CHAPTER 17 THE STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements. Multiple Choice Questions

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1 CHAPTER 17 THE STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT True-False Statements 1. 1 K 9. 2 K C a C sg K 2. 1 K K C a C sg C 3. 1 K C C a K a,sg K 4. 1 K C C a C a,sg K 5. 1 K C C a K 6. 1 C C C a K 7. 1 C C K sg K 8. 2 K C K sg K Multiple Choice Questions K C C K a AP K C C ,6 AP a AP C K C ,6 C a AP C K C ,6 C a C C K AP ,6 C a AP K K AP ,6 C a AP K AP K ,6 C a C C AP C ,6 C a AP K AP C ,6 C a AP K AP K ,6 C a AP K AP K K a AP C AP C C sg K K AP C AP sg K C AP C a C st K C AP C a C sg K C AP C a C sg C C AP C a C sg K C K C a K sg ,6 AP K K C a AP a,sg AP C AP AP a AP a,sg AP K K C a AP a.sg K C C C a AP Brief Exercises C AP K AP a AP AP AP K AP a AP sg st a This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.

2 17-2 Test Bank for Accounting Principles, Eighth Edition SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Exercises C AP AP a AP a AP C C AP a AP C ,4 AP a AP a AP AP AP a AP a AP AP AP a AP a AP Completion Statements K K K a K a K K K K a AN K K a K a K SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type Study Objective 1 1. TF 4. TF 7. TF 39. MC 42. MC 45. MC 2. TF 5. TF 37. MC 40. MC 43. MC 46. MC 3. TF 6. TF 38. MC 41. MC 44. MC Study Objective 2 8. TF 15. TF 48. MC 55. MC 62. MC 69. MC 156. Ex 9. TF 16. TF 49. MC 56. MC 63. MC 136. MC 157. Ex 10. TF 17. TF 50. MC 57. MC 64. MC 137. MC 158. Ex 11. TF 31. TF 51. MC 58. MC 65. MC 138. MC 159. Ex 12. TF 32. TF 52. MC 59. MC 66. MC 139. MC 177. C 13. TF 33. TF 53. MC 60. MC 67. MC 140. MC 178. C 14. TF 47. MC 54. MC 61. MC 68. MC 146. BE Study Objective TF 74. MC 84. MC 94. MC 104. MC 142. MC 163. Ex 19. TF 75. MC 85. MC 95. MC 105. MC 147. BE 164. Ex 20. TF 76. MC 86. MC 96. MC 106. MC 148. BE 165. Ex 21. TF 77. MC 87. MC 97. MC 107. MC 149. BE 166. Ex 22. TF 78. MC 88. MC 98. MC 108. MC 150. BE 179. C 34. TF 79. MC 89. MC 99. MC 109. MC 151. BE 180. C 70. MC 80. MC 90. MC 100. MC 110. MC 152. BE 181. C 71. MC 81. MC 91. MC 101. MC 111. MC 160. Ex 182. C 72. MC 82. MC 92. MC 102. MC 112. MC 161. Ex 183. C 73. MC 83. MC 93. MC 103. MC 141. MC 162. Ex Study Objective TF 113. MC 115. MC 163. Ex 184. C 24. TF 114. MC 153. BE 167. Ex a 25. a 35. TF TF a 116. a 117. MC MC Study Objective a 5 a 118. MC a 168. Ex a 145. MC

3 The Statement of Cash Flows 17-3 a 26. TF a 27. TF a 28. TF a 29. TF a 30. TF a 36. TF a 104. MC a 105. a 106. a 107. a 108. a 109. a 110. a 111. MC MC MC MC MC MC MC a 112. a 119. a 120. a 121. a 122. a 123. a 124. Study Objective a 6 MC a 125. MC a 132. MC a 126. MC a 133. MC a 127. MC a 134. MC a 128. MC a 135. MC a 129. MC a 143. MC a 130. MC a 144. MC a 131. MC a 154. MC MC MC MC MC MC BE a 155. a 169. a 170. a 171. a 172. a 173. a 174. BE Ex Ex Ex Ex Ex Ex a 175. a 176. a 185. a 186. a 187. a 188. a 189. Ex Ex C C C C C Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains two sets of ten Matching questions and five Short-Answer Essay questions. CHAPTER STUDY OBJECTIVES 1. Indicate the usefulness of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period. 2. Distinguish among operating, investing, and financing activities. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items. 3. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. 4. Analyze the statement of cash flows. The statement of cash flows can be used for cashbased ratio analysis. Free cash flow provides information about a company s cash-generating capabilities. It is calculated as cash from operations less capital expenditures and cash dividends. a 5. Explain how to use a worksheet to prepare the statement of cash flows using the indirect method. When there are numerous adjustments, a worksheet can be a helpful tool in preparing the statement of cash flows. Key guidelines for using a worksheet are (1) List accounts with debit balances separately from those with credit balances. (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits. (3) Do not enter reconciling items in any journal or account, but use them only to help prepare the statement of cash flows.

4 17-4 Test Bank for Accounting Principles, Eighth Edition The steps in preparing the worksheet are (1) Enter beginning and ending balances of balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the increase or decrease in cash in two places as a balancing amount. a 6. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities. TRUE-FALSE STATEMENTS 1. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement. 2. For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both. 3. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions. 4. A statement of cash flows indicates the sources and uses of cash during a period. 5. In preparing a statement of cash flows, cash equivalents are subtracted from cash in order to compute the net change in cash during a period. 6. Cash equivalents are highly-liquid investments that have maturities of less than three months. 7. The use of cash to purchase highly liquid short-term investments (cash equivalents) would be reported on the statement of cash flows as an investing activity. 8. In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt. 9. Noncash investing and financing activities must be reported in the body of a statement of cash flows. 10. The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities. 11. The sale of land for cash would be classified as a cash inflow from an investing activity. 12. Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income. 13. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

5 The Statement of Cash Flows The payment of interest on bonds payable is classified as a cash outflow from operating activities. 15. Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities. 16. The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash. 17. All major financing and investing activities affect cash. 18. Cash provided by operations is generally equal to operating income. 19. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations. 20. Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations. 21. A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method. 22. In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity. 23. Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations. 24. Free cash flow equals cash provided by operations less capital expenditures and cash dividends. a 25. a 26. a 27. a 28. a 29. The use of a worksheet to prepare a statement of cash flows is optional. During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $3,000; therefore, the cash paid for income taxes was $27,000. In preparing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis. Using the direct method, major classes of investing and financing activities are listed in the operating activities section. During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers. a 30. Operating expenses + an increase in prepaid expenses a decrease in accrued expenses payable = cash payments for operating expenses.

6 17-6 Test Bank for Accounting Principles, Eighth Edition Additional True-False Questions 31. The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities. 32. Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed. 33. The adjusted trial balance is the only item needed to prepare the Statement of Cash Flows. 34. Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash. a 35. a 36. The reconciling entry for depreciation expense in a worksheet is a credit to Accumulated Depreciation and a debit to Operating-Depreciation Expense. Under the direct method, the formula for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable. Answers to True-False Statements Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. T 7. F 13. F 19. T a 25. T 31. F 2. F 8. T 14. T 20. F a 26. T 32. T 3. F 9. F 15. F 21. T a 27. T 33. F 4. T 10. F 16. T 22. F a 28. F 34. F 5. F 11. T 17. F 23. T a 29. F a 35. T 6. T 12. F 18. F 24. T a 30. F a 36. F MULTIPLE CHOICE QUESTIONS 37. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period. 38. The statement of cash flows a. must be prepared on a daily basis. b. summarizes the operating, financing, and investing activities of an entity. c. is another name for the income statement. d. is a special section of the income statement.

7 The Statement of Cash Flows Which one of the following items is not generally used in preparing a statement of cash flows? a. Adjusted trial balance b. Comparative balance sheets c. Current income statement d. Additional information 40. The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships. 41. If a company reports a net loss, it a. may still have a net increase in cash. b. will not be able to pay cash dividends. c. will not be able to get a loan. d. will not be able to make capital expenditures. 42. In addition to the three basic financial statements, which of the following is also a required financial statement? a. the "Cash Budget" b. the Statement of Cash Flows c. the Statement of Cash Inflows and Outflows d. the "Cash Reconciliation" 43. The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period. 44. Cash equivalents do not include a. short-term corporate notes. b. treasury bills. c. money market funds. d. 2-year certificates of deposit. 45. Which of the following characteristics does not apply to cash equivalents? a. Short-term b. Highly-liquid c. Readily convertible into cash d. Sensitive to interest rate changes 46. Cash equivalents are generally investments with maturities of a. $1,000 or more. b. three months or less. c. at least six months. d. one year or the operating cycle, whichever is less.

8 17-8 Test Bank for Accounting Principles, Eighth Edition 47. The best measure of a company's ability to generate sufficient cash to continue as a going concern is net cash provided by a. financing activities. b. investing activities. c. operating activities. d. processing activities. 48. The acquisition of land by issuing common stock is a. a noncash transaction which is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a noncash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method. 49. The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating. 50. Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets. 51. Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed. 52. Generally, the most important category on the statement of cash flows is cash flows from a. operating activities. b. investing activities. c. financing activities. d. significant noncash activities. 53. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year. 54. Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. operating activities. d. either financing or investing activities.

9 The Statement of Cash Flows Each of the following is an example of a significant noncash activity except a. conversion of bonds into common stock. b. exchanges of plant assets. c. issuance of debt to purchase assets. d. stock dividends. 56. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the a. two cash effects can be netted and presented as one item in the investing activities section. b. cash inflow and cash outflow should be reported separately in the investing activities section. c. two cash effects can be netted and presented as one item in the financing activities section. d. cash inflow and cash outflow should be reported separately in the financing activities section. 57. Of the items below, the one that appears first on the statement of cash flows is a. noncash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period. 58. Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of treasury stock d. Exercise of the call option on bonds payable 59. Significant noncash transactions would not include a. conversion of bonds into common stock. b. asset acquisition through bond issuance. c. treasury stock acquisition. d. exchange of plant assets. 60. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in a. the financing section. b. the "extraordinary" section. c. a separate schedule or note to the financial statements. d. the stockholders' equity section. Use the following information for questions For each of the following transactions, indicate where, if at all, it would be classified on the statement of cash flows. Assume the indirect method is used. 61. Paid income taxes. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

10 17-10 Test Bank for Accounting Principles, Eighth Edition 62. Issued common stock for cash. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow 63. Purchased land for cash. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow 64. Purchased land and building with a mortgage. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow Use the following information for questions Joy Elle s Vegetable Market had the following transactions during 2008: 1. Issued $25,000 of par value common stock for cash. 2. Repaid a 6 year note payable in the amount of $11, Acquired land by issuing common stock of par value $50, Declared and paid a cash dividend of $1, Sold a long-term investment (cost $3,000) for cash of $3, Acquired an investment in IBM stock for cash of $6, What is the net cash provided by financing activities? a. $13,000 b. $25,000 c. $14,000 d. $9, What is the net cash provided by investing activities? a. $6,000 b. $16,000 c. ($3,000) d. $3, Miller Company purchased treasury stock with a cost of $15,000 during During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $816,000. Cash flows from financing activities for 2008 total a. $796,000 net cash inflow. b. $811,000 net cash inflow. c. $5,000 net cash outflow. d. $781,000 net cash inflow.

11 The Statement of Cash Flows Cline Company issued common stock for proceeds of $186,000 during The company paid dividends of $33,000 and issued a long-term note payable for $45,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $7,000. The financing section of the statement of cash flows will report net cash inflows of a. $146,000. b. $202,000. c. $153,000. d. $179, In Gentry Company, land decreased $120,000 because of a cash sale for $120,000, the equipment account increased $40,000 as a result of a cash purchase, and Bonds Payable increased $130,000 from issuance for cash at face value. The net cash provided by investing activities is a. $120,000. b. $210,000. c. $80,000. d. $90, Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $240,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $240,000. b. $250,000. c. $310,000. d. $230, Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $120,000. b. $125,000. c. $155,000. d. $115, Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable decreased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $30,000. b. $55,000. c. $39,000. d. $35, Buster Company reported a net loss of $3,000 for the year ended December 31, During the year, accounts receivable increased $7,000, merchandise inventory decreased $5,000, accounts payable decreased by $10,000, and depreciation expense of $5,000 was recorded. During 2007, operating activities a. used net cash of $10,000. b. used net cash of $14,000. c. provided net cash of $14,000. d. provided net cash of $9,000.

12 17-12 Test Bank for Accounting Principles, Eighth Edition 74. The net income reported on the income statement for the current year was $205,000. Depreciation recorded on plant assets was $38,000. Accounts receivable and inventories increased by $2,000 and $8,000, respectively. Prepaid expenses and accounts payable decreased by $1,000 and $11,000 respectively. How much cash was provided by operating activities? a. $185,000 b. $223,000 c. $205,000 d. $239, The net income reported on the income statement for the current year was $220,000. Depreciation was $50,000. Account receivable and inventories decreased by $10,000 and $30,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities? a. $281,000 b. $317,000 c. $301,000 d. $309, If a gain of $10,000 is incurred in selling (for cash) office equipment having a book value of $100,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $90,000. b. $110,000. c. $100,000. d. $10, If a loss of $12,500 is incurred in selling (for cash) office equipment having a book value of $50,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $37,500. b. $50,000. c. $62,500. d. $12, Harbor Company reported net income of $60,000 for the year ended December 31, During the year, inventories decreased by $12,000, accounts payable decreased by $18,000, depreciation expense was $20,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2008 using the indirect method was a. $119,000. b. $65,000. c. $77,000. d. $55, The third (final) step in preparing the statement of cash flows is to a. analyze changes in noncurrent asset and liability accounts. b. compare the net change in cash with the change in the cash account reported on the balance sheet. c. determine net cash provided by operating activities. d. list the noncash activities.

13 The Statement of Cash Flows Which one of the following items is not necessary in preparing a statement of cash flows? a. Determine the change in cash b. Determine the cash provided by operations c. Determine cash from financing and investing activities d. Determine the cash in all bank accounts 81. If accounts receivable have increased during the period, a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis. 82. If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis. 83. Which one of the following affects cash during a period? a. Recording depreciation expense b. Declaration of a cash dividend c. Write-off of an uncollectible account receivable d. Payment of an accounts payable 84. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows. 85. Meyer Company reported net income of $50,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $45,000. b. $65,000. c. $49,000. d. $50, Flynn Company reported a net loss of $20,000 for the year ended December 31, During the year, accounts receivable decreased $10,000, merchandise inventory increased $16,000, accounts payable increased by $20,000, and depreciation expense of $10,000 was recorded. During 2008, operating activities a. used net cash of $4,000. b. used net cash of $16,000. c. provided net cash of $4,000. d. provided net cash of $16,000.

14 17-14 Test Bank for Accounting Principles, Eighth Edition 87. Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method. 88. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses. 89. Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income. 90. In developing the cash flows from operating activities, most companies in the U. S. a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis. 91. Each of the following is added to net income in computing net cash provided by operating activities except a. amortization expense. b. an increase in accrued expenses payable. c. a gain on sale of equipment. d. a decrease in inventory. 92. Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses 93. Which of the following would be added to net income using the indirect method? a. An increase in accounts receivable b. An increase in prepaid expenses c. Depreciation expense d. A decrease in accounts payable 94. Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense b. An increase in Prepaid Insurance c. Amortization Expense d. An increase in Land

15 The Statement of Cash Flows In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities. 96. Which of the following adjustments to convert net income to net cash provided by operating activities is correct? Add to Net Income Deduct from Net Income a. Accounts Receivable increase decrease b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Taxes Payable decrease increase 97. Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? Add to Net Income Deduct from Net Income a. Accounts Receivable decrease increase b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Accounts Payable increase decrease 98. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Sale of Equipment b. Depreciation Expense c. Patent Amortization Expense d. Depletion Expense 99. Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section A company had net income of $180,000. Depreciation expense is $26,000. During the year, Accounts Receivable and Inventory increased $15,000 and $40,000, respectively. Prepaid Expenses and Accounts Payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities? a. $146,000 b. $152,000 c. $226,000 d. $238, On the statement of cash flows using the indirect method, patent amortization expense will a. be added to net income in the operating section. b. be deducted from net income in the operating section. c. appear as an inflow of cash in the investing section. d. appear as an outflow of cash in the investing section.

16 17-16 Test Bank for Accounting Principles, Eighth Edition 102. The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section Land acquired from the issuance of common stock is reported a. as a financing activity. b. as an investing activity. c. as an operating activity. d. in a separate schedule at the bottom of the statement If $250,000 of bonds are issued during the year but $150,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $100,000. b. net decrease in cash of $100,000. c. increase in cash of $250,000 and a decrease in cash of $150,000. d. net gain on retirement of bonds of $100, Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? 1. Declaration of a cash dividend paid during the period. 2. Net income for the period. a. 1 b. 2 c. Neither 1 nor 2. d. Both 1 and The statement of cash flows a. is prepared instead of an income statement under generally accepted accounting principles. b. is used to assess an entity's ability to pay dividends and meet obligations. c. is prepared from comparative income statements. d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of a. the adjusted trial balance. b. the current period's balance sheet. c. a comparative balance sheet. d. a comparative income statement To determine the net cash provided (used) by operating activities, it is necessary to analyze a. the current year's income statement. b. a comparative balance sheet. c. additional information. d. all of these.

17 The Statement of Cash Flows Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense b. Change in accounts receivable c. Payment of cash dividends d. Change in prepaid expenses 110. When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. d. how the retirement of debt was accomplished Which of the following transactions would not be classified as a financing activity? a. Purchase of treasury stock b. Payment of dividends c. Issuance of bonds at a discount d. Purchase of a long-term investment in bonds 113. A measure that describes the cash remaining from operations after adjustment for capital expenditures and dividends is a. adjusted cash from operations. b. cash provided by operations. c. free cash flow. d. net cash provided by operating activities Free cash flow equals cash provided by a. operations less capital expenditures and cash dividends. b. operations less cash dividends. c. investing activities less capital expenditures and cash dividends. d. operations less capital expenditures DV s Pest Control Products has the following information available: Net Income $15,000 Cash Provided by Operations 21,000 Cash Sales 65,000 Capital Expenditures 11,000 Dividends Paid 3,000 What is DV s free cash flow? a. $18,000 b. $10,000 c. $7,000 d. $1,000

18 17-18 Test Bank for Accounting Principles, Eighth Edition a 116. When listing accounts in the statement of cash flows worksheet, the accumulated depreciation account is shown a. with accounts that have credit balances. b. with accounts that have debit balances. c. as a credit under the reconciling items. d. as a debit under the reconciling items. a 117. In the bottom portion of the statement of cash flows worksheet, a. inflows of cash are debits in the reconciling columns. b. outflows of cash are debits in the reconciling columns. c. information pertaining to investing and financing activities only is entered. d. only significant noncash transactions are entered. a 118. On the statement of cash flows worksheet, a. significant noncash investing and financing activities are not entered in the reconciling columns. b. a decrease in cash will be offset by a debit in the reconciling items columns at the bottom of the worksheet. c. an increase in cash will be offset by a debit in the reconciling items column at the bottom of the worksheet. d. income statement accounts are listed after balance sheet accounts in the top half of the worksheet under the indirect method. a 119. Each of the following would be reported under operating activities except cash receipts a. from sales of goods. b. from sales of investments. c. of interest on loans. d. of dividends from investments. a 120. Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to a net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes. a 121. Carter Company reports the following: End of Year Beginning of Year Inventory $25,000 $40,000 Accounts Payable 30,000 10,000 If cost of goods sold for the year is $170,000, the amount of cash paid to suppliers is a. $175,000. b. $165,000. c. $135,000. d. $205,000.

19 The Statement of Cash Flows a 122. During the year, Salaries Payable decreased by $6,000. If Salary Expense amounted to $190,000 for the year, the cash paid to employees (including deductions from gross pay) is a. $196,000. b. $190,000. c. $184,000. d. $202,000. a 123. Gary Company reports a $15,000 increase in inventory and a $5,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $180,000. The cash payments made to suppliers were a. $180,000. b. $190,000. c. $160,000. d. $175,000. a 124. Rader Company had credit sales of $600,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period? a. $700,000 b. $600,000 c. $500,000 d. $640,000 a 125. Goren Inc. had cash sales of $300,000 and credit sales of $1,150,000. The accounts receivable balance increased $15,000 during the year. How much cash did Goren receive from its customers during the year? a. $1,435,000 b. $1,465,000 c. $1,135,000 d. $1,165,000 a 126. Stine Company had a cost of purchases of $220,000. The comparative balance sheet analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Stine's cash payments to suppliers? a. $200,000 b. $190,000 c. $230,000 d. $250,000 a 127. Wayne Company had an increase in inventory of $40,000. The cost of goods sold was $80,000. There was a $5,000 decrease in accounts payable from the prior period. What were Wayne's cash payments to suppliers? a. $125,000 b. $75,000 c. $115,000 d. $85,000 a 128. Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers b. Cash collections from customers c. Depreciation Expense d. Cash from the sale of equipment

20 17-20 Test Bank for Accounting Principles, Eighth Edition a 129. Nixon Company has other operating expenses of $90,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were Nixon's cash payments for operating expenses? a. $92,000 b. $88,000 c. $80,000 d. $90,000 a 130. Carsen Corporation shows income tax expense of $90,000. There has been a $5,000 decrease in federal income taxes payable and a $7,000 increase in state income taxes payable during the year. What was Carsen's cash payment for income taxes? a. $90,000 b. $88,000 c. $85,000 d. $92,000 a 131. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers b. Cash paid for income taxes c. Gain on sale of equipment d. Cash paid to employees a 132. The cost of goods sold during the year was $165,000. Merchandise inventory decreased by $6,000 during the year and accounts payable decreased by $3,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $168,000. b. $162,000. c. $156,000. d. $174,000. a 133. Bent Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $150,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $150,000. b. $165,000. c. $175,000. d. $135,000. a 134. During 2008, Unruh Company had $160,000 in cash sales and $1,400,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2007 and 2008, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2008? a. $1,368,000 b. $1,592,000 c. $1,560,000 d. $1,528,000

21 The Statement of Cash Flows a 135. Logan Company has other operating expenses of $260,000. There has been an increase in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 lower than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Logan's cash payments for operating expenses? a. $248,000 b. $252,000 c. $220,000 d. $300,000 Additional Multiple Choice Questions 136. Which of the following steps is not required in preparing the statement of cash flows? a. Determine the change in cash. b. Determine the net cash provided by operating activities. c. Determine cash from investing and financing activities. d. Determine the change in current assets Financing activities involve a. lending money to other entities and collecting on those loans. b. cash receipts from sales of goods and services. c. acquiring and disposing of productive long-lived assets. d. long-term liability and owners' equity items The information to prepare the statement of cash flows usually comes from each of the following except a. the comparative balance sheet. b. the retained earnings statement. c. additional information. d. the current income statement The statement of cash flows is prepared from all of the following except a. the adjusted trial balance. b. comparative balance sheets. c. selected transaction data. d. the current income statement The information in a statement of cash flows will not help investors to assess the entity's ability to a. generate future cash flows. b. obtain favorable borrowing terms at a bank. c. pay dividends. d. pay its obligations when they become due In converting net income to net cash provided by operating activities, under the indirect method: a. decreases in accounts receivable and increases in prepaid expenses are added. b. decreases in inventory and increases in accrued liabilities are added. c. decreases in accounts payable and decreases in inventory are deducted. d. increases in accounts receivable and increases in accrued liabilities are deducted.

22 17-22 Test Bank for Accounting Principles, Eighth Edition 142. In the Freyfogle Company, land decreased $60,000 because of a cash sale for $60,000, the equipment account increased $20,000 as a result of a cash purchase, and Bonds Payable increased $70,000 from an issuance for cash at face value. The net cash provided by investing activities is a. $60,000. b. $110,000. c. $40,000. d. $50,000. a 143. Cribbets Company uses the direct method in determining net cash provided by operating activities, During the year, operating expenses were $260,000, prepaid expenses increased $20,000, and accrued expenses payable increased $30,000. Cash payments for operating expenses were a. $210,000. b. $310,000. c. $270,000. d. $250,000. a 144. Bainbridge Company uses the direct method in determining net cash provided by operating activities. The income statement shows income tax expense $60,000. Income taxes payable were $25,000 at the beginning of the year and $18,000 at the end of the year. Cash payments for income taxes are a. $53,000. b. $60,000. c. $67,000. d. $78,000. a 145. When a worksheet is used, all but one of the following statements is correct. The incorrect statement is a. Reconciling items on the worksheet are not journalized or posted. b. The bottom portion of the worksheet shows the statement of cash flows effects. c. The balance sheet accounts portion of the worksheet is divided into two parts: assets, and liabilities and stockholders' equity. d. Each line pertaining to a balance sheet account should foot across.

23 The Statement of Cash Flows Answers to Multiple Choice Questions Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 37. a 53. a 69. c 85. a 101. a a 117. a a 133. c 38. b 54. c 70. b 86. c 102. b a 118. b a 134. d 39. a 55. d 71. d 87. b 103. d a 119. b a 135. d 40. c 56. b 72. b 88. a 104. c a 120. b 136. d 41. a 57. b 73. a 89. d 105. a a 121. c 137. d 42. b 58. a 74. b 90. b 106. b a 122. a 138. b 43. a 59. c 75. b 91. c 107. c a 123. b 139. a 44. d 60. c 76. b 92. b 108. d a 124. c 140. b 45. d 61. a 77. a 93. c 109. c a 125. a 141. b 46. b 62. c 78. b 94. d 110. c a 126. a 142. c 47. c 63. b 79. b 95. b 111. c a 127. a a 143. d 48. a 64. d 80. d 96. c 112. d a 128. c a 144. c 49. a 65. a 81. b 97. b 113. c a 129. c a 145. c 50. c 66. c 82. c 98. a 114. a a 130. b 51. a 67. d 83. d 99. d 115. c a 131. c 52. a 68. a 84. b 100. b a 116. a a 132. b BRIEF EXERCISES BE 146 Selected transactions for the Eldon Company are listed below. 1. Collected accounts receivable. 2. Declared and paid dividends on common stock. 3. Sold long-term investments for cash. 4. Issued stock for equipment. 5. Repaid five year note payable. 6. Paid employee wages. 7. Converted bonds payable to common stock. 8. Acquired long-term investment with cash. 9. Sold buildings and equipment for cash. 10. Sold merchandise to customers. Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Solution 146 (5 min.) 1. (a) Operating activity 6. (a) Operating activity 2. (c) Financing activity 7. (d) Noncash activity 3. (b) Investing activity 8. (b) Investing activity 4. (d) Noncash activity 9. (b) Investing activity 5. (c) Financing activity 10. (a) Operating activity

24 17-24 Test Bank for Accounting Principles, Eighth Edition BE 147 Bertucci Company had net income of $204,000 in Depreciation expense for the year is $45,000. During the year, Accounts Receivable increased $9,000 and Prepaid Expenses decreased $1,000. The company also sold equipment at a loss of $2,000. Calculate net cash flows from operating activities using the indirect method. Solution 147 (5 min.) Net Income $204,000 Add: Depreciation 45,000 Loss on sale of equipment 2,000 Decrease in Prepaid Expenses 1,000 Deduct: Increase in Accounts Receivable (9,000) Net cash flows from operating activities $243,000 BE 148 During 2008, Baxter Company sold a building with a book value of $145,000 for proceeds of $132,000. The company also sold long-term investments for proceeds of $45,000. The company purchased land and a new building for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during Compute net cash flows from investing activities. Solution 148 (3 min.) Net cash flows from investing = $132,000 + $45,000 = $177,000 BE 149 Mover Company issued common stock for proceeds of $14,000 during The company paid dividends of $2,000. The company also issued a long-term note payable for $30,000 in exchange for equipment during the year. The company sold treasury stock that had a cost of $2,000 for $4,000. Compute net cash flows from financing activities. Solution 149 (3 min.) Net cash flows from financing activities = $14,000 - $2,000 + $4,000 = $16,000

25 The Statement of Cash Flows BE 150 At January 1, 2008, Bergman Enterprises reported a balance in the Equipment account of $45,000. During the year the company purchased equipment with a cost of $60,000 and sold equipment with a book value of $30,000. The company reported a loss on the sale of equipment of $2,000. Assume the indirect method is used. Determine what amount will be reported in (a) the operating activities section and (b) the investing activities section with regard to the purchase and sale of equipment. Solution 150 (3 min.) a. Loss on Sale of Equipment, $2,000 b. Proceeds from the Sale of Equipment, $28,000 ($30,000 $2,000) Purchase of Equipment, $60,000 BE 151 Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D 1. Increase in accounts receivable 2. Increase in inventory 3. Decrease in prepaid expenses 4. Decrease in accounts payable 5. Increase in accrued liabilities 6. Increase in income taxes payable 7. Depreciation expense 8. Loss on sale of investment 9. Gain on disposal of equipment 10. Amortization expense Solution 151 (5 min.) 1. D 6. A 2. D 7. A 3. A 8. A 4. D 9. D 5. A 10. A

26 17-26 Test Bank for Accounting Principles, Eighth Edition BE 152 Dutton Company prepared the tabulation below at December 31, Net Income... $275,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $25, Decrease in accounts receivable, $55, Increase in inventory, $12, Decrease in accounts payable, $6, Increase in income taxes payable, $1, Loss on sale of land, $5, Net cash provided (used) by operating activities... Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Solution 152 (6 min.) Net Income... $275,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense... 25,000 Decrease in accounts receivable... 55,000 Increase in inventory... (12,000) Decrease in accounts payable... (6,600) Increase in income taxes payable... 1,500 Loss on sale of land... 5,000 Net cash provided (used) by operating activities... $342,900 BE 153 Daimler Enterprises reported cash flow from operations of $342,000. The company made capital expenditures of $112,000 and paid dividends of $34,000. Compute free cash flow.