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Chapter 21 The Statement of Cash Flows

True/False Questions
1. Amounts held in cash equivalent investments must be reported separately from amounts held
as cash on the statement of cash flows.
Answer: False

Learning Objective: 2

Level of Learning:

2. Generally speaking, cash flows from operating activities include the elements of net income
reported on a cash basis.
Answer: True

Learning Objective: 4

Level of Learning: 2

3. In using a spreadsheet to prepare the statement of cash flows, the spreadsheet entries duplicate
the actual journal entries used to record the transactions during the year.
Answer: True

Learning Objective: 8

Level of Learning: 2

4. Interest payments on debt are classified as cash outflows from financing activities.
Answer: False

Learning Objective: 6

Level of Learning: 2

5. Transactions that represent noncash investing and financing should be reported in the
statement of cash flows.
Answer: True

Learning Objective: 7

Level of Learning: 2

6. If the direct method is used to report cash flows from operating activities in the body of the
statement of cash flows, a reconciliation of net income to net cash flows from operating
activities also is required.
Answer: True

Learning Objective: 4

Level of Learning: 1

7. Cash paid for taxes and interest must be disclosed on the face of the statement or in the
disclosure notes under both the direct and indirect methods of reporting cash flows from
operating activities.
Answer: True

Learning Objective: 4

Level of Learning: 1

8. The purchase of treasury stock is an investing cash outflow.


Answer: False

Learning Objective: 5

Level of Learning: 1

9. A decrease in cash dividends payable means that dividends declared were less than dividends
paid.
Answer: True

Learning Objective: 4

Level of Learning: 2

10. When one enters a $50,000 credit entry to the Land account in a spreadsheet for the statement
of cash flows, it represents a negative change in that account and probably is due to selling
such assets.
Answer: True

Learning Objective: 8

Level of Learning: 2

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Matching Pair Questions
Use the following to answer questions 11-15:
11-15. Listed below are the reporting classifications for a statement of cash flows using the direct
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating cash inflow
B. Operating cash outflow
C. Investing cash inflow
D. Investing cash outflow
E. Financing cash inflow
F. Financing cash outflow
G. Noncash financing and investing activity
H. Not reported on the statement of cash flows
Phrases:
11. ____ Gain from the sale of a cash equivalent.
12. ____ Cash purchase of inventory.
13. ____ Cash dividends received under the equity method.
14. ____ Principal payment on a note.
15. ____ Distribution of a stock dividend.
Answer: 11-A; 12-B; 13-C; 14-F; 15-H
Use the following to answer questions 16-20:
16-20. Listed below are the reporting classifications for a statement of cash flows using the direct
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating cash inflow
B. Operating cash outflow
C. Investing cash inflow
D. Investing cash outflow
E. Financing cash inflow
F. Financing cash outflow
G. Noncash financing and investing activity
H. Not reported on the statement of cash flows
Phrases:
16. ____ Cash collected on accounts receivable.
17. ____ Cash collection of a nontrade note receivable.
18. ____ Cash purchase of securities issued by another corporation.
19. ____ Issuance of a long-term note payable for cash.
20. ____ Payment of a property dividend.
Answer: 16-A; 17-C; 18-D; 19-E; 20-G
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Use the following to answer questions 21-25:
21-25. Listed below are reporting classifications for a statement of cash flows using the indirect
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating activity, no adjustment to net income
B. Operating activity, negative adjustment to net income
C. Operating activity, positive adjustment to net income
D. Investing cash inflow
E. Investing cash outflow
F. Financing cash inflow
G. Financing cash outflow
H. Noncash financing and investing activity
Phrases:
21. ____ Increase in inventory account.
22. ____ Payment of cash dividends.
23. ____ Cash sales.
24. ____ Prepayment of an insurance premium for six months.
25. ____ Cash proceeds from sale of equipment.
Answer: 21-B; 22-G; 23-A; 24-B; 25-D
Use the following to answer questions 26-30:
26-30. Listed below are reporting classifications for a statement of cash flows using the indirect
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating activity, no adjustment to net income
B. Operating activity, negative adjustment to net income
C. Operating activity, positive adjustment to net income
D. Investing cash inflow
E. Investing cash outflow
F. Financing cash inflow
G. Financing cash outflow
H. Noncash financing and investing activity
Phrases:
26. ____ Payment of semi-annual interest on bonds payable.
27. ____ Acquisition of a building for cash.
28. ____ Depreciation expense.
29. ____ Issuance of bonds at a discount for cash.
30. ____ Decrease in account payable.
Answer: 26-A; 27-E; 28-C; 29-F; 30-B

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Use the following to answer questions 31-35:
31-35. Listed below are the reporting classifications for a statement of cash flows using the direct
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating cash inflow
B. Operating cash outflow
C. Investing cash inflow
D. Investing cash outflow
E. Financing cash inflow
F. Financing cash outflow
G. Noncash financing and investing activity
H. Not reported on the statement of cash flows
Phrases:
31. ____ Acquisition of equipment by issuing bonds payable.
32. ____ Repayment of long-term debt by issuing preferred stock.
33. ____ Interest received on trading securities.
34. ____ Cash sale of a patent.
35. ____ Loan of cash to a supplier in exchange for a six-month note receivable.
Answer: 31-G; 32-G; 33-A; 34-C; 35-D
Use the following to answer questions 36-40:
36-40. Listed below are the reporting classifications for a statement of cash flows using the direct
method for reporting operating cash flows. Indicate the reporting classification that would
apply to each of the five transactions described below by placing the letter of the reporting
classification in the space provided by each transaction.
Terms:
A. Operating cash inflow
B. Operating cash outflow
C. Investing cash inflow
D. Investing cash outflow
E. Financing cash inflow
F. Financing cash outflow
G. Noncash financing and investing activity
H. Not reported on the statement of cash flows
Phrases:
36. ____ Payment of cash dividends.
37. ____ Purchase of treasury stock.
38. ____ Investment of excess cash in an interest-bearing security classified as a cash equivalent.
39. ____ Appropriation of retained earnings for expansion of the R&D program.
40. ____ Acquisition of equipment under a capital lease.
Answer: 36-F; 37-F; 38-H; 39-H; 40-G

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Multiple Choice Questions
41. Which of the following financial statements is prepared as of a particular point in time rather
than for a period of time?
A) Statement of cash flows.
B) Income statement.
C) Statement of shareholders' equity.
D) Balance sheet.
Answer: D

Learning Objective: 1

Level of Learning: 1

42. Which one of the following financial statements does not report amounts primarily on an
accrual basis?
A) Income statement.
B) Balance sheet.
C) Statement of cash flows.
D) Statement of shareholders' equity.
Answer: C

Learning Objective: 1

Level of Learning: 1

43. Which of the following is not required by generally accepted accounting principles?
A) Cash flow per share.
B) Earnings per share.
C) Statement of cash flows.
D) Disclosure notes.
Answer: A

Learning Objective: 1

Level of Learning: 1

44. Which of the following is always reported as an outflow of cash?


A) The accrual of warranty expense.
B) The declaration of a cash dividend.
C) The purchase of equipment for cash.
D) Amortization expense.
Answer: C

Learning Objective: 5

Level of Learning: 1

45. Which of the following causes a change in cash?


A) Accrual of interest payable.
B) Recording of depreciation expense.
C) Write-off of an uncollectible account.
D) Payment of a cash dividend declared in the previous fiscal year.
Answer: D

Learning Objective: 6

Level of Learning: 1

46. Cash equivalents generally would not include short-term investments in:
A) Commercial paper.
B) Certificates of deposit.
C) Held-to-maturity securities.
D) Money market funds.
Answer: C

Learning Objective: 2

Level of Learning: 1

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47. How is the amortization of patents reported in a statement of cash flows that is prepared using
the indirect method?
A) A decrease in cash flows from investing activities.
B) An increase in cash flows from investing activities.
C) A deduction from net income.
D) An addition to net income in arriving at cash flows from operations.
Answer: D

Learning Objective: 4

Level of Learning: 2

48. How is the amortization of patents reported in a statement of cash flows that is prepared using
the direct method?
A) Not reported.
B) An increase in cash flows from operating activities.
C) A decrease in cash flows from operating activities.
D) A decrease in cash flows from investing activities.
Answer: A

Learning Objective: 1

Level of Learning: 2

49. Which of the following is reported as an investing activity on the statement of cash flows?
A) Sale of a subsidiary.
B) Issuance of a long-term promissory note.
C) Sale of treasury stock.
D) Purchase of highly liquid, short-term investments with excess cash.
Answer: A

Learning Objective: 5

Level of Learning: 2

50. Which of the following is reported as an investing activity on the statement of cash flows?
A) The receipt of dividend revenue.
B) The payment of cash dividends.
C) The payment of interest on bonds.
D) The sale of machinery.
Answer: D

Learning Objective: 5

Level of Learning: 2

51. Which of the following is reported as an operating activity on the statement of cash flows?
A) The payment of dividends.
B) The sale of office equipment.
C) The payment of interest on long-term notes.
D) The issuance of a stock dividend.
Answer: C

Learning Objective: 3

Level of Learning: 2

52. Which of the following is reported as an operating activity on the statement of cash flows?
A) The purchase of operating assets.
B) The acquisition of treasury stock.
C) The retirement of bonds.
D) The payment of prepaid insurance.
Answer: D

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Learning Objective: 3

Level of Learning: 2

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53. Which of the following is reported as a financing activity on the statement of cash flows?
A) The sale of securities classified as available for sale.
B) The acquisition of stock for the purpose of retiring it.
C) The payment of interest on bonds payable.
D) The receipt of dividend revenue.
Answer: B

Learning Objective: 6

Level of Learning: 2

54. Which of the following is reported as a financing activity on the statement of cash flows?
A) The amortization of a patent.
B) The exchange of common stock for a building.
C) The acquisition of long-term investments.
D) The repayment of bonds issued at par.
Answer: D

Learning Objective: 6

Level of Learning: 2

55. When preparing the statement of cash flows using the indirect method for determining net
cash flows from operating activities, depreciation is added to net income because:
A) It was deducted as an expense on the income statement, but does not require cash.
B) It was deducted as an expense on the income statement and affects the amount of cash.
C) It is a significant portion of the year's expenses.
D) It represents a source or inflow of cash.
Answer: A

Learning Objective: 4

Level of Learning: 2

56. Which of the following is not classified as an operating activity?


A) Interest paid on long-term debt.
B) Dividends received on common stock.
C) Dividends paid on common stock.
D) Payments on accounts payable.
Answer: C

Learning Objective: 6

Level of Learning: 2

57. When a company purchases a security it considers a cash equivalent, the cash outflow is:
A) Reported as an operating activity.
B) Reported as an investing activity.
C) Reported as a financing activity.
D) Not reported on a statement of cash flows.
Answer: D

Learning Objective: 2

Level of Learning: 2

58. When treasury stock is sold at an amount less than its cost, the sale is classified as:
A) A financing activity.
B) An operating activity.
C) A financing activity and an operating activity.
D) An investing activity.
Answer: A

Learning Objective: 6

Level of Learning: 2

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59. Using the direct method, cash received from customers is calculated as sales:
A) Plus an increase in allowance for uncollectible accounts.
B) Minus an increase in allowance for uncollectible accounts.
C) Plus an increase in accounts receivable.
D) Plus a decrease in accounts receivable.
Answer: D

Learning Objective: 3

Level of Learning: 3

60. Cash paid to suppliers under the direct method is computed as:
A) Cost of goods sold plus a decrease in inventory and minus an increase in accounts
payable.
B) Cost of goods sold plus an increase in inventory and minus an increase in accounts
payable.
C) Cost of goods sold minus a decrease in inventory and plus an increase in accounts
payable.
D) Cost of goods sold minus an increase in inventory and plus an increase in accounts
payable.
Answer: B

Learning Objective: 3

Level of Learning: 3

61. Which of the following never requires an outflow of cash?


A) Early extinguishment of debt.
B) Retirement of common stock.
C) Payment of dividends.
D) Amortization of patent.
Answer: D

Learning Objective: 1

Level of Learning: 1

62. Which of the following is not an inflow of cash?


A) Depletion.
B) Cash borrowed on a short-term note.
C) Sale of a computer.
D) Cash borrowed on a long-term note.
Answer: A

Learning Objective: 1

Level of Learning: 1

63. The amortization of bond discount is included in the statement of cash flows (indirect method)
as:
A) A financing cash inflow.
B) An investing activity.
C) An addition to net income.
D) A deduction from net income.
Answer: C

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Learning Objective: 4

Level of Learning: 1

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64. Which of the following is not reported as an adjustment to net income when using the indirect
method of computing net cash flows from operating activities?
A) Cash dividends paid.
B) A change in accounts receivable.
C) Depreciation.
D) A change in a prepaid expense.
Answer: A

Learning Objective: 4

Level of Learning: 1

65. Which of the following is reported as a deduction from net income when using the indirect
method to determine net cash flows from operating activities?
A) Depreciation expense.
B) A bad debt written off under the allowance method.
C) Amortization of premium on bonds payable.
D) Dividends declared.
Answer: C

Learning Objective: 4

Level of Learning: 2

66. All of the following may qualify as cash equivalents except:


A) Money market accounts.
B) Certificates of deposit.
C) U.S. Treasury bills.
D) Newly issued corporate bonds.
Answer: D

Learning Objective: 1

Level of Learning: 1

67. Cost of goods sold as reported on the income statement will be less than cash paid to suppliers
if:
A) The increase in accounts payable is greater than the increase in inventory during the
period.
B) The decrease in accounts payable is equal to the increase in inventory during the period.
C) The decrease in accounts payable is less than the decrease in inventory during the period.
D) The increase in accounts payable is equal to the decrease in inventory during the period.
Answer: B

Learning Objective: 3

Level of Learning: 3

68. The primary objective of the statement of cash flows is to provide information about a
company's:
A) Cash receipts and disbursements.
B) Noncash financing and investing activities.
C) Financial position.
D) Profitability.
Answer: A

Learning Objective: 1

Level of Learning: 1

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69. When a transfer is made between cash and cash equivalents with no gain or loss, how is the
transaction treated on the statement of cash flows?
A) It is included as an operating activity.
B) It is included as a noncash financing activity.
C) It is included as an investing activity.
D) It is not reported.
Answer: D

Learning Objective: 1

Level of Learning: 2

70. Creditors and investors would generally find the statement of cash flows least useful for
assessing the:
A) Ability to generate future cash flows.
B) Ability to pay dividends.
C) Financial position at a point in time.
D) Quality of earnings.
Answer: C

Learning Objective: 1

Level of Learning: 2

71. Of the following, which is not an investing activity?


A) Purchasing a new computer.
B) Buying treasury stock.
C) Selling a parcel of land.
D) Purchasing short-term investments.
Answer: B

Learning Objective: 6

Level of Learning: 2

72. A loss on the sale of machinery should be reported on the statement of cash flows as:
A) An adjustment to net income under the indirect method.
B) An operating activity under the direct method.
C) An investing activity cash outflow.
D) A noncash investing activity.
Answer: A

Learning Objective: 4

Level of Learning: 2

73. Which of the following would not be a cash inflow from financing activities?
A) Cash from issuing common stock.
B) Cash from issuing bonds.
C) Cash from issuing preferred stock.
D) Cash from the sale of stock of a supplier.
Answer: D

Learning Objective: 6

Level of Learning: 2

74. Which of the following would be reported as a cash outflow from investing activities?
A) Issuance of bonds.
B) Purchase of land.
C) Payment of dividends.
D) Retirement of common stock.
Answer: B

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Learning Objective: 5

Level of Learning: 2

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75. Payments to acquire bonds of other corporations should be classified on a statement of cash
flows as:
A) A lending activity.
B) An operating activity.
C) A financing activity.
D) An investing activity.
Answer: D

Learning Objective: 5

Level of Learning: 2

76. Which of the following would be added to net income when determining cash flows from
operating activities under the indirect method?
A) A gain on the sale of land.
B) An increase in prepaid expenses.
C) A decrease in accounts payable.
D) A decrease in accounts receivable.
Answer: D

Learning Objective: 4

Level of Learning: 3

77. Which of the following would be an example of an investing activity on a statement of cash
flows?
A) Sale of equipment.
B) Issuance of long-term bonds.
C) Receipt of investment revenue.
D) Conversion of a cash equivalent into cash.
Answer: A

Learning Objective: 5

Level of Learning: 2

78. Interest payments to creditors are reported on a statement of cash flows as:
A) An investing activity.
B) A borrowing activity.
C) A financing activity.
D) An operating activity.
Answer: D

Learning Objective: 4

Level of Learning: 1

79. Accrual of payroll expense is:


A) Reported as an operating activity in the statement of cash flows.
B) Reported as an investing activity in the statement of cash flows.
C) Reported as a financing activity in the statement of cash flows.
D) None of the above is correct.
Answer: D Learning Objective: 2
Level of Learning: 2
Rationale: Accruing expenses does not affect cash flows.
80. Purchase of equipment for cash is:
A) Reported as an operating activity in the statement of cash flows.
B) Reported as an investing activity in the statement of cash flows.
C) Reported as a financing activity in the statement of cash flows.
D) None of the above is correct.
Answer: B

Learning Objective: 5

Level of Learning: 2

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81. Acquiring land with a long-term note is:
A) Reported as an investing activity in the statement of cash flows.
B) Reported as a financing activity in the statement of cash flows.
C) Reported as a noncash investing and financing activity in the statement of cash flows.
D) None of the above is correct.
Answer: C

Learning Objective: 7

Level of Learning: 2

82. Proceeds from the sale of a plant site are:


A) Reported as an operating activity in the statement of cash flows.
B) Reported as an investing activity in the statement of cash flows.
C) Reported as a financing activity in the statement of cash flows.
D) None of the above is correct.
Answer: B

Learning Objective: 5

Level of Learning: 2

83. Purchase of treasury stock is:


A) Reported as a financing activity in the statement of cash flows.
B) Reported as an investing activity in the statement of cash flows.
C) Reported as an operating activity in the statement of cash flows.
D) None of the above is correct.
Answer: A

Learning Objective: 6

Level of Learning: 2

Use the following to answer questions 84-88:


Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its
income statement with its statement of cash flows on both the direct and indirect method bases.
84. In its 2006 income statement, WME reported a $60,000 loss on the sale of equipment. In its
reconciliation schedule, WME should:
A) Report a $40,000 cash outflow for the direct method.
B) Show a $40,000 positive adjustment to net income under the indirect method.
C) Show a $40,000 negative adjustment to net income under the indirect method.
D) None of the above is correct.
Answer: B Learning Objective: 4
Level of Learning: 3
Rationale: This loss reduces net income, but has no effect on cash flow.

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85. In its 2006 income statement, WME reported $11,000 of interest expense on its outstanding
bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its
reconciliation schedule, WME should:
A) Show a $2,000 positive adjustment to net income under the indirect method for the
decrease in bond premium.
B) Show a $2,000 negative adjustment to net income under the indirect method for the
decrease in bond premium.
C) Show a $2,000 positive adjustment to net income under the indirect method for the
decrease in bond discount.
D) Show a $2,000 negative adjustment to net income under the indirect method for the
decrease in bond discount.
Answer: C Learning Objective: 4
Level of Learning: 3
Rationale: When interest expense exceeds the cash paid, the effective interest rate exceeds the
stated interest rate; therefore, the bond was sold at a discount.
86. In its 2006 income statement, WME reported $440,000 for the cost of goods sold. WME paid
inventory suppliers $380,000 in 2006, and its inventory balance decreased by $41,000 during
the year. In its reconciliation schedule, WME should:
A) Show a $19,000 positive adjustment to net income under the indirect method for the
increase in accounts payable.
B) Show a $19,000 positive adjustment to net income under the indirect method for the
decrease in accounts payable.
C) Show a $19,000 negative adjustment to net income under the indirect method for the
increase in accounts payable.
D) Show a $19,000 negative adjustment to net income under the indirect method for the
decrease in accounts payable.
Answer: A Learning Objective: 4
Level of Learning: 3
Rationale: Decrease in inventory balance by $41,000 indicates that purchases were less than
cost of goods sold by $41,000, totaling $399,000. If cash paid to suppliers was $380,000,
accounts payable increased by $19,000.
87. In its 2006 income statement, WME reported $58,000 for insurance expense. WME paid
$72,000 in insurance premiums during 2006. In its reconciliation schedule, WME should:
A) Show a $14,000 positive adjustment to net income under the indirect method for the
increase in prepaid insurance.
B) Show a $14,000 negative adjustment to net income under the indirect method for the
decrease in prepaid insurance.
C) Show a $14,000 negative adjustment to net income under the indirect method for the
increase in prepaid insurance.
D) Show a $14,000 positive adjustment to net income under the indirect method for the
decrease in prepaid insurance.
Answer: C Learning Objective: 4
Level of Learning: 3
Rationale: Prepaid insurance, an asset account, increased by the cash payment of $72,000 and
decreased by the $58,000 portion that was expensed. Thus, prepaid insurance increased by
$14,000.

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88. In its 2006 income statement, WME reported $695,000 for service revenue earned from
membership fees. WME received $681,000 cash in advance from members during 2006. In
its reconciliation schedule, WME should:
A) Show a $14,000 negative adjustment to net income under the indirect method for the
increase in unearned revenue.
B) Show a $14,000 negative adjustment to net income under the indirect method for the
decrease in unearned revenue.
C) Show a $14,000 positive adjustment to net income under the indirect method for the
increase in unearned revenue.
D) Show a $14,000 positive adjustment to net income under the indirect method for the
decrease in unearned revenue.
Answer: B Learning Objective: 4
Level of Learning: 3
Rationale: Unearned revenue, a liability account, increased by the cash received for $681,000
and decreased by the $695,000 revenue recognized. Thus, unearned revenue decreased by
$14,000.
89. Rampart Inc. recorded the following transaction:
Land
Notes Payable
Cash

15 million
12 million
3 million

In the statement of cash flows, this would be reported as:


A) $3 million outflow from investing activities.
B) $15 million outflow from investing activities.
C) $3 million outflow from investing activities and $12 million noncash investing and
financing activity.
D) None of the above
Answer: C

Learning Objective: 7

Level of Learning: 3

90. On December 31, 2006, Wellstone Company reported net income of $70,000 and sales of
$210,000. The company also reported beginning and ending accounts receivable at $20,000
and $25,000, respectively. Wellstone will report cash collected from customers in its 2006
statement of cash flows (direct method) in the amount of:
A) $215,000.
B) $285,000.
C) $135,000.
D) $205,000.
Answer: D Learning Objective: 3
Rationale:
Cash
Accounts receivable
Sales revenue

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Level of Learning: 3
205,000
5,000
210,000

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91. On December 31, 2006, Tiras Company reported net income of $50,000 and sales of
$200,000. The company also reported beginning and ending accounts receivable at $20,000
and $25,000, respectively. Tiras will report cash collected from customers in its 2006
statement of cash flows (indirect method) in the amount of:
A) $0.
B) $245,000.
C) $205,000.
D) $195,000.
Answer: A Learning Objective: 4
Level of Learning: 3
Rationale: When using the indirect method to determine cash flows from operating activities,
cash collected from customers is not calculated or reported.
92. Hemmer Company reported net income for 2006 in the amount of $40,000. The company's
financial statements also included the following:
Decrease in accounts receivable
Increase in inventory
Depreciation expense

$6,000
1,000
3,000

What is net cash provided by operating activities?


A) $38,000.
B) $43,000.
C) $35,000.
D) $48,000.
Answer: D Learning Objective: 4
Level of Learning: 3
Rationale:
Net income
$40,000
Decrease in accounts receivable
6,000
Increase in inventory
(1,000 )
Depreciation expense
3,000
Net cash flows from operating activities
$48,000

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93. Creble Company reported net income for 2006 in the amount of $40,000. The company's
financial statements also included the following:
Increase in accounts receivable
Decrease in inventory
Depreciation expense
Gain on sale of equipment

$4,000
2,000
3,000
5,000

On the statement of cash flows what is net cash provided by operating activities under the
indirect method?
A) $36,000.
B) $41,000.
C) $40,000.
D) $38,000.
Answer: A Learning Objective: 4
Level of Learning: 3
Rationale:
Net income
$40,000
Increase in accounts receivable
(4,000 )
Decrease in inventory
2,000
Depreciation expense
3,000
Gain on sale of equipment
(5,000 )
Net cash flows from operating activities
$36,000
94. Lite Travel Company's accounting records include the following information:
Payments to suppliers
Collections on accounts receivable
Cash sales

$50,000
79,000
44,000

What is the amount of net cash provided by operating activities indicated by the numbers
provided?
A) $ 50,000.
B) $ 73,000.
C) $ 94,000.
D) $129,000.
Answer: B Learning Objective: 3
Rationale:
Cash
Accounts payable
Accounts receivable
Sales revenue

128

Level of Learning: 3
73,000
50,000
79,000
44,000

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Chapter 21 The Statement of Cash Flows


95. Freeman Company's accounting records include the following information:
Payments to suppliers
Collections on accounts receivable
Cash sales
Income taxes paid
Equipment purchased

$50,000
90,000
20,000
5,000
15,000

What is the amount of net cash provided by operating activities indicated by these
transactions?
A) $40,000.
B) $45,000.
C) $55,000.
D) $60,000.
Answer: C Learning Objective: 5
Rationale:
Cash
Accounts payable
Income taxes payable
Accounts receivable
Sales revenue

Level of Learning: 3
55,000
50,000
5,000
90,000
20,000

The purchase of equipment is an investing activity.


96. Ludwig Company's prepaid rent was $9,000 at December 31, 2005, and $13,000 at December
31, 2006. Ludwig reported rent expense of $19,000 on the 2006 income statement. What
amount would be reported on the statement of cash flows as rent paid using the direct method?
A) $15,000.
B) $19,000.
C) $23,000.
D) None of the above is correct.
Answer: D Learning Objective: 3
Rationale:
Rent expense
Prepaid rent
Cash

Level of Learning: 3
19,000
4,000
23,000

97. Pickering Company's prepaid insurance was $8,000 at December 31, 2005, and $10,000 at
December 31, 2006. Pickering reported insurance expense of $15,000 on the 2006 income
statement. What amount would be reported on the statement of cash flows as insurance paid
using the direct method?
A) $13,000.
B) $17,000.
C) $15,000.
D) $23,000.
Answer: B Learning Objective: 3
Rationale:
Insurance expense
Prepaid insurance
Cash

Level of Learning: 3
15,000
2,000

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

17,000
129

Chapter 21 The Statement of Cash Flows


98. Alpha Company had the following account balances for 2006:
Dec. 31
$44,000
58,000

Accounts receivable
Accounts payable

Jan. 1
$35,000
60,000

Alpha reported net income of $210,000 for 2006. Assuming no other changes in current
account balances, what is the amount of net cash provided by operating activities for 2006
reported on the statement of cash flows?
A) $224,000.
B) $206,000.
C) $214,000.
D) $196,000.
Answer: D Learning Objective: 4
Rationale:
Net income
Increase in accounts receivable
Decrease in accounts payable

Level of Learning: 3
$210,000
(9,000 )
(5,000 )
$196,000

99. Hogan Company had the following account balances for 2006:
Dec. 31
$44,000
60,000
15,000

Accounts receivable
Accounts payable
Prepaid insurance

Jan. 1
$35,000
55,000
10,000

Hogan reported net income of $300,000 for 2006. Assuming no other changes in current
account balances, what is the amount of net cash provided by operating activities for 2006
reported on the statement of cash flows?
A) $291,000.
B) $290,000.
C) $281,000.
D) $301,000.
Answer: A Learning Objective: 4
Rationale:
Net income
Increase in accounts receivable
Increase in accounts payable
Increase in prepaid insurance

130

Level of Learning: 3
$300,000
(9,000 )
5,000
(5,000 )
$291,000

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Chapter 21 The Statement of Cash Flows


100. Hanson Company had the following account balances for 2006:
Inventory
Accounts payable

Dec. 31
$40,000
40,000

Jan. 1
$35,000
55,000

Hanson reported net income of $90,000 for 2006. Assuming no other changes in current
account balances, what is the amount of net cash provided by operating activities for 2006
reported on the statement of cash flows?
A) $ 70,000.
B) $ 80,000.
C) $100,000.
D) $110,000.
Answer: A Learning Objective: 4
Rationale:
Net income
Increase in inventory
Decrease in accounts payable

Level of Learning: 3
$90,000
(5,000 )
(15,000 )
$70,000

101. A company reported interest expense of $540,000 for the year. Interest payable was $35,000
and $75,000 at the beginning and the end of the year, respectively. What was the amount of
interest paid?
A) $580,000.
B) $615,000.
C) $500,000.
D) $575,000.
Answer: C Learning Objective: 4
Rationale:
Interest expense
Interest payable
Cash

Level of Learning: 3
540,000
40,000
500,000

102. A firm reported (in millions of dollars) net cash inflows (outflows) as follows: operating $75,
investing ($200), and financing $350. The beginning cash balance was $250. What was the
ending cash balance?
A) $875.
B) $ 25.
C) $475.
D) $125.
Answer: C Learning Objective: 1
Level of Learning: 3
Rationale: $75 - $200 + $350 + $250 = $475

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Chapter 21 The Statement of Cash Flows


103. During the year, cash increased by $300 million. Investing and financing activities created
positive cash flow totaling $500 million. What were net cash flows from operating activities
on the statement of cash flows?
A) Inflow of $300 million.
B) Outflow of $200 million.
C) Outflow of $300 million.
D) Inflow of $600 million.
Answer: B Learning Objective: 3
Rationale: $300 $500 = ($200)

Level of Learning: 3

104. Bowers Corporation reported the following (in thousands of dollars) for the year:
Balance
Beginning
Ending
$600
$850
40
35

Accounts receivable
Allowance for bad debts

Sales on account were $1,900 and bad debt expense was $18 for the year. How much cash was
collected from customers on account?
A) $1,627.
B) $1,642.
C) $1,638.
D) $2,142.
Answer: A Learning Objective: 3
Rationale:
Cash
Accounts receivable
Allowance for bad debts
Bad debt expense
Sales revenue

Level of Learning: 3
1,627
250
5
18
1,900

105. Sneed Corporation reported balances in the following accounts for the current year:
Beginning
$50
80

Income tax payable


Deferred tax liability

Ending
$30
140

Income tax expense was $230 for the year. What was the amount paid for taxes?
A) $280.
B) $220.
C) $210.
D) $190.
Answer: D Learning Objective: 3
Rationale:
Income tax expense
Income tax payable
Deferred tax liability
Cash
132

Level of Learning: 3
230
20
60
190

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Chapter 21 The Statement of Cash Flows


106. Dooling Corporation reported balances in the following accounts for the current year:
Inventories
Accounts payable

Beginning
$600
300

Ending
$300
500

Cost of goods sold was $7,500. What was the amount of cash paid to suppliers?
A) $7,000.
B) $7,200.
C) $7,300.
D) $7,500.
Answer: A Learning Objective: 3
Rationale:
Cost of goods sold
Inventory
Accounts payable
Cash

Level of Learning: 3
7,500
300
200
7,000

107. A firm reported salary expense of $239,000 for the current year. The beginning and ending
balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of
cash paid for salaries?
A) $214,000.
B) $289,000.
C) $264,000.
D) $239,000.
Answer: C Learning Objective: 3
Rationale:
Salary expense
Salaries payable
Cash

Level of Learning: 3
239,000
25,000
264,000

108. Goodfellow Corporation reported pension expense of $477 for the current year. The beginning
and ending balances in the prepaid pension expense account were $50 and $30, respectively.
What was the amount of cash paid into the pension fund?
A) $477.
B) $457.
C) $497.
D) None of the above is correct.
Answer: B Learning Objective: 5
Rationale:
Pension expense
Prepaid pension expense
Cash

Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

477
20
457

133

Chapter 21 The Statement of Cash Flows


109. Melanie Corporation declared cash dividends of $13,500 during the current year. The
beginning and ending balances in dividends payable were $450 and $750, respectively. What
was the amount of cash paid for dividends?
A) $12,750.
B) $13,800.
C) $12,900.
D) $13,200.
Answer: D Learning Objective: 6
Rationale:
Retained earnings
Dividends payable
Cash

Level of Learning: 3
13,500
300
13,200

Problems
110. Determine the amount of cash received from customers for each of the four independent
situations below.
Situation
1
2
3
4

Sales
revenue
$300,000
300,000
400,000
400,000

Accounts
receivable
inc (dec)
$ 10,000
(10,000)
(10,000)
10,000

Bad debt
expense
$

0
0
2,000
2,000

Allowance for
uncollectible
accounts
inc (dec)
$ 0
0
1,000
(1,000)

Cash received
from customers
$
$
$
$

Answer:
1) $300,000 - $10,000 = $290,000
2) $300,000 + $10,000 = $310,000
3) $400,000 + $10,000 + $1,000 - $2,000 = $409,000
4) $400,000 - $10,000 - $1,000 - $2,000 = $387,000
Learning Objective: 3

134

Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


111. Determine the amount of cash paid to suppliers for each of the four independent situations
below.
Situation

Cost of
goods sold

1
2
3
4

$300,000
300,000
400,000
400,000

Answer:
1) $300,000
2) $300,000
3) $400,000
4) $400,000

Inventory
inc (dec)
$6,000
0
6,000
(6,000)

Accounts
payable
inc (dec)
$
0
7,000
7,000
(7,000)

Cash paid to suppliers


$
$
$
$

+ $6,000 = $306,000
- $7,000 = $293,000
+ $6,000 - $7,000 = $399,000
+ $7,000 - $6,000 = $401,000

Learning Objective: 3

Level of Learning: 3

112. The accounting records of Eastlake Industries provided the data below.
Net income
Depreciation expense
Increase in inventory
Increase in accounts receivable
Decrease in interest payable
Amortization of bond premium
Increase in accounts payable
Cash dividends paid

$300,000
15,000
2,000
1,400
1,600
3,000
7,000
20,000

Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Answer:
Net income
Adjustments for noncash effects:
Depreciation expense
Increase in inventory
Decrease in interest payable
Increase in accounts receivable
Decrease in bond premium
Increase in accounts payable
Net cash flows from operating activities
Learning Objective: 4

$300,000
15,000
(2,000 )
(1,600 )
( 1,400 )
(3,000 )
7,000
$314,000

Level of Learning: 3

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135

Chapter 21 The Statement of Cash Flows


113. The accounting records of Westlake Industries provided the data below.
Net income
Depreciation expense
Decrease in inventory
Increase in accounts receivable
Increase in interest payable
Amortization of bond discount
Increase in accounts payable
Cash dividends paid

$200,000
15,000
12,000
1,400
1,600
3,000
7,000
20,000

Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Answer:
Net income
Adjustments for noncash effects:
Depreciation expense
Decrease in inventory
Increase in interest payable
Increase in accounts receivable
Decrease in bond discount
Increase in accounts payable
Net cash flows from operating activities
Learning Objective: 4

$200,000
15,000
12,000
1,600
(1,400 )
3,000
7,000
$237,200

Level of Learning: 3

114. Prepare the spreadsheet entries necessary to determine the amount of cash received from
customers for each of the four independent situations below.

136

Situation

Sales
revenue

1
2
3
4

200,000
200,000
200,000
200,000

Accounts
receivable
inc (dec)
10,000
(10,000)
(10,000)
10,000

Bad debt
expense
inc (dec)
0
0
2,000
2,000

Allowance for
uncollectible
accounts
0
0
1,000
(1,000)

Answer:
(1.) Cash
Accounts receivable
Sales revenue

190,000
10,000

(2.)

210,000

Cash received
from customers

200,000

Cash
Accounts receivable
Sales revenue

10,000
200,000

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Chapter 21 The Statement of Cash Flows


(3.)

(4.)

Cash
Bad debt expense
Allowance for uncollectible accounts
Accounts receivable
Sales revenue

209,000
2,000

Cash
Bad debt expense
Allowance for uncollectible accounts
Accounts receivable
Sales revenue

187,000
2,000
1,000
10,000

Learning Objective: 3

1,000
10,000
200,000

200,000

Level of Learning: 3

115. Prepare the spreadsheet entries necessary to determine the amount of cash paid to suppliers for
each of the four independent situations below.
Situation

Cost of
goods sold

Inventory
inc (dec)

1
2
3
4

400,000
400,000
100,000
100,000

6,000
0
6,000
(6,000)

Account
payable
inc (dec)
0
7,000
7,000
(7,000)

Cash paid
to suppliers

Answer:
(1.) Cost of goods sold
Inventory
Cash

400,000
6,000

(2.)

Cost of goods sold


Accounts payable
Cash

400,000

Cost of goods sold


Inventory
Accounts payable
Cash

100,000
6,000

Cost of goods sold


Accounts payable
Inventory
Cash

100,000
7,000

(3.)

(4.)

Learning Objective: 3

406,000
7,000
393,000

7,000
99,000

6,000
101,000
Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


116. Following are the income statement and some additional information for Carolina Consulting
Company.
Carolina Consulting Company
Income Statement
For the Year Ended December 31, 2006
Net sales
Cost of goods sold
Gross margin
Operating expenses
Depreciation expense
Income before taxes
Income taxes
Net income

$10,000
(1,500 )
8,500
$2,000
900

(2,900 )
5,600
(1,600 )
$4,000

All sales were on credit and accounts receivable decreased by $900 this year compared to last
year. Merchandise purchases were on credit with a decrease in accounts payable of $700
during the year. Ending inventory was $500 larger than beginning inventory. Income taxes
payable increased $300 during the year. All operating expenses were paid for in cash.
Required:
Prepare the cash flows from operating activities section of the statement of cash flows using
the direct method.
Answer:
Cash flows from operating activities:
Cash received from customers ($10,000 + $900)
Cash paid to suppliers ($1,500 + $500 + $700)
Cash paid for operating expenses
Cash paid for taxes ($1,600 - $300)
Net cash flows from operating activities
Learning Objective: 3

138

$10,900
(2,700 )
(2,000 )
(1,300 )
$4,900

Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


117. Following are the income statement and some additional information for Parson Corporation
for 2006.
Parson Corporation
Income Statement
For the Year Ended December 31, 2006
Net sales
Cost of goods sold
Gross margin
Operating expenses
Depreciation expense
Income before taxes
Income taxes
Net income

$10,000
(1,500 )
8,500
$2,000
900

(2,900 )
5,600
(1,600 )
$4,000

All sales were on credit and accounts receivable increased by $600 this year compared to last
year. Merchandise purchases were on credit with a increase in accounts payable of $400
during the year. Ending inventory was $500 larger than beginning inventory. Income taxes
payable increased $300 during the year. All operating expenses were paid for in cash.
Required:
Prepare the cash flows from operating activities section of the statement of cash flows using
the indirect method.
Answer:
Cash flows from operating activities:
Net income
Adjustment for noncash effects:
Depreciation expense
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Increase in taxes payable
Net cash flows from operating activities
Learning Objective: 4

$4,000
900
(600 )
(500 )
400
300
$4,500

Level of Learning: 3

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139

Chapter 21 The Statement of Cash Flows


118. Partial balance sheets and additional information are listed below for Sowell Company.
Sowell Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$40,000
70,000
40,000

2005
$20,000
85,000
35,000

$54,000

$62,000

Additional information for 2006:


Net income was $88,000.
Depreciation expense was $19,000.
Required:
Prepare the operating activities section of the statement of cash flows for 2006 using the
indirect method.
Answer:
Cash flows from operating activities:
Net income
Adjustment for noncash effects:
Depreciation expense
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Net cash flows from operating activities
Learning Objective: 4

$88,000
19,000
15,000
(5,000 )
(8,000 )
$109,000

Level of Learning: 3

119. Partial balance sheets and additional information are listed below for Rickey Company.
Rickey Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$20,000
85,000
35,000

2005
$40,000
70,000
40,000

$62,000

$80,000

Additional information for 2006:


Net income was $160,000.
Depreciation expense was $20,000.
Required:
Prepare the operating activities section of the statement of cash flows for 2006 using the
indirect method.
140

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Chapter 21 The Statement of Cash Flows


Answer:
Cash flows from operating activities:
Net income
Adjustment for noncash effects:
Depreciation expense
Increase in accounts receivable
Decrease in inventory
Decrease in accounts payable
Net cash flows from operating activities
Learning Objective: 4

$160,000
20,000
(15,000 )
5,000
(18,000 )
$152,000

Level of Learning: 3

120. Partial balance sheets and additional information are listed below for Monaco Company.
Monaco Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$40,000
60,000
25,000

2005
$20,000
90,000
40,000

$60,000

$72,000

Additional information for 2006:


Net income was $270,000.
Depreciation expense was $30,000.
Sales totaled $800,000.
Cost of goods sold totaled $305,000.
Required:
Calculate the amount of cash paid to merchandise suppliers during 2006.
Answer:
Cost of goods sold
Accounts payable
Inventory
Cash (paid to suppliers)
Learning Objective: 3

305,000
12,000
15,000
302,000

Level of Learning: 3

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141

Chapter 21 The Statement of Cash Flows


121. Partial balance sheets and additional information are listed below for Ensign Company.
Ensign Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$20,000
90,000
20,000

2005
$40,000
60,000
25,000

$72,000

$58,000

Additional information for 2006:


Net income was $170,000.
Depreciation expense was $30,000.
Sales totaled $400,000.
Cost of goods sold totaled $145,000.
Required:
Calculate the amount of cash paid to merchandise suppliers during 2006.
Answer:
Cost of goods sold
Inventory
Accounts payable
Cash (paid to suppliers)
Learning Objective: 3

145,000
5,000
14,000
126,000

Level of Learning: 3

122. Partial balance sheets and additional information are listed below for Funk Company.
Funk Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$40,000
94,000
25,000

2005
$20,000
90,000
40,000

$58,000

$72,000

Additional information for 2006:


Net income was $170,000.
Depreciation expense was $30,000.
Sales totaled $800,000.
Cost of goods sold totaled $325,000.
Required:
Calculate the amount of cash received from customers during 2006.

142

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Chapter 21 The Statement of Cash Flows


Answer:
Cash (received from customers)
Accounts receivable
Sales revenue
Learning Objective: 3

796,000
4,000
800,000

Level of Learning: 3

123. Partial balance sheets and additional information are listed below for Julius Company.
Julius Company
Partial Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Liabilities
Accounts payable

2006
$20,000
90,000
40,000

2005
$40,000
60,000
25,000

$72,000

$58,000

Additional information for 2006:


Net income was $70,000.
Depreciation expense was $30,000.
Sales totaled $600,000.
Cost of goods sold totaled $325,000.
Required:
Calculate the amount of cash received from customers during 2006.
Answer:
Cash (received from customers)
Accounts receivable
Sales revenue
Learning Objective: 3

570,000
30,000
600,000

Level of Learning: 3

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143

Chapter 21 The Statement of Cash Flows


124. Partial balance sheets for Yarborough Company and additional information are found below.
Yarborough Company
Partial Balance Sheets
as of December 31
Assets
Equipment
Accumulated depreciation
Shareholders' equity
Common stock, $5 par
Paid-in capital - excess of par
Retained earnings

2006
$100,000
(25,000)
$150,000
20,000
40,000

2005
$75,000
(20,000)
$100,000
0
30,000

Additional information for 2006:


July 1:
Issued 10,000 shares of common stock for cash.
July 1:
Purchased new equipment for cash.
Dec. 31
Paid cash dividends of $30,000.
Required:
Prepare the investing activities section of the statement of cash flows for 2006.
Answer:
Cash flows from investing activities:
Purchase of equipment
Net cash flows from investing activities
Learning Objective: 5

$(25,000)
$(25,000)

Level of Learning: 3

125. Partial balance sheets for ABC Company and additional information are provided below.
ABC Company
Partial Balance Sheets
as of December 31
Assets
Equipment
Accumulated depreciation
Shareholders' equity
Common stock, $10 par
Paid-in capital excess of par
Retained earnings

2006
$100,000
(25,000)
180,000
20,000
40,000

2005
$75,000
(20,000)
$100,000
0
30,000

Additional information for 2006:


July 1:
Issued 8,000 shares of common stock for cash.
July 1:
Purchased new equipment for cash.
December 31: Paid cash dividends of $20,000.
Required:
Prepare the financing activities section of the statement of cash flows for 2006.

144

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Chapter 21 The Statement of Cash Flows


Answer:
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash flows from financing activities
Learning Objective: 6

$100,000
(20,000)
$80,000

Level of Learning: 3

126. The accounting records of Harrison Company provided the data below.
Net loss
Depreciation expense
Increase in salaries payable
Decrease in accounts receivable
Increase in inventory
Amortization of patent
Decrease in discount on bonds

$10,000
12,000
1,000
4,000
4,800
700
500

Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Answer:
Net loss
Adjustments for noncash effects:
Depreciation expense
Increase in salaries payable
Decrease in accounts receivable
Increase in inventory
Amortization of patent
Reduction in discount on bonds
Net cash flows from operating activities
Learning Objective: 4

$(10,000 )
12,000
1,000
4,000
(4,800 )
700
500
$ 3,400

Level of Learning: 3

127. The accounting records of Unlucky Company provided the data below
Net loss
Depreciation expense
Increase in salaries payable
Increase in accounts receivable
Decrease in inventory
Amortization of patent
Decrease in premium on bonds

$40,000
12,000
11,000
4,000
4,800
700
500

Required:
Prepare a reconciliation of net income to net cash flows from operating activities.

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Chapter 21 The Statement of Cash Flows


Answer:
Net loss
Adjustments for noncash effects:
Depreciation expense
Increase in salaries payable
Increase in accounts receivable
Decrease in inventory
Amortization expense
Reduction in premium on bonds
Net cash flows from operating activities
Learning Objective: 4

$(40,000 )
12,000
11,000
(4,000 )
4,800
700
(500 )
$ (16,000 )

Level of Learning: 3

128. The Murdock Corporation reported the following balance sheet data for 2006 and 2005.
Cash
Available-for-sale securities
(not cash equivalents)
Accounts receivable
Inventory
Prepaid insurance
Land, buildings, and equipment
Accumulated depreciation
Total assets
Accounts payable
Salaries payable
Notes payable (current)
Bonds payable
Common stock
Retained earnings
Total liabilities and shareholders' equity

2006
77,375

2005
$ (22,955 )

15,500
80,000
165,000
1,500
1,250,000
(610,000 )
$ 979,375

85,000
68,250
145,000
2,000
1,125,000
(572,000 )
$ 830,295

$ 102,760
24,500
75,000
0
300,000
328,035
$ 830,295

76,340
20,000
25,000
200,000
300,000
358,035
$ 979,375

Additional information for 2006:


(1.) Sold available-for-sale securities costing $69,500 for $74,000.
(2.) Equipment costing $20,000 with a book value of $5,000 was sold for $6,000.
(3.) Issued 6% bonds payable at par, $200,000.
(4.) Purchased new equipment for cash $145,000.
(5.) Paid cash dividends of $20,000.
(6.) Net income was $50,000.
(7.) Proceeds of the notes payable were used for operating purposes.
Required:
Prepare a statement of cash flows for 2006 in good form using the indirect method for cash
flows from operating activities.

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Chapter 21 The Statement of Cash Flows


Answer:
Note: This can be solved in spreadsheet form if the instructor wishes.
Murdock Company
Statement of Cash Flows
For the Year Ended December 31, 2006
Cash flows from operating activities:
Net income
$ 50,000
Adjustments for noncash effects:
Depreciation expense
53,000
Gain on sale of available for sale securities
(4,500 )
Gain on sale of equipment
(1,000 )
Increase in accounts receivable
(11,750 )
Increase in inventory
(20,000 )
Decrease in prepaid insurance
500
Decrease in accounts payable
(26,420 )
Decrease in salaries payable
(4,500 )
Decrease in notes payable
(50,000 )
Net cash flows from operating activities
Cash flows from investing activities:
Sale of available-for-sale securities
Sale of equipment
Purchase of equipment
Net cash flows from investing activities

74,000
6,000
(145,000 )

Cash flows from financing activities:


Sale of bonds payable
Payment of cash dividends
Net cash flows from financing activities

200,000
(20,000 )

(65,000 )

Net increase in cash


Cash balance, January 1
Cash balance, December 31
Learning Objective: 8

$(14,670 )

180,000
100,330
(22,955 )
$ 77,375

Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


129. The following are comparative balance sheets and on income statement for Wentworth
Company.
Wentworth Company
Balance Sheets
as of December 31
Assets
Cash
Accounts receivable
Inventory
Long-term investments
Totals

2006
$ 21,500
195,000
180,000
0
$396,500

2005
$120,000
105,000
225,000
60,000
$510,000

Liabilities and shareholders' equity


Accounts payable
Operating expenses payable
Bonds payable
Common stock
Retained earnings
Totals

$ 75,000
24,000
70,000
125,000
102,500
$396,500

$120,000
15,000
100,000
125,000
150,000
$510,000

Wentworth Company
Income Statement
For the Year Ended December 31, 2006
Sales
Cost of goods sold:
Beginning inventory
Purchases
Goods available for sale
Less: ending inventory
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Other expenses:
Loss on sale of long-term investment
Net loss

$560,000
$225,000
330,000
555,000
180,000
375,000
185,000
180,000
5,000
(7,500 )
$ (2,500 )

Cash dividends of $45,000 were paid in 2006.


Required: Prepare a statement of cash flows for 2006 using the direct method.

148

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Chapter 21 The Statement of Cash Flows


Answer:
Note: This can be solved in spreadsheet form if the instructor wishes.
Wentworth Company
Statement of Cash Flows
For the Year Ended December 31, 2006
Cash flows from operating activities:
Cash inflows:
From customers
$470,000
Cash outflows:
To suppliers of goods
(375,000)
For operating expenses
(171,000)
Net cash flows from operating activities
Cash flows from investing activities:
Sale of long-term investments
Net cash flows from investing activities

52,500

Cash flows from financing activities:


Payment of bonds
Payment of cash dividends
Net cash flows from financing activities

(30,000)
(45,000)

52,500

(75,000)

Net decrease in cash


Cash balance, January 1
Cash balance, December 31
Learning Objective: 8

$(76,000)

(98,500)
120,000
$ 21,500

Level of Learning: 3

Use the following to answer questions 130-135:


In its 2005 Annual Report to Shareholders, Henchman & Co. provided the following Statement of
Cash Flows:
Years ended December 31, $ in millions
Operating Activities
Sources of Cash
Cash received from customers
Progress payments
Other collections
Proceeds from litigation settlement
Interest received
Income tax refunds received
Other cash receipts
Cash provided by operating activities
Uses of Cash
Cash paid to suppliers and employees
Interest paid
Income taxes paid
Other cash payments
Cash used in operating activities
Net cash provided by operating activities

2005

2004

$3,102
11,148
220
17
23
24
14,534

$ 1,438
7,003

13,251
333
126
7
13,717
817

7,250
165
57
1
7,473
1,010

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17
15
10
8,483

149

Chapter 21 The Statement of Cash Flows

Investing Activities
Payment for businesses purchased, net of
cash acquired
Additions to property, plant and equipment
Collection of note receivable
Proceeds from sale of property, plant and
equipment
Proceeds from sale of businesses
Other investing activities
Net cash used in investing activities
Financing Activities
Proceeds from issuance of long-term debt
Proceeds from equity security units
Borrowings under lines of credit
Repayment of borrowings under lines of
credit
Principal payments of long-term debt/
capital leases
Proceeds from issuance of stock
Dividends paid
Other financing activities
Net cash provided by (used in) financing
activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

(3,061 )

(510 )

(393 )
148
86

(274 )

18
(2 )
(3,204 )

668
(6 )
(78 )

1,491
690
1,173
(1,306 )

(175 )

(119 )

(485 )

825
(158 )
(64 )
2,532

19
(114 )
_____
(755 )

145
319
$ 464

44

177
142
$ 319

130. What method (direct or indirect) does Henchman & Co. use to present its Statement of Cash
Flows? Explain how you can tell.
Answer: Henchman & Co. uses the direct method, one of very few companies that do. One
can tell this by the fact that they simply list sources and uses of cash in the operating activities
section, rather than starting with net income and making the series of adjustments necessary to
work back to operating cash flows.
Learning Objective: 1

Level of Learning: 3

131. What was the net change in cash and cash equivalents experienced by Henchman & Co.
during 2005? Was it positive or negative?
Answer: $145 million positive change (increase).
Learning Objective: 2

150

Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


132. Which type of activity (operating, investing, financing) was most responsible for the net
change in cash and cash equivalents experienced by Henchman & Co. during 2005?
Answer: Financing activities were most responsible.
Learning Objective: 3

Level of Learning: 3

133. (a.) What is the most significant change in operating cash outflow activity in 2005 relative to
2004?
(b.) What balance sheet accounts would likely have changed during 2005 in relation to the
cash flow change that you identify in (a)?
Answer:
(a.) Cash payments to suppliers and employees increased from $7,250 million to $13,251
million.
(b.) Accounts Payable and Wages/Salaries Payable probably are the accounts that would have
changed.
Learning Objective: 3

Level of Learning: 3

134. What was most responsible for the negative cash flow from financing activities during 2004?
What amount was paid?
Answer: Principal payments on long-term debt and capital leases were $485 million.
Learning Objective: 6

Level of Learning: 3

135. What was most responsible for the positive cash flow from financing activities during 2005?
What amount was received?
Answer: Proceeds from issuance of long-term debt were $1,491 million.
Learning Objective: 6

Level of Learning: 3

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151

Chapter 21 The Statement of Cash Flows


Use the following to answer questions 136-139:
In its 2005 Annual Report to Shareholders, Kinney Inc. reported the following Consolidated Statement
of Cash Flows:
For the years ended December 31,
2005
Cash flow from operations:
Cash received from customers
Cash paid to suppliers and employees
Interest paid, net
Income taxes paid
Cash provided by operations
Cash flow from investing activities:
Capital expenditures and acquisitions
Expenditures for other assets
Cash used in investing activities
Cash flow from financing activities:
Principal payments of long-term debt and capitalized
leases
Addition to long-term debt and capitalized leases
Changes in restricted unexpended IRB cash
Purchase of common stock and other capital
transactions
Payment of dividends
Cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2005
Reconciliation of net income to net cash
provided by operations:
Net income
$1,747,833
Depreciation and amortization
3,505,504
Deferred income taxes
Changes in assets and liabilities, net of
acquisitions:
Decrease (increase) in receivables

$197,942,040
-191,276,791
-1,563,990
-406,650
4,694,609

$211,773,952
-200,474,336
-2,098,523
-542,250
8,658,843

-3,003,579
-43,560
-3,047,139

-1,667,382
137,420
-1,804,802

-2,062,485

-6,370,175

5,817,348
-2,748,970
-1,605,906

1,434,847
-908,231

-855,558
-1,455,571
191,899
192,615
$ 384,514

-1,021,968
-6,865,527
-11,486
204,101
$ 192,615

2004

$2,382,027
3,525,087

205,000

344,766

-2,897,353

4,120,668

-355,508

6,041,490

Increase (decrease) in prepaid expenses

361,648

-94,350

Increase (decrease) in controlled


disbursements
Increase (decrease) in accounts payable

373,394

83,718

1,768,676

-8,164,148

Increase (decrease) in accrued expenses

-14,585

417,616

$4,694,609

1,969
$8,658,843

Decrease (increase) in inventories

Other, net
Cash provided by operations

152

2004

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Chapter 21 The Statement of Cash Flows


136. Assuming the decrease in accrued expenses during fiscal year 2005 included a $20,000
reduction due to taxes, compute the income tax expense for Kinney in that year.
Answer:
The reduction in accrued taxes is actually a reduction in taxes payable, a liability. Therefore,
beg. taxes payable + income tax expense income tax deferred income taxes paid = end.
taxes payable
Therefore, income tax expense = (end. taxes payable - beg. taxes payable) + income taxes
deferred + income taxes paid = $(20,000) + $205,000 + $406,650
= $591,650
Learning Objective: 3

Level of Learning: 3

137. Assuming the decrease in accrued expenses during fiscal year 2005 included a $14,000
reduction due to interest on debt, compute the interest expense (net) for Kinney in that year.
Answer:
The reduction in accrued expenses is actually a reduction in interest payable, a liability.
Therefore,
beg. interest payable + interest expense (net) interest paid = end. interest payable
Therefore, interest expense =
(end. interest payable beg. interest payable) + interest paid
= $(14,000) + 1,563,990
= $1,549,990
Learning Objective: 3

Level of Learning: 3

138. Kinney reported cost of goods sold of $168,114,150 in its fiscal 2005 income statement.
Compute its net inventory purchases during the year.
Answer:
Assuming that there were no inventory impairments, the computation is as follows:
CGS = beg. inventory + net purchases end. inventory. Therefore,
net purchases = CGS + (end. inventory beg. inventory)
= $168,114,150 + 355,508
= $168,469,658
Learning Objective: 3

Level of Learning: 3

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Chapter 21 The Statement of Cash Flows


139. Kinney reported cost of goods sold of $168,114,150 in its fiscal 2005 income statement.
Assuming that Kinney uses accounts payable strictly for inventory purchases and that all such
purchases are on credit, how much cash did Kinney pay during the year for inventories:
(a) to inventory suppliers?
(b) to employees?
Answer:
(a.) Assuming that there were no inventory impairments, the computation is as follows:
CGS = beg. inventory + net purchases end. inventory. Therefore,
net purchases = CGS + (end. inventory beg. inventory)
= $168,114,150 + 355,508
= $168,469,658
end. acct. payable = beg. acct. payable + net inventory purchases cash paid to suppliers
Therefore,
(end. acct. payable - beg. acct. payable) + cash paid to suppliers = net inventory purchases
$1,768,676 + cash paid to suppliers = $168,469,658
Cash paid to suppliers = $168,469,658 - $1,768,676
= $166,700,982
(b.) Cash paid to suppliers and employees is $191,276,791. Therefore,
Cash paid to employees
= $191,276,791 - $166,700,982
= $24,575,809
Learning Objective: 3

Level of Learning: 3

Essay
Instructions:
The following answers point out the key phrases that should appear in students' answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
140. Since the statement of cash flows has been required only since 1988, is the reporting of cash
flows a new concept? Explain.
Answer: No. Financial reporting on a cash basis was common several decades ago. The
requirement for a cash flow statement represents a renewed emphasis on cash flow reporting.
Prior to the mid-1930s, preparing financial statements on the cash basis, rather than the
accrual basis, was a common practice.
Learning Objective: 1

154

Level of Learning: 1

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Chapter 21 The Statement of Cash Flows


141. Is depreciation a source of cash? Explain.
Answer: No. Depreciation is simply the systematic and rational allocation of an asset's cost.
The expenditure to acquire the item being depreciated was a use of cash. When the indirect
method is used to determine cash flows from operating activities, depreciation is added back
to net income on the statement of cash flows because it was deducted on the accrual basis
income statement but it did not require the use of cash.
Learning Objective: 4

Level of Learning: 1

142. Why is the statement of cash flows required as part of the set of external financial statements?
Answer: The FASB in statement No. 95 requires the statement of cash flows in direct response
to FASB Concept Statement No. 1, which states as the primary objective of financial reporting
to "provide information to help investors and creditors, and others assess the amounts, timing,
and uncertainty of prospective net cash inflows to the related enterprise."
Learning Objective: 1

Level of Learning: 2

143. Why are "cash equivalents" included as part of cash on the statement of cash flows?
Answer: Skilled managers will invest temporarily idle cash in short-term investments to earn a
return on those funds, rather than maintaining an unnecessarily large checking account. The
FASB views short-term, highly liquid investments that can be easily converted into cash, with
little risk of loss, to be the equivalent of cash.
Learning Objective: 2

Level of Learning: 2

144. What are the general guidelines for an investment to be considered a cash equivalent?
Answer: To be classified as a cash equivalent, an investment must have a maturity date not
longer than three months from the date of purchase. The investment must be easily convertible
into cash, with little risk of loss on the conversion. However, flexibility is permitted in
designating cash equivalents. Each company must establish a policy regarding which shortterm, highly liquid investments it classifies as cash equivalents. The policy should be
consistent with the company's customary motivation for acquiring various investments and
should be disclosed in the notes accompanying the financial statements.
Learning Objective: 2

Level of Learning: 1

145. What activities are included on the statement of cash flows under the section entitled "Cash
flows from investing activities"?
Answer: Cash flows from investing activities include the sale or purchase of operating assets,
the sale or purchase of nontrading investments, and the collection or making of loans to
others.
Learning Objective: 5

Level of Learning: 1

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Chapter 21 The Statement of Cash Flows


146. What activities are included on the statement of cash flows under the section entitled "Cash
flows from financing activities"?
Answer: Cash flows from financing activities include the issuance and repurchase of stock, the
issuance and repayment of bonds and notes, and the payment of cash dividends.
Learning Objective: 6

Level of Learning: 1

147. Do "cash flows from operating activities" report all the elements of the income statement on a
cash basis? Explain.
Answer: Although the cash flows from operating activities section of a statement of cash
flows reports income statement elements on a cash basis, not all the elements from the income
statement are necessarily reported on a cash basis. No cash effects are reported for
depreciation and amortization. Further, no cash effect is reported for gains or losses from the
sale of operational assets. When these operational assets are bought and sold, the effect is
reported under "cash flows from investing activities."
Learning Objective: 1

Level of Learning: 2

148. Does the statement of cash flows report only transactions that cause an increase or decrease in
cash? Explain.
Answer:
A statement of cash flows reports transactions that cause an increase or decrease in cash.
However, some transactions that do not increase or decrease cash, but which result in
significant investing and financing activities, must be reported in related disclosure notes.
Examples of noncash transactions that are important or significant enough to be reported
include:
1)
Acquiring an asset by incurring debt or issuing stock,
2)
Acquiring an asset by entering into a capital lease,
3)
Converting debt into common stock,
4)
Exchanging noncash assets or liabilities for other noncash assets or liabilities.
Learning Objective: 1

156

Level of Learning: 2

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 21 The Statement of Cash Flows


Use the following to answer questions 149-150:
In its 2005 Annual; Report to Shareholders, Netherlands Corporation included the following
information on cash flows from operations:
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
2005
Operating activities:
Net income
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization
Deferred income taxes
Equity income
Changes in operating assets and liabilities:
Receivables
Inventories
Accounts payable and accrued expenses
Prepaids and other-net
Net Cash Provided By Operating Activities

$ 10,680

2004
$30,100

25,734
5,156
(486 )

20,051
9,885
(864 )

17,888
39,331
(23,737 )
(10,913 )
63,653

(33,018 )
(10,173 )
13,515
5,893
35,389

149. Explain why Netherlands Corporation subtracts equity income from its net income in its
measurement of operating cash flows.
Answer: Under the equity method, income accrues to the investor company when it is earned
by the investee company, not when dividends are distributed. In effect, Netherlands
Corporation has earned investment revenue that has been included in its income statement.
However, this amount does not involve cash until PVH receives dividends (that will be
reported as investment inflows). Therefore, Netherlands Corporation makes an adjustment to
eliminate this non-cash equity income from the company's operating cash flows.
Learning Objective: 4

Level of Learning: 3

150. Did accounts receivable increase or decrease during 2005?


Answer: The accounts receivable balance decreased during 2005. This is apparent because
adjustments for current assets are inversely related to the direction of the change in balance.
Because the adjustment for accounts receivable was positive, its balance must have decreased.
Learning Objective: 4

Level of Learning: 3

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157