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Exam 12: Statement of Cash Flows

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Question 21

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Free cash flow measures the sufficiency of cash flow from operating activities to cover both capital expenditures for property, plant and equipment as well as the payment of dividends.

A) True
B) False

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Question 22

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The quality of income ratio measures the portion of net income that was generated by cash flow from operating activities.

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B) False

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Question 23

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While preparing a statement of cash flows, you encountered the following transaction: February 1, 2015: Battles Corporation acquired a small office building in exchange for 50,000 shares of its own common stock; par value $10 per share; market value $15 per share. Required: Should this transaction be shown on the statement of cash flows? Why or why not?

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from investing activities?

Below is the 2015 income statement for the Critters Corporation. Critters Corporation Income Statement For the Year Ended December 31, 2015 $\begin{array}{lc}\text { Net sales } && \$ 100,000 \\\text { Cost of goods sold } && \underline{(40,000)} \\\text { Gross profit on sales } && \$ 60,000\\\text { Various operating expenses } & \$ 25,000 \\\text { Depreciation expense } & 5,000 \\\text { Interest expense } & 2,000 \\\text { Income tax expense } & 4,000&(36,000)\\\text { Net income }&&\$24,000\end{array}$ Additional Information: Accounts receivable increased by $8,000. Merchandise inventory increased by $4,000. Accounts payable increased by $6,000. Prepaid expenses decreased by $2,000. Accrued liabilities decreased by $5,000. Interest payable increased by $1,000. Required: Prepare the operating activities section of the statement of cash flows using the indirect method.

Which of the following would not be reported as a financing activities cash flow?

Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?

Under the indirect method, depreciation expense is added to net income because it decreases net income but does not affect cash flow.

Reliance Corporation has provided the following information for the year ended December 31, 2014: • The equipment account balance increased $200,000. • The equipment accumulated depreciation account increased $35,000. • Equipment costing $50,000 was sold during the year resulting in a $10,000 gain. • Depreciation expense recorded on the equipment during the year was $65,000. Which of the following statements is correct with respect to determining cash flow from operating activities?

Rice Company, a retailer, has provided the following information pertaining to its recent year of operation: • Net income, $100,000 • Accounts receivable increased $9,000 • Prepaid insurance decreased $3,000 • Depreciation expense was $15,000 • Gain on sale of land, $2,000 • Wages payable decreased $7,000 • Unearned revenue increased $11,000 Using the indirect method, how much was Rice's net cash provided by operating activities?

For each of the following items, indicate with the letter X whether the transaction would appear in the operating, investing, or financing activities section of the statement of cash flows, or is not reported in any one of these three categories. Assume the indirect method is used for reporting.

During 2014, Boogle reported net income of $785 million and net cash inflow from operating activities of $1,196 million. During 2013, Boogle's net income was $563 million and net cash inflow from operations was $1,237 million. Which of the following is incorrect about the quality of income ratios?

Sagaworth Inc. reported the following information: $\begin{array}{l}2015 \text { Income Statement: }\\\begin{array} { l r } \text { Net loss } & \$ 380,000 \\\text { Depreciation expense } & 150,000 \\\text { Amortization expense } & 25,000\end{array}\end{array}$ Balance Sheet: $\begin{array}{lrr}&2015&2014\\\text { Accounts receivable } & \$ 200,000 & \$ 230,000 \\\text { Inventory } & 140,000 & 160,000 \\\text { Prepaid expenses } & 40,000 & 30,000 \\\text { Accounts payable } & 190,000 & 180,000 \\\text { Accrued liabilities } & 50,000 & 45,000 \\\text { Taxes payable } & 10,000 & 20,000\end{array}$ Required: Determine Sagaworth's net cash flow from operating activities for 2015 under the indirect method.

Brice Corporation reported the following information: Required: Compute Brice's cash paid to suppliers for inventory for 2014.

The statement of cash flows explains how the cash balance changed during a particular period of time.

When a company purchases equipment using common stock, the equipment purchase is reported as a financing activity.

Significant noncash financing and investing activities

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from financing activities?

KAJ Incorporated purchased a machine costing $250,000 by paying $35,000 and signing a $215,000 note payable. How would this transaction be reported within the cash flow from investing activities section of the cash flow statement?

Brice Corporation reported the following information: Required: Compute Brice's cash paid for operating expenses for 2014.