Introduction to Financial Accounting 11th Edition Horngren Test Bank
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Introduction to Financial Accounting, 11e (Horngren)
Chapter 5 Statement of Cash Flows
Learning Objective 5.1 Questions
1) Which of the following statements show the results of a company over a period of time?
1. Balance sheet
2. Income statement
3. Statement of cash flows
4. Statement of stockholders' equity
A) 2 and 4
B) 3 and 4
C) 1
D) 2
E) 2, 3, and 4
Answer: E
Diff: 1
Objective: L.O. 5-1
2) The statement of cash flows has classifications of
A) operating, investing, and debt activities.
B) investing, operating, and expense activities.
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C) operating, investing, and equity activities.
D) operating, financing, and equity activities.
E) operating, investing, and financing activities.
Answer: E
Diff: 2
Objective: L.O. 5-1
3) Cash and cash equivalents include all of the following except
A) an investment purchased in March, 2012 with a maturity of March, 2014.
B) money market funds.
C) cash balance in a savings account.
D) cash balance in a checking account.
E) Treasury bills.
Answer: A
Diff: 1
Objective: L.O. 5-1
4) The statement of cash flows reports on where cash came from and how it was used.
Answer: TRUE
Diff: 1
Objective: L.O. 5-1
5) Like the income statement, the statement of cash flows covers a period of time.
Answer: TRUE
Diff: 1
Objective: L.O. 5-1
6) A firm may have a significant amount of net income, as computed by accountants on the accrual basis, and yet have a severe decline in cash.
Answer: TRUE
Diff: 1
Objective: L.O. 5-1
7) A statement of cash flows reports cash inflows and cash outflows on a particular day.
Answer: FALSE
Diff: 1
Objective: L.O. 5-1
8) One of the purposes of a statement of cash flows is to determine a company's ability to pay its debts when they become due.
Answer: TRUE
Diff: 1
Objective: L.O. 5-1
Learning Objective 5.2 Questions
1) Which of the following statements is false?
A) The statement of cash flows reports the cash receipts and cash payments of an entity over a period of time.
B) The statement of cash flows is similar to the income statement, as they both determine the net income
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for a company.
C) The operating activities in a cash flow statement include transactions that affect the sale and the purchase or production of goods and services.
D) Investing activities in a cash flow statement include acquiring and selling long-term assets.
E) Financing activities in a cash flow statement include obtaining resources from owners and creditors and repaying amounts borrowed.
Answer: B
Diff: 2
Objective: L.O. 5-2
2) Cash payments to suppliers would appear on a statement of cash flows using the direct method as a(n)
A) financing activity.
B) operating activity.
C) investing activity.
D) debt activity.
E) equity activity.
Answer: B
Diff: 2
Objective: L.O. 5-2
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3) The issuance of a long-term debt for cash would appear on the statement of cash flows as a(n)
A) investing activity.
B) operating activity.
C) financing activity.
D) equity activity.
E) debt activity.
Answer: C
Diff: 2
Objective: L.O. 5-2
4) The issuance of stock for cash would be classified as a(n)
A) investing activity on the statement of cash flows.
B) equity activity on the statement of cash flows.
C) operating activity on the statement of cash flows.
D) would not appear on the statement of cash flows.
E) financing activity on the statement of cash flows.
Answer: E
Diff: 2
Objective: L.O. 5-2
5) Activities or transactions that affect the income statement are primarily included in which section of the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Managing
E) Net income
Answer: A
Diff: 1
Objective: L.O. 5-2
6) Activities that involve (1) providing and collecting cash as a lender and (2) acquiring and disposing of fixed assets are included in which section of the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Managing
E) Fixed assets
Answer: B
Diff: 1
Objective: L.O. 5-2
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7) Activities that involve obtaining resources as a borrower or issuer of securities and repaying creditors and owners are included in which section of the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Managing
E) Net income
Answer: C
Diff: 1
Objective: L.O. 5-2
8) All of the following would be included in a company's operating activities except
A) dividend payments.
B) collections from customers.
C) cash payments to suppliers.
D) income tax payments.
E) interest and dividends collected.
Answer: A
Diff: 1
Objective: L.O. 5-2
9) Which of the following would be classified as an operating activity on a statement of cash flows?
A) Purchase of a building
B) Sale of another company's stock
C) Borrowing money through a promissory note
D) Payment of dividends
E) Purchase of inventory for cash
Answer: E
Diff: 2
Objective: L.O. 5-2
10) Which of the following would be classified as an operating activity on a statement of cash flows?
A) Issuing bonds
B) Receipt of loan repayments
C) Collections from customers
D) Issuing stock
E) Repayment of amounts borrowed
Answer: C
Diff: 2
Objective: L.O. 5-2
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11) All of the following activities would be included in a company's operating activities on a statement of cash flows except
A) payments to employees.
B) payment to a local government for property taxes.
C) payment to suppliers.
D) payment to the bank to reduce loan balance.
E) payment to landlord for rent.
Answer: D
Diff: 2
Objective: L.O. 5-2
12) All of the following would be included in a company's investing activities except
A) taking out a loan from the bank.
B) purchase of equipment.
C) sale of another company's stock.
D) making loans to another company.
E) sale of a building.
Answer: A
Diff: 2
Objective: L.O. 5-2
13) All of the following would be included in a company's investing activities except
A) purchase of land.
B) payment of dividends.
C) collection of loan repayments.
D) purchase of equipment.
E) purchase of another company's stock.
Answer: B
Diff: 2
Objective: L.O. 5-2
14) All of the following would be included in a company's financing activities except
A) issuing equity securities.
B) purchasing treasury stock.
C) repayment of amounts borrowed.
D) borrowing cash from a bank.
E) interest payments.
Answer: E
Diff: 2
Objective: L.O. 5-2
15) All of the following would be included in a company's financing activities except
A) receipt of dividends.
B) payment of dividends.
C) issuing stock.
D) purchase of treasury stock.
E) issuing bonds.
Answer: A
Diff: 2
Objective: L.O. 5-2
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16) Which of the following would appear in the financing activities section of a statement of cash flows?
A) Cash payments to employees
B) Cash payment of dividends
C) Cash purchase of equipment
D) Cash paid for income taxes
E) Cash purchase of land
Answer: B
Diff: 2
Objective: L.O. 5-2
17) Companies with divisions outside the United States
A) prepare their Statement of Cash Flows with consolidated equipment purchases, but retain individual financial statements otherwise.
B) confirm account balances on their Statement of Cash Flows using the throughput method.
C) show the effect of exchange rate differences on their Statement of Cash Flows.
D) indicate variances on material purchases on a separate coinciding schedule.
E) label their Statement of Cash Flows by preceding the label with the term "International Operations."
Answer: C
Diff: 2
Objective: L.O. 5-2
18) Investing activities involve obtaining resources as a borrower and repaying creditors.
Answer: FALSE
Diff: 1
Objective: L.O. 5-2
19) The issuance of long-term debt results in a cash outflow as reported in the financing section.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
20) The purchase of another company's stock is an example of an investing activity.
Answer: TRUE
Diff: 1
Objective: L.O. 5-2
21) Cash flows from financing activities include borrowing cash through a lender.
Answer: TRUE
Diff: 1
Objective: L.O. 5-2
22) Cash flows from operating activities include the receipt of interest income.
Answer: TRUE
Diff: 2
Objective: L.O. 5-2
23) Cash flows from financing activities include the payment of interest on a note payable.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
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24) A transaction in which long-term debt of $50,000 is converted to common stock would be reported in the financing section of the cash flow statement.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
25) Dividends received from a subsidiary would be classified as an investing activity on a statement of cash flows.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
26) Issuing equity securities is an operating activity on the statement of cash flows.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
27) Operating activities on a statement of cash flows relate to acquiring assets such as buildings and equipment.
Answer: FALSE
Diff: 2
Objective: L.O. 5-2
28) Cash received from customers is a financing activity on the statement of cash flows.
Answer: FALSE
Diff: 1
Objective: L.O. 5-2
29) Cash dividends paid to stockholders are an operating activity on the statement of cash flows.
Answer: FALSE
Diff: 1
Objective: L.O. 5-2
30) The receipt of loan repayments is an investing activity on the statement of cash flows.
Answer: TRUE
Diff: 2
Objective: L.O. 5-2
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31) Designate how each transaction would be reported on the statement of cash flows using OP for operating activities, IN for investing activities, FI for financing activities, I for an inflow of cash and O for an outflow of cash. If the transaction is included only in a supplemental schedule, denote this as SS.
1. Paid cash dividends
2. Purchased 6 months of insurance in advance
3. Sold inventory for cash
4. Purchased equipment signing a two-year note
5. Collected accounts receivable balance from a customer
6. Sold shares of another company's stock held for speculative purposes
7. Reclassified a note from long term to short term
8. Issued bonds at a premium
Answer:
1. Paid cash dividends
2. Purchased 3 months of rent in advance
3. Sold inventory for cash
4. Purchased equipment signing a one-year note
5. Collected accounts receivable balance from a customer
6. Sold shares of another company's stock held for speculative purposes
7. Reclassified a note from long term to short term
8. Issued bonds at a premium
Diff: 2
Objective: L.O. 5-2
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Section Inflow
Outflow
or
________
Section Inflow or Outflow
FI O
OP O
OP I
SS
OP I
IN I
SS
FI I
Learning Objective 5.3 Questions
1) Cleft Company had the following account balances on its balance sheet at December 31, 2012 and 2011, respectively: 12/31/12 12/31/11
Long-term Bonds Payable $39,000 $36,000
Assume no bonds were retired during 2012. What was the positive cash flow associated with the longterm debt for Cleft Company in 2012?
A) $10,000
B) $3,000
C) $13,000
D) $4,000
E) $7,000
Answer: B
Diff: 3
Objective: L.O. 5-3
2) Cleft Company had the following account balances on its balance sheet at December 31, 2012 and 2011, respectively: 12/31/12 12/31/11
Long-term Bonds Payable $39,000 $36,000
Assume no bonds were retired during 2012. What was the negative cash flow associated with long-term debt for Cleft Company in 2012?
A) $10,000
B) $4,000
C) $7,000
D) $0
E) $3,000
Answer: D
Diff: 3
Objective: L.O. 5-3
3) If a company extinguishes debt, which of the following explains the effect of this transaction on a statement of cash flows?
A) If the debt is extinguished with a loss, the loss is subtracted from the operating section if the company uses the direct method.
B) If the debt is extinguished with a loss, the loss will not appear in the operating or the investing section if the company uses the direct method.
C) If the debt is extinguished with a gain, the gain is added to the cash flow from financing section if the company uses the indirect method.
D) If the debt is extinguished with a gain, the gain is added to the operating section if the company uses the indirect method.
E) If the debt is extinguished with a loss, the loss is added to the financing section if the company uses the indirect method.
Answer: B
Diff: 3
Objective: L.O. 5-3
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4) When an increase in cash occurs, it ensues from
A) increases in assets.
B) increases in liabilities.
C) increases in paid-in-capital.
D) both A and B
E) both B and C
Answer: E
Diff: 2
Objective: L.O. 5-3
5) Which of the following will not affect cash in the financing section of the Statement of Cash Flows?
A) increasing long or short term debt
B) selling common or preferred shares of stock
C) converting debt to common stock
D) repurchasing common shares of stock
E) paying dividends
Answer: C
Diff: 2
Objective: L.O. 5-3
6) The purchase of an intangible asset such as a trademark would be a financing activity on the statement of cash flows.
Answer: FALSE
Diff: 1
Objective: L.O. 5-3
7) The purchase of treasury stock would be considered a financing activity.
Answer: TRUE
Diff: 1
Objective: L.O. 5-3
8) Payment of dividends is a financing activity.
Answer: TRUE
Diff: 2
Objective: L.O. 5-3
9) Receipt of loan repayments is a financing activity.
Answer: FALSE
Diff: 2
Objective: L.O. 5-3
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10) Retall Company refinanced its long-term debt in 2012. It bought and retired common shares of stock for cash of $20,000. The company spent $72,500 to retire long-term debt due in 3 years and issued $185,000 of 10-year bonds at par. Interest expense for 2012 was $21,000, of which $17,000 was paid in cash; the other $4,000 was still payable at the end of the year. Dividends declared and paid during the year were $12,500. Determine net cash flows from financing activities.
Answer:
Cash Flows from financing activities:
Notice that both proceeds from the new issue of bonds and the retirement of long-term debt are listed. Presenting only the net amount of proceeds is not permitted. Also, the interest expense is omitted because it is an operating activity, not a financing activity.
Diff: 2
Objective: L.O. 5-3
11) The Statement of Cash Flows for Urban Athletic Company included the following items, among others:
Prepare the cash flows from financing activities section of the statement of cash flows. All items necessary for that section appear above, in addition to items that belong in the operating and investing sections.
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Proceeds from issuance of long-term debt $185,000 Payment to retire long-term debt (72,500) Payment to retire common stock (20,000) Dividends paid (12,500) Net cash provided by financing activities $80,000
Dividends paid $ 31,000 Depreciation on equipment 19,500 Issued common stock 98,000 Paid off long-term note payable 23,000 Net income 29,540 Purchases of stock of other companies 8,000 Purchases of equipment 60,000
Answer: Cash Flows from Financing Activities: Dividends paid $(31,000) Issued common stock 98,000 Paid off long-term note payable (23,000) Net cash provided by financing activities $ 44,000 Diff: 2 Objective: L.O. 5-3
Learning Objective 5.4 Questions
1) Chorba Chocolates had the following account balances on its balance sheets at December 31, 2012 and 2011, respectively:
Depreciation expense for 2012 was $7,000. There were no gains or losses on the 2012 income statement. One fixed asset with an original cost of $8,000 was sold during 2012.What was the cash flow associated with the acquisition of fixed assets by Chorba Chocolates in 2012?
A) $(2,000)
B) $(8,000)
C) $(14,000)
D) $(13,000)
E) $(21,000)
Answer: E
Diff: 3
Objective: L.O. 5-4
2) Chorba Chocolates had the following account balances on its balance sheets at December 31, 2012 and 2011, respectively:
Depreciation expense for 2012 was $7,000. There were no gains or losses on the 2012 income statement. One fixed asset with an original cost of $8,000 was sold during 2012.What would be the net cash flow from investing activities for Chorba Chocolates in 2012?
A) ($2,000)
B) ($8,000)
C) ($13,000)
D) ($15,000)
E) ($21,000)
Answer: D
Diff: 3
Objective: L.O. 5-4
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12/31/12 12/31/11 Fixed Assets $80,000 $67,000 Accumulated Depreciation 44,000 39,000
12/31/12 12/31/11 Fixed Assets $80,000 $67,000 Accumulated Depreciation 44,000 39,000
3) When a fixed asset is sold for other than its book value, which one of the following incorrectly states the effect of this transaction on a company's statement of cash flows?
A) Under the direct method, no gain or loss from the sale of fixed assets is included in the operating activities section.
B) Under the indirect method, gains from the sale of fixed assets are subtracted from net income in the operating activities section.
C) Under the indirect method, losses from the sale of fixed assets are added back to net income to arrive at net cash from operations.
D) Losses and gains from the sale of fixed assets are operating items to be listed in the operating activities section under both the direct and indirect methods.
E) Under both the direct and indirect methods, the sale of a fixed asset would affect the investing activities section.
Answer: D
Diff: 2
Objective: L.O. 5-4
4) Which balance sheet accounts are most affected by investing activities?
A) Current assets
B) Current liabilities
C) Long term assets
D) Long term liabilities
E) Stockholders' equity
Answer: C
Diff: 2
Objective: L.O. 5-4
5) Which of the following activities does not affect cash on the investing section of the Statement of Cash Flows?
A) purchased store equipment on credit
B) purchased stock in another company for investment purposes using cash
C) collected partial payment on a loan made to an employee
D) purchased building using cash
E) sold investment securities and received cash
Answer: A
Diff: 2
Objective: L.O. 5-4
6) Important non-cash investing and financing activities
A) belong in the investing and financing section of the Statement of Cash Flows.
B) belong in the operating section of the Statement of Cash Flows.
C) belong in a separate schedule of non-cash investing and financing activities.
D) belong on the Income Statement.
E) belong on the Balance Sheet.
Answer: C
Diff: 1
Objective: L.O. 5-4
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7) The investing section of the Statement of Cash Flows includes the sale of fixed assets for cash.
Answer: TRUE
Diff: 1
Objective: L.O. 5-4
8) The schedule of noncash investing and financing activities is used by investors to determine a company's net worth.
Answer: FALSE
Diff: 1
Objective: L.O. 5-4
9) A company acquired a small building by signing a mortgage payable. How would this transaction be shown in the statement of cash flows? Explain how this treatment fulfills the investors' need for information regarding the financial management of the company.
Answer: This transaction would not be shown in the body of the statement of cash flows because it doesn't involve any cash activity. However, it should be reported in a separate schedule outlining significant investing and financing activities. This transaction is reported because it could have been accomplished by signing a note payable for cash and then buying the building with the cash. Readers of statements of cash flows should be informed about any significant investing and financing transactions, regardless of whether cash was directly involved. It helps investors understand where financing was obtained and how it was used (i.e., the financial management of the company).
Diff: 2
Objective: L.O. 5-4
10) Telder Amusement Park issued common stock for $650,000 on January 1, 2012. The company bought fixed assets for $435,000 cash and inventory for $50,000 cash. Later that same year, the company sold fixed assets for $10,000 more than their book value of $65,000. Half of the inventory was sold for $98,350 during the year. On December 15, cash was used to purchase $49,000 worth of Allen Food Services common stock, which Telder regarded as a long-term investment. Prepare the cash flows from investing activities of the statement of cash flows for Telder Amusement Park.
2
Objective: L.O. 5-4
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Answer: Cash from Investing Activities: Purchase of fixed assets $(435,000) Sale of fixed assets 75,000 Purchase of long-term investment (49,000) Net cash used by investing activities $(409,000) Diff:
Learning Objective 5.5 Questions
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Exhibit 5-1 Cartell Paper Products Balance Sheet December 31, 2012 and 2011 12/31/12 12/31/11 Current Assets: Cash $ 4,600 $ 3,100 Accounts Receivable 9,600 7,900 Inventory 17,500 18,600 Supplies 1,200 2,100 Prepaid Insurance 1,400 1,000 Total Current Assets 34,300 32,700 Long-term Assets: Fixed Assets 71,000 58,000 Accumulated Depreciation (30,400) (26,500) Patent 6,000 7,100 Total Long-term Assets 46,600 38,600 Total Assets $ 80,900 $ 71,300 Current Liabilities: Accounts Payable $ 6,100 $ 4,900 Wages Payable 2,200 2,600 Interest Payable 800 1,000 Taxes Payable 2,300 1,600 Total Current Liabilities 11,400 10,100 Long-term Liabilities: Bonds Payable 20,300 24,000 Total Liabilities 31,700 34,100 Stockholders' Equity: Common Stock 22,700 20,000 Retained Earnings 26,500 17,200 Total Stockholders' Equity 49,200 37,200 Total Liabilities and Stockholders' Equity $ 80,900 $ 71,300
Cartell Paper Products Income Statement
For the Year Ended December 31, 2012
1) Referring to Exhibit 5-1, what was the cash collected from customers by Cartell Paper Products in 2012?
A) $138,000
B) $145,900
C) $147,600
D) $149,200
E) $157,200
Answer: B
Diff: 2
Objective: L.O. 5-5
2) Referring to Exhibit 5-1, how much inventory did Cartell Paper Products purchase in 2012?
A) $81,300
B) $63,800
C) $64,900
D) $46,300
E) $62,700
Answer: E
Diff: 3
Objective: L.O. 5-5
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Sales $147,600 Cost of Goods Sold 63,800 Gross Profit 83,800 Less Operating Expenses: Wage Expense $ 40,100 Supply Expense 3,600 Insurance Expense 3,000 Depreciation Expense 3,900 Amortization Expense 1,100 Rent Expense 5,400 57,100 Operating Income 26,700 Interest Expense 2,600 Income before Taxes 24,100 Income Tax Expense 10,800 Net Income $ 13,300
3) Referring to Exhibit 5-1, what was the cash paid to suppliers of inventory by Cartell Paper Products in 2012?
A) $63,800
B) $61,500
C) $63,700
D) $63,900
E) $66,100
Answer: B
Diff: 3
Objective: L.O. 5-5
4) Referring to Exhibit 5-1, what was the cash paid to employees by Cartell Paper Products in 2012?
A) $40,500
B) $39,700
C) $40,100
D) $38,000
E) $42,300
Answer: A
Diff: 2
Objective: L.O. 5-5
5) Referring to Exhibit 5-1, what was the cash paid for supplies by Cartell Paper Products in 2012? (Assume all purchases of supplies were for cash.)
A) $3,600
B) $4,500
C) $2,400
D) $2,700
E) $4,800
Answer: D
Diff: 2
Objective: L.O. 5-5
6) Referring to Exhibit 5-1, what was the cash paid for income taxes by Cartell Paper Products in 2012?
A) $7,100
B) $11,700
C) $10,100
D) $10,900
E) $8,600
Answer: C
Diff: 2
Objective: L.O. 5-5
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7) Referring to Exhibit 5-1, what was the net cash flow from operations for Cartell Paper Products in 2012?
A) $18,300
B) $19,500
C) $8,200
D) $14,500
E) $13,000
Answer: B
Diff: 3
Objective: L.O. 5-5
8) Referring to Exhibit 5-1, what was the cash paid from the purchase of fixed assets by Cartell Paper Products in 2012? Assume no fixed assets were sold in 2012.
A) $(13,000)
B) $(9,100)
C) $(16,900)
D) $9,100
E) Cannot be determined from the information given
Answer: A
Diff: 3
Objective: L.O. 5-5
9) Referring to Exhibit 5-1, what was the net cash flow from investing activities for Cartell Paper Products in 2012?
A) $(9,100)
B) $9,100
C) $(13,000)
D) $(12,000)
E) $2,000
Answer: C
Diff: 3
Objective: L.O. 5-5
10) Referring to Exhibit 5-1, what were the dividends paid by Cartell Paper Products in 2012?
A) $11,900
B) $0
C) $22,600
D) $4,000
E) $9,300
Answer: D
Diff: 3
Objective: L.O. 5-5
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11) Which of the following items will NOT appear in the operating activities section of the statement of cash flows when using the direct method?
A) Payments to employees
B) Collections from customers
C) Net income
D) Payments to suppliers
E) Income tax payments
Answer: C
Diff: 2
Objective: L.O. 5-5
12) Which of the following items will NOT appear in the operating activities section of the statement of cash flows when using the direct method?
A) Collections from customers
B) Depreciation expense
C) Cash paid for income taxes
D) Payments to employees
E) Payments to suppliers
Answer: B
Diff: 2
Objective: L.O. 5-5
13) When preparing the statement of cash flows under the direct method, all of the following would be an inappropriate procedure except
A) add depreciation expense to net income under the operating activities.
B) subtract depreciation expense from net income under the operating activities.
C) add depreciation expense to net income under the financing activities.
D) subtract depreciation expense from net income under the financing activities.
E) ignore depreciation expense.
Answer: E
Diff: 2
Objective: L.O. 5-5
14) When preparing the statement of cash flows under the direct method, an appropriate procedure would be to
A) subtract a gain from the sale of a fixed asset to net income.
B) subtract an increase in accounts receivable from sales when calculating cash received from customers.
C) subtract depreciation expense from net income.
D) add a loss from the sale of a fixed asset to net income.
E) add depreciation expense to net income.
Answer: B
Diff: 3
Objective: L.O. 5-5
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15) The direct method of preparing the statement of cash flows
A) is preferred by IASB and FASB.
B) is the same as the indirect method with the exception of the cash account.
C) is an accumulation of net income accounts so that accountants can locate discrepancies in balances.
D) omits the financing section of the statement.
E) focuses on cash outflows over cash inflows.
Answer: A
Diff: 1
Objective: L.O. 5-5
16) Under the direct method, a gain from the sale of a fixed asset is added to net income when calculating cash flows from operations.
Answer: FALSE
Diff: 2
Objective: L.O. 5-5
17) Under the direct method, depreciation is ignored when calculating cash flows from operations.
Answer: TRUE
Diff: 2
Objective: L.O. 5-5
18) Under the direct method, dividends from investments are included when calculating cash flows from operations.
Answer: TRUE
Diff: 2
Objective: L.O. 5-5
19) Net income is always used in determining a company's cash flow from operations.
Answer: FALSE
Diff: 1
Objective: L.O. 5-5
20) Wages and salaries expense plus the increase in wages and salaries payable equals cash paid for wages and salaries.
Answer: FALSE
Diff: 3
Objective: L.O. 5-5
21) Both the direct and indirect methods yield the same net cash flow from operations.
Answer: TRUE
Diff: 1
Objective: L.O. 5-5
22) The indirect method is used by the majority of US corporations in preparing the statement of cash flows.
Answer: TRUE
Diff: 1
Objective: L.O. 5-5
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23) Income tax expense minus the decrease in income taxes payable equals cash paid for income taxes.
Answer: FALSE
Diff: 3
Objective: L.O. 5-5
24) Stepp Entertainment has the following selected balance sheet and income statement information:
Determine the following items for Stepp Entertainment for the year ended December 31, 2012:
a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid for wages
d. Cash paid for income taxes
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For the Year Ended Income Statement Accounts December 31, 2012 Income Tax Expense $ 15,000 Cost of Goods Sold 164,000 Sales 523,000 Wage Expense 88,000 Balance Sheet Accounts At December 31, 2012 At December 31, 2011 Accounts Payable $19,000 $17,000 Cash 19,000 12,000 Income Taxes Payable 21,000 9,000 Accounts Receivable 41,000 36,000 Inventory 12,000 23,000 Wages Payable 5,000 12,000
a. Sales $523,000 Less: increase in A/R (5,000) Cash received from customers $518,000 b. Cost of goods sold $164,000 Less: decrease in Inventory (11,000) Less: increase in A/P (2,000) Cash paid to suppliers $151,000 c. Wage expense $88,000 Add: decrease in wages payable 7,000 Cash paid for wages $95,000 d. Income tax expense $15,000 Less: increase in taxes payable (12,000) Cash paid for taxes $ 3,000 Diff: 2 Objective: L.O. 5-5
Answer:
25) The following data pertains to Joss Decorating for the year of 2012:
a. Salaries and wages: accrued, $175,000; paid in cash $200,000.
b. Depreciation, $50,000.
c. Interest expense, all paid in cash, $12,500.
d. Other expenses, all paid in cash, $112,000.
e. Income taxes accrued, $35,000; income taxes paid in cash, $33,000.
f. Bought plant and facilities for $365,000 cash.
g. Sales of $1,500,000, all on credit. Cash collections from customers, $1,250,000.
h. The cost of items sold was $750,000. Purchases of inventory totaled $825,000; inventory and accounts payable were affected accordingly.
i. Cash payments on trade accounts payable were $700,000.
j. Issued long-term debt for $110,000 cash.
k. Paid cash dividends of $45,000. Prepare a statement of cash flows using the direct method for reporting cash flows from operating activities. Omit supporting schedules.
Answer: Joss Decorating Statement of Cash Flows For the Year Ended December 31, 2012
23
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from Operating Activities: Cash received from customers $ 1,250,000 Cash paid to suppliers (700,000) Cash paid to employees (200,000) Cash paid for interest (12,500) Cash paid for other expenses (112,000) Cash paid for income taxes (33,000) Net cash provided by operating activities 192,500 Cash from Investing Activities: Purchased plant and facilities (365,000) Net cash used by investing activities (365,000) Cash from Financing Activities: Issued long-term debt 110,000 Paid cash dividends (45,000) Net cash provided by financing activities 65,000 Net decrease in cash $(107,500) Diff: 3 Objective: L.O. 5-5
Cash
Determine the cash flows from operations for Bearpaw Tours assuming the company uses the direct method.
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Income Statement For the Year Ended December 31, 2012 Sales $624,000 Less Expenses: Cost of Goods Sold $332,000 Wage Expense 211,000 Depreciation Expense 20,000 Rent Expense 18,000 Income Tax Expense 16,000 597,000 Net Income $ 27,000 Bearpaw Tours Balance Sheet December 31, 2011 and 2012 12/31/12 12/31/11 12/31/12 12/31/11 Current Assets: Current Liabilities: Cash $ 8,100 $ 10,600 Accounts Payable $ 57,200 $59,900 Accts. Rec. 66,100 53,400 Wages Payable 17,500 11,300 Inventory 27,700 35,900 Taxes Payable 7,100 8,200 Prepaid Rent 3,000 4,500 81,800 79,400 104,900 104,400 Owners' Equity: Long-term Assets: Common Stock 75,000 74,000 Fixed Assets 165,500 147,700 Retained Earnings 44,800 43,500 Acc. Depreciation (68,800) (55,200) 119,800 117,500 96,700 92,500 Total Liabilities Total Assets $201,600 $196,900 & Owners' Equity $201,600 $196,900
26) Bearpaw Tours
Answer: Sales $624,000 Less: increase in accounts rec. (12,700) Cash received from customers $611,300 Cost of goods sold $ 332,000 Less: decrease in inventory (8,200) Add: decrease in accounts payable 2,700 Cash paid to suppliers $(326,500) Wage expense $ 211,000 Less: increase in wages payable (6,200) Cash paid for wages $(204,800)
Objective: L.O. 5-5
Learning Objective 5.6 Questions
1) The indirect method of preparing the statement of cash flows
A) is seldom used by companies because of the extra effort required to gather cash flow information.
B) calculates only the cash effect of each operating activity.
C) is the method preferred by the FASB.
D) begins with net income, adds back non cash expenses, and adjusts for changes in the current asset and current liability accounts.
E) can be used to determine cash flows from operating, investing, and financing activities.
Answer: D
Diff: 2
Objective: L.O. 5-6
2) When preparing the statement of cash flows under the indirect method, an appropriate procedure would be to
A) add a loss from the sale of a fixed asset.
B) add an increase in accounts receivable.
C) subtract depreciation expense.
D) subtract an increase in accounts payable.
E) determine cash received from customers.
Answer: A
Diff: 2
Objective: L.O. 5-6
3) When preparing the statement of cash flows under the indirect method, an appropriate procedure would be to
A) subtract an increase in wages payable.
B) subtract an increase in accounts receivable.
C) subtract amortization expense.
D) determine cash paid to suppliers.
E) add a gain from the sale of a fixed asset.
Answer: B
Diff: 2
Objective: L.O. 5-6
25 Copyright © 2014 Pearson Education, Inc. Rent expense $ 18,000 Less: decrease in prepaid rent (1,500) Cash paid for rent $(16,500) Income tax expense $ 16,000 Add: decrease in taxes payable 1,100 Cash paid for taxes (17,100) Net cash provided by operations $ 46,400
3
Diff:
4) When preparing the statement of cash flows under the indirect method, all of the following would be an appropriate procedure except
A) adding depreciation expense.
B) subtracting a decrease in accounts payable.
C) subtracting a decrease in prepaid expenses.
D) adding a decrease in inventories.
E) subtracting a gain from the sale of a fixed asset.
Answer: C
Diff: 2
Objective: L.O. 5-6
5) The following selected information is for Porter Handbags at, and for the year ended, December 31, 2012, and 2011:
Using the indirect method, what is the net cash flow from operations for Porter Handbags for the year ended December 31, 2012?
A) $30,000
B) $33,000
C) $36,000
D) $43,000
E) $44,000
Answer: A
Diff: 3
Objective: L.O. 5-6
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Selected Balance Sheet Accounts 12/31/12 12/31/11 Accounts Payable $19,000 $13,000 Inventory 26,000 30,000 Prepaid Expense 7,000 5,000 Retained Earnings 23,000 19,000 Wages Payable 2,000 7,000 Accounts Receivable 29,000 22,000 Accumulated Depreciation 43,000 35,000 Cash 19,000 14,000 Fixed Assets 94,000 79,000 Selected Income Statement Accounts Depreciation Expense $14,000 Gain on Sale of Fixed Asset 3,000 Net Income 23,000 Sales 91,000 Wages Expense 34,000
6) Which of the following transactions do not affect cash?
1. Convert debt to common stock
2. Credit sales
3. Purchase a fixed asset by issuing debt
4. Accept rental deposit
5. Write-off of prepaid expenses
A) 1 and 2
B) 4 and 5
C) 1, 2, and 3
D) 3, 4, and 5
E) 1, 2, 3, and 5
Answer: E
Diff: 3
Objective: L.O. 5-6
7) Which of the following transactions do not affect cash?
1. Purchase inventory on credit
2. Accrue operating expenses
3. Collection of accounts receivable
4. Accrue taxes and interest
5. Reclassify long-term debt to short-term debt
A) 1 and 2
B) 1, 2, and 4
C) 1, 2, 3, and 5
D) 1, 2, 4, and 5
E) 1, 2, 3, 4, and 5
Answer: D
Diff: 2
Objective: L.O. 5-6
8) Which of the following transactions decrease cash?
1. Purchase inventory from cash
2. Pay trade accounts payable
3. Accruing operating expenses
4. Purchase stock in R&D partner with cash
5. Charging depreciation
A) 1, 2, and 5
B) 1, 2, and 4
C) 1, 2, 3, and 5
D) 1, 2, 3, and 4
E) 1, 2, 4, and 5
Answer: B
Diff: 2
Objective: L.O. 5-6
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9) Which of the following transactions decrease cash?
1. Reduce prepaid expenses
2. Increase treasury stock
3. Lend money to an employee
4. Recognize cost of goods sold
5. Reduce long-term or short-term debt
A) 1 and 4
B) 3 and 5
C) 1, 3, and 5
D) 2, 3, and 5
E) 1, 2, 3, 4, and 5
Answer: D
Diff: 2
Objective: L.O. 5-6
10) Which of the following transactions increase cash?
1. Convert debt to common stock
2. Credit sales
3. Increase long-term debt
4. Issue common stock
A) 1 and 3
B) 2 and 4
C) 3 and 4
D) 1, 2, and 4
E) 1, 2, 3, and 4
Answer: C
Diff: 2
Objective: L.O. 5-6
11) Which of the following transactions increase cash?
1. Sales of goods and services for cash
2. Receiving cash dividends
3. Collection of accounts receivable
4. Reclassifying long-term debt to short-term debt
5. Accruing interest revenue
A) 1 and 2
B) 1 and 3
C) 1, 2, and 3
D) 1, 2, 3, and 4
E) 1, 2, 3, and 5
Answer: C
Diff: 2
Objective: L.O. 5-6
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12) The following selected information is for Barble Gardening Center at, and for the year ended, December 31, 2012, and 2011:
Using the indirect method, what is the net cash flow from operations for Barble Gardening Center for the year ended December 31, 2012?
A) $63,000
B) $57,000
C) $83,000
D) $58,000
E) $87,000
Answer: D
Diff: 3
Objective: L.O. 5-6
13) A decrease in inventory will be added to net income when preparing the operating activities section under the indirect method.
Answer: TRUE
Diff: 2
Objective: L.O. 5-6
14) Under the indirect method, a loss from the sale of a fixed asset is subtracted from net income.
Answer: FALSE
Diff: 2
Objective: L.O. 5-6
15) Under the indirect method, a gain from the early extinguishment of long-term debt is subtracted from net income.
Answer: TRUE
Diff: 2
Objective: L.O. 5-6
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Selected Balance Sheet Accounts 12/31/12 12/31/11 Fixed Assets $ 188,000 $ 158,000 Inventory 52,000 60,000 Prepaid Expense 14,000 10,000 Retained Earnings 46,000 38,000 Accounts Payable 38,000 25,000 Accounts Receivable 58,000 44,000 Accumulated Depreciation 86,000 70,000 Cash 38,000 28,000 Wages Payable 4,000 14,000 Selected Income Statement Accounts Depreciation Expense $ 28,000 Gain on Sale of Fixed Asset 6,000 Net Income 43,000 Sales 182,000 Wages Expense 68,000
16) A decrease in accounts receivable is added to the financing activities when preparing a statement of cash flows using the indirect method.
Answer: FALSE
Diff: 2
Objective: L.O. 5-6
17) The indirect method of determining cash from operations is most often used as this method produces larger positive cash flows than the direct method.
Answer: FALSE
Diff: 1
Objective: L.O. 5-6
18) The Financial Accounting Standards Board (FASB) prefers the indirect method of determining cash flows from operations.
Answer: FALSE
Diff: 1
Objective: L.O. 5-6
19) In 2012, Jaycox Custom Bikes had net income of $575,000. Jaycox also recorded $215,000 in depreciation. The company also had the following changes in its balance sheet accounts.
Compute the net cash provided by operating activities using the indirect method.
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Accounts Receivable $26,000 increase Inventories 11,000 decrease Accounts Payable 19,000 decrease
Answer: Net income $ 575,000 Add: depreciation expense 215,000 Less: increase in accounts receivable (26,000) Add: decrease in inventories 11,000 Less: decrease in accounts payable (19,000) Net cash provided by operating activities $756,000 Diff: 2 Objective: L.O. 5-6
Bearington Motors Income Statement
For the Year Ended December 31, 2012
Determine the net cash flow from operations for Bearington Motors, assuming the company uses the indirect method.
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20)
Sales $624,000 Less Expenses: Cost of Goods Sold $332,000 Wage Expense 211,000 Depreciation Expense 20,000 Rent Expense 18,000 Income Tax Expense 16,000 597,000 Net Income $ 27,000 Bearington Motors Balance Sheet December 31, 2011 and 2012 12/31/12 12/31/11 12/31/12 12/31/11 Current Assets: Current Liabilities: Cash $ 8,100 $ 10,600 Accounts Payable $ 57,200 $59,900 Accts. Rec. 66,100 53,400 Wages Payable 17,500 11,300 Inventory 27,700 35,900 Taxes Payable 7,100 8,200 Prepaid Rent 3,000 4,500 81,800 79,400 104,900 104,400 Owners' Equity: Long-term Assets: Common Stock 75,000 74,000 Fixed Assets 165,500 147,700 Retained Earnings 44,800 43,500 Acc. Depreciation (68,800) (55,200) 119,800 117,500 96,700 92,500 Total Liabilities Total Assets $201,600 $196,900 & Owners' Equity $201,600 $196,900
Answer: Net Income $27,000 Add: depreciation expense 20,000 Less: increase in accounts receivable (12,700) Add: decrease in inventory 8,200 Add: decrease in prepaid rent 1,500 Less: decrease in accounts payable (2,700) Add: increase in wages payable 6,200 Less: decrease in taxes payable (1,100) Net cash provided by operations $46,400 Diff: 2 Objective: L.O. 5-6
21) After analyzing the following statement of cash flows
1. State the method Pet Halt Services uses to prepare its operating section of the statement of cash flows and explain how you arrived at your answer.
2. Explain why depreciation expense is added back to net income in the operating section of the statement of cash flows.
Pet Halt Services Statement of Cash Flows (Partial) For the Month ending January 31, 2012
1. The company uses the indirect method of preparing its statement of cash flows because it starts with the net income balance and adjusts for increases and decreases in current assets(excluding cash) and current liabilities in order to arrive at net cash provided by operating activities.
2. Depreciation expense is a noncash expense that was deducted to arrive at net income on the income statement, but since it does not eventually turn into cash it must be added back to net income to arrive at net cash flow from operating activities.
Diff: 2
Objective: L.O. 5-6
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flows from Operating Activities: Net Income $120,000 Adjustments to reconcile net income to cash provided (used) by operating activities Depreciation expense 18,000 Increase in accounts receivable (29,000) Increase in accounts payable 33,000 Net cash provided by (used for) operating activities $142,000 Answer:
Cash
Learning Objective 5.7 Questions
1) Which of the following statements is incorrect, regarding the effect of depreciation expense on a statement of cash flows using the indirect method?
A) Depreciation expense is not an outflow of cash.
B) Depreciation expense represents an inflow of cash.
C) Depreciation expense is added in the operating activities section of the statement of cash flows.
D) Depreciation expense is not a source of cash.
E) Depreciation expense will reduce the net income used in determining net cash flow from operations.
Answer: B
Diff: 2
Objective: L.O. 5-7
2) If an accountant establishes the sales for the month and adds the beginning balance of accounts receivable and subtracts the accounts receivable balance at the end of the month, this would determine
A) cash collections from customers for the month.
B) net income for the month
C) total assets less liabilities for the month.
D) cash payments to vendors for the month.
E) total sales in cash for the month.
Answer: A
Diff: 2
Objective: L.O. 5-7
3) A supplementary schedule reconciling net income to net cash flow from operating activities is
A) not needed when using the direct method.
B) part of the income statement.
C) needed when using the direct method.
D) part of the balance sheet.
E) used by investors to determine earnings per share.
Answer: C
Diff: 2
Objective: L.O. 5-7
4) Purchases of inventory minus the increase in accounts payable equals
A) cash collected from customers.
B) cash collected for sales on credit.
C) cash paid to vendors.
D) cash paid for inventory.
E) none of the above
Answer: D
Diff: 2
Objective: L.O. 5-7
5) To determine cash collections from customers, we take sales and add the increase in Accounts Receivable.
Answer: FALSE
Diff: 1
Objective: L.O. 5-7
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6) Depreciation expense is not a source of cash; however, it is added to net income when determining net cash flow from operations under the indirect method.
Answer: TRUE
Diff: 2
Objective: L.O. 5-7
7) Depreciation expense is not a source of cash; however, it is subtracted from net income when determining net cash flow from operations under the direct method.
Answer: FALSE
Diff: 2
Objective: L.O. 5-7
8) Cash received from customers is equal to sales plus the increase in accounts receivable.
Answer: FALSE
Diff: 3
Objective: L.O. 5-7
9) Purchases of inventory minus the increase in accounts payable equals cash paid for inventory.
Answer: TRUE
Diff: 3
Objective: L.O. 5-7
10) Cost of goods sold plus the increase in inventory equals cash paid for inventory.
Answer: FALSE
Diff: 3
Objective: L.O. 5-7
11) Molecule Labs, Inc. had sales of $450,000, all received in cash. Total operating expenses were $350,000. All expenses except depreciation were paid in cash. Depreciation of $60,000 was included in the operating expenses. Ignore income taxes. Calculate net income and net cash provided by operating activities using the direct method.
5-7
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Answer: Sales revenue $450,000 Less: operating expenses 350,000 Net income $100,000 Cash received from customers $450,000 Less: cash operating expenses 290,000 Net cash provided by operating activities $160,000 Diff: 3
L.O.
Objective:
Learning Objective 5.8 Questions
1) The balance sheet equation provides the conceptual basis for all financial statements and can be rearranged to incorporate the statement of cash flows as follows:
A) Cash + Noncash assets = Liabilities + Stockholders' equity
B) Cash - Noncash assets = Liabilities + Stockholders' equity
C) Assets = Liabilities - Noncash assets + Stockholders' equity
D) Assets = Liabilities + Noncash assets + Stockholders' equity
E) Liabilities - Noncash assets = Cash + Stockholders' equity
Answer: A
Diff: 2
Objective: L.O. 5-8
2) Increases in cash stem from
1. increases in liabilities.
2. increases in stockholders' equity.
3. increases in noncash assets.
4. decreases in liabilities.
5. decreases in stockholders' equity.
6. decreases in noncash assets.
A) 1, 2, and 3
B) 2, 3, and 4
C) 1, 2, and 6
D) 2, 3, and 5
E) 3, 4, and 5
Answer: C
Diff: 2
Objective: L.O. 5-8
3) An increase in stockholders' equity can be calculated as
A) new issuance of stock plus net income plus cash dividends declared.
B) new issuance of stock plus net income less cash dividends declared.
C) new issuance of stock less net income less cash dividends declared.
D) new issuance of stock less net income plus cash dividends declared.
E) Cannot be determined from the information provided
Answer: B
Diff: 2
Objective: L.O. 5-8
4) The indirect method and the direct method of preparing the statement of cash flows
A) always produce the same totals for net cash from operating activities.
B) sometimes produce the same totals for net cash from operating activities.
C) have different totals for net cash from financing activities.
D) have different totals for net cash from investing activities.
E) have different answers for the change in cash.
Answer: A
Diff: 2
Objective: L.O. 5-8
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5) Increases in liabilities, owners' equity, and noncash assets increase cash.
Answer: FALSE
Diff: 2
Objective: L.O. 5-8
6) Even though assets must always equal the sum of liabilities and owners' equity, the net cash flow from operations does not have to equal the sum of the net cash flow from investing activities and the net cash flow from financing activities.
Answer: TRUE
Diff: 2
Objective: L.O. 5-8
7) Net cash provided by operating activities is always equal to net income.
Answer: FALSE
Diff: 1
Objective: L.O. 5-8
8) Losses and gains on the disposal of assets are essentially nonoperating items that are adjustments to net income under the direct method.
Answer: FALSE
Diff: 2
Objective: L.O. 5-8
Learning Objective 5.9 Questions
1) Caltrac Company had net cash used by operating activities of $(150,000), had proceeds from the sale of a stock investment of $100,000, and incurred capital expenditures of $50,000. What is Caltrac Company's free cash flow?
A) $100,000
B) $(50,000)
C) $(200,000)
D) $0
E) $50,000
Answer: C
Diff: 2
Objective: L.O. 5-9
2) Supporting Therapy has a negative free cash flow. What is Supporting Therapy most likely going to do assuming they are not able to obtain financing?
A) Sell its assets
B) Hire new employees
C) Buy a new patent
D) Buy additional inventory
E) Pay dividends
Answer: A
Diff: 2
Objective: L.O. 5-9
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3) Since both the income statement and the statement of cash flows report on company changes,
A) an income statement is not necessary if a statement of cash flows is prepared.
B) a statement of cash flows is not necessary if an income statement is prepared.
C) a statement of cash flows and an income statement are prepared regardless.
D) a balance sheet is not necessary if an income statement and a statement of cash flows is prepared.
E) a balance sheet is not necessary if either an income statement or a statement of cash flows is prepared.
Answer: C
Diff: 2
Objective: L.O. 5-9
4) What does a positive free cash flow tell investors about a company's ability to produce cash flows from operations and make necessary investments?
Answer: A positive free cash flow tells investors that the company has cash left over after undertaking the company's operations and making the necessary investments to ensure its continued operations.
Diff: 2
Objective: L.O. 5-9
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