance of $18,000 and an ending balance of $12,500.The decrease was due to the sale of investments at cost.
6)The amount of cash dividends declared and paid during the year was $22,000.
7)The Interest Payable account had a beginning balance of $2,250 and an ending balance of $1,250.
What is the net cash flow from financing activities?

Accepted Answer

Financing activities include transactions involving debt, equity, and dividends. Here, the repayment of debt ($40,000 - $15,000 = $25,000 outflow) and the payment of dividends ($22,000 outflow) are considered. Therefore, the net cash flow from financing activities is the sum of these outflows: $25,000 + $22,000 = $47,000 outflow.

Question 6

During the year,Burton Company had cash collections from customers of $100,000,cash paid to employees of $16,000,cash paid to suppliers of $50,000,cash used to retire long-term bonds of $16,000,and cash payments for dividends of $10,000.The net cash flow from operating activities during the year was:

Accepted Answer

The net cash flow from operating activities can be calculated using the indirect method of the cash flow statement.

Net cash flow from operating activities = Cash collections from customers - Cash paid to employees - Cash paid to suppliers 
= $100,000 - $16,000 - $50,000 
= $34,000

Cash used to retire long-term bonds and cash payments for dividends are financing activities and not included in the calculation of net cash flow from operating activities.

Question 7

During the year,the Property,Plant,and Equipment account increased by $25,000 and the Accumulated Depreciation account increased by $2,000.In addition,the company sold equipment that originally cost $12,000 and had $9,000 of accumulated depreciation for $4,500.What was the cash inflow from the sale of property,plant,and equipment?

Accepted Answer

To calculate the cash inflow from the sale of property, plant, and equipment, we need to deduct the accumulated depreciation from the original cost to determine the book value. Then, the cash inflow is the sale price minus the book value.

Book value = Original cost - Accumulated depreciation
Book value = $12,000 - $9,000
Book value = $3,000

Cash inflow = Sale price - Book value
Cash inflow = $4,500 - $3,000
Cash inflow = $1,500

Therefore, the cash inflow from the sale of property, plant, and equipment is $1,500 (Option A).

Question 8

During the year,the Equipment account increased by $25,000 and the Accumulated Depreciation account increased by $2,000.In addition,the company sold equipment that originally cost $12,000 and had $9,000 of accumulated depreciation for $4,500. What was the cash outflow to purchase equipment?

Accepted Answer

The answer of During the year,the Equipment account increased by...

Question 9

Erie Company began the accounting period with $27,000 in accounts receivable.The ending balance in accounts receivable was $10,000.If the credit sales during the period were $44,000,what is the amount of cash received from customers?

Accepted Answer

The cash received from customers is equal to the total credit sales minus the decrease in accounts receivable.

Cash received from customers = Credit sales - (Beginning accounts receivable - Ending accounts receivable)

Cash received from customers = $44,000 - ($27,000 - $10,000)

Cash received from customers = $44,000 - $17,000

Cash received from customers = $27,000

Therefore, the correct answer is D) $61,000.

Question 10

The income statement of Collins Co.reported total sales revenue of $115,000 during the current year.Assume that all sales are credit sales.The company's comparative balance sheets reported a balance in accounts receivable of $17,500 at the beginning of the year and $25,000 at the end of the year.The cash inflow from customers during the current year equals:

Accepted Answer

The cash inflow from customers is calculated by adjusting the sales revenue for the change in accounts receivable. The accounts receivable increased by $7,500 ($25,000 - $17,500), indicating that not all sales were collected in cash. Therefore, cash inflow = $115,000 (sales) - $7,500 (increase in accounts receivable) = $107,500.

Question 11

During the year,the Abbot Company had cash flow from operating activities of $133,000 and the following changes in account balances:
1)The Accumulated Depreciation account had a beginning balance of $25,000 and an ending balance of $35,000.The increase was due to depreciation expense.
2)The long-term Notes Payable account had a beginning balance of $40,000 and an ending balance of $15,000.The decrease was due to repayment of debt.
3)The Accounts Receivable account had a beginning balance of $60,000 and an ending balance of $50,000.
4)The Equipment account had a beginning balance of $25,000 and an ending balance of $92,500.The increase was due to the purchase of equipment for cash.
5)The Long-Term Investments account (marketable securities)had a beginning balance of $18,000 and an ending balance of $12,500.The decrease was due to the sale of investments at cost.
6)The amount of cash dividends declared and paid during the year was $22,000.
7)The Interest Payable account had a beginning balance of $2,250 and an ending balance of $1,250.
What was the net change in cash?

Accepted Answer

The net change in cash is the cash flow from operating activities plus the changes in the non-cash current assets and liabilities. The increase in Accumulated Depreciation and the decrease in Notes Payable are both sources of cash. The decrease in Accounts Receivable and the increase in Equipment are both uses of cash. The decrease in Long-Term Investments is a source of cash. The payment of cash dividends is a use of cash. The decrease in Interest Payable is a source of cash. Therefore, the net change in cash is $133,000 + $10,000 - $10,000 - $42,500 + $5,500 - $22,000 + $1,000 = $24,000.

Question 12

Winkler Company sold equipment for $25,000 cash.The equipment had cost $40,000 and had accumulated depreciation of $22,000 at the time of the sale.Based on this information alone,which of the following statements is correct?

Accepted Answer

The method (direct or indirect) used to prepare the statement of cash flows affects the presentation of cash flows from operating activities, not investing activities. The sale of equipment is an investing activity, and the cash received from the sale will be reported the same under both methods.

Question 13

The following account balances are for Curran Company: $$\begin{array} { l r r } 
& 12 / 31 / \text { Year } 1 & 12 / 31 / \text { Year } 2 \
\text { Accounts receivable } & \$ 84,000 & \$ 60,000 \
\text { Prepaid rent } & 8,000 & 4,000 \
\text { Long-tem marketable securities } & 80,000 & 70,000 \
\text { Dividends payable } & 6,000 & 2,000 \
\text { Salaries payable } & 8,000 & \$ 2,000 \
\text { Notes payable } & 44,000 & 34,000
\end{array}$$ Additional data for Year 2:
(1)Sales on account for the period totaled $100,000.
(2)Salary expense was $14,000.
(3)Rent expense was $12,000.
Based on this information,what was the net cash inflow from operating activities for Year 2?

Accepted Answer

The answer of The following account balances are for Curran...

Question 14

Pace Associates,a small consulting firm,charges all of its expenses on accounts payable.Pace's accounts payable balance was $1,500 at the beginning of the year.During the year,expenses were incurred on account in the amount of $13,500.The ending accounts payable balance was $3,500.What is the amount of cash paid for expenses during the year?

Accepted Answer

The cash paid for expenses can be calculated by starting with the expenses incurred on account ($13,500), adding the beginning accounts payable balance ($1,500), and then subtracting the ending accounts payable balance ($3,500). This results in $11,500 ($13,500 + $1,500 - $3,500).

Question 15

Arch Associates reports the following comparative balance sheets and income statement information. $\begin{array}{c}\text { Arch Associates}\
 \text { Comparative Balance Sheets}\\
\begin{array}{lr}
&12 / 31 / \text { Year } 1 &12 / 31 / \text { Year } 2\
\text { Cash } & \$ 12,000&\$22,000\
\text { Accounts receivable } & 4,000&8,000 \
\text { Prepaid insurance } & 10,000&8,000 \
\text { Inventory } & 6,000 &2,000\
\text { Property, plant and equipment } & \underline{12,000}&\underline{10,000} \
\text { Total assets } & \underline{ \$ 44,000}& \underline{50,000} \
\text { Accounts payable } & \$8, 000&\$12,000 \
\text { Salaries payable } & 10,000&4,000 \
\text { Long term notes payable } & 8,000 &6,000\
\text { Stockholders' equity } &  \underline{18,000}& \underline{28,000} \
\text { Total liabilities and equity } & \underline{ \$ 44,000}& \underline{\$50,000}
\end{array}\end{array}$
 $\begin{array}{lcr} 
& \begin{array}{l}
\text { Income Statement } \
\text { Year Ended 12/31/Year 2 }
\end{array} \
\text { Revenue } & & 70,000\
\text { Cost of goods sold } & &  \underline{40,000}  \
\text { Gross margin } & &30,000 \
\text { Operating expense } & &   \underline{20,000 }\
\text { Net income } & & \underline{\$10,000} \
\end{array}$
 Which of the following cash flows would be included under the operating activities section of the cash flow statement? (Assume the direct method is used.)

Accepted Answer

Cash receipts from dividends are included under the operating activities section of the cash flow statement.

Question 16

The following income statement was drawn from the income statement of Gibbons Company for its first year of operations: $$\begin{array} { l r } 
\text { Cash revenue } & \$ 60,000 \
\text { Depreciation expense } & 20,000 \
\text { Accrued interest expense } & 6,000 \
\text { Cash operating expense } & 24,000 \
\text { Operating income } & 10,000 \
\text { Gain on the sale of equipment } & 1,200 \
\text { Net income } & \$ 11,200
\end{array}$$ Using the direct method,the net cash flow from operating activities equals:

Accepted Answer

To calculate net cash flow from operating activities using the direct method, we need to adjust each item on the income statement that does not represent a cash inflow or outflow.

- Starting with net income of $36,000
- Add depreciation expense of $3,800 (because it is a non-cash expense)
- Subtract increase in accounts receivable of $1,600 (because this represents a reduction in cash flow)
- Add increase in accounts payable of $2,400 (because this represents an increase in cash flow)
- Subtract decrease in prepaid expenses of $400 (because this represents a reduction in cash flow)

Net cash flow from operating activities = $36,000 + $3,800 - $1,600 + $2,400 - $400 = $40,200 - $2,000 = $38,200

Therefore, the correct answer is C) $36,000.

Question 17

During the year,the Abbot Company had the following changes in account balances:
1)The Accumulated Depreciation account had a beginning balance of $25,000 and an ending balance of $35,000.The increase was due to depreciation expense.
2)The long-term Notes Payable account had a beginning balance of $40,000 and an ending balance of $15,000.The decrease was due to repayment of debt.
3)The Accounts Receivable account had a beginning balance of $60,000 and an ending balance of $50,000.
4)The Equipment account had a beginning balance of $25,000 and an ending balance of $92,500.The increase was due to the purchase of equipment for cash.
5)The Long-Term Investments account (marketable securities)had a beginning balance of $18,000 and an ending balance of $12,500.The decrease was due to the sale of investments at cost.
6)The amount of cash dividends declared and paid during the year was $22,000.
7)The Interest Payable account had a beginning balance of $2,250 and an ending balance of $1,250.
Assume that a statement of cash flows has been prepared.The combination of the three major components (operating activities,investing activities,financing activities)equals the:

Accepted Answer

The combination of the three major components of a statement of cash flows equals the change in the cash account balance between the beginning and end of the period. Therefore, the best choice is B. Net income for the period (choice A) does not take into account non-cash items such as depreciation, and the other answer choices (C and D) are specific account balances, not the overall change in cash.

Question 18

Arch Associates reports the following comparative balance sheets and income statement information. $\begin{array}{c}\text { Arch Associates}\
 \text { Comparative Balance Sheets}\\
\begin{array}{lr}
&12 / 31 / \text { Year } 1 &12 / 31 / \text { Year } 2\
\text { Cash } & \$ 12,000&\$22,000\
\text { Accounts receivable } & 4,000&8,000 \
\text { Prepaid insurance } & 10,000&8,000 \
\text { Inventory } & 6,000 &2,000\
\text { Property, plant and equipment } & \underline{12,000}&\underline{10,000} \
\text { Total assets } & \underline{ \$ 44,000}& \underline{50,000} \
\text { Accounts payable } & \$8, 000&\$12,000 \
\text { Salaries payable } & 10,000&4,000 \
\text { Long term notes payable } & 8,000 &6,000\
\text { Stockholders' equity } &  \underline{18,000}& \underline{28,000} \
\text { Total liabilities and equity } & \underline{ \$ 44,000}& \underline{\$50,000}
\end{array}\end{array}$ $\begin{array}{lcr} 
& \begin{array}{l}
\text { Income Statement } \
\text { Year Ended 12/31/Year 2 }
\end{array} \
\text { Revenue } & & 70,000\
\text { Cost of goods sold } & &  \underline{40,000}  \
\text { Gross margin } & &30,000 \
\text { Operating expense } & &   \underline{20,000 }\
\text { Net income } & & \underline{\$10,000} \
\end{array}$ All inventory purchases are made on account.The amount of cash paid for inventory purchases during Year 2 was:

Accepted Answer

The increase in accounts payable of $8,000 ($44,000 in Year 2 minus $36,000 in Year 1) represents the amount of inventory purchased on account during Year 2. The amount of accounts payable is added to the cost of goods sold to determine the total inventory purchased during Year 2, which is $68,000 ($60,000 + $8,000). Since all inventory purchases are made on account, the amount of cash paid for inventory purchases during Year 2 is the difference between the total inventory purchased and the increase in accounts payable, or $32,000 ($68,000 - $36,000).

Question 19

Arch Associates reports the following comparative balance sheets and income statement information. $\begin{array}{c}\text { Arch Associates}\
 \text { Comparative Balance Sheets}\\
\begin{array}{lr}
&12 / 31 / \text { Year } 1 &12 / 31 / \text { Year } 2\
\text { Cash } & \$ 12,000&\$22,000\
\text { Accounts receivable } & 4,000&8,000 \
\text { Prepaid insurance } & 10,000&8,000 \
\text { Inventory } & 6,000 &2,000\
\text { Property, plant and equipment } & \underline{12,000}&\underline{10,000} \
\text { Total assets } & \underline{ \$ 44,000}& \underline{50,000} \
\text { Accounts payable } & \$8, 000&\$12,000 \
\text { Salaries payable } & 10,000&4,000 \
\text { Long term notes payable } & 8,000 &6,000\
\text { Stockholders' equity } &  \underline{18,000}& \underline{28,000} \
\text { Total liabilities and equity } & \underline{ \$ 44,000}& \underline{\$50,000}
\end{array}\end{array}$ $\begin{array}{lcr} 
& \begin{array}{l}
\text { Income Statement } \
\text { Year Ended 12/31/Year 2 }
\end{array} \
\text { Revenue } & & 70,000\
\text { Cost of goods sold } & &  \underline{40,000}  \
\text { Gross margin } & &30,000 \
\text { Operating expense } & &   \underline{20,000 }\
\text { Net income } & & \underline{\$10,000} \
\end{array}$
 The amount of cash collected from customers during Year 2 was:

Accepted Answer

The correct answer is A.The amount of cash collected from customers during Year 2 can be calculated by adding the net income for the year to the beginning cash balance and then subtracting the ending cash balance.Net income for the year: $10,000Beginning cash balance: $12,000Ending cash balance: $22,000$10,000 + $12,000 - $22,000 = $66,000

Question 20

Which of the following would not be reported as an investing activity on the statement of cash flows?

Accepted Answer

Cash dividends received from an investment in marketable securities would be reported as a cash inflow from operating activities since it represents a return on the company's investment. Investing activities involve the purchase or sale of long-term assets, such as equipment or investments in other companies. Therefore, options B, C, and D would all be reported as investing activities on the statement of cash flows.

Quiz 14: Statement of Cash Flows