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Exam 12: Reporting Cash Flows

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Question 41

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Which of the following transactions or events should be reported as a source of cash from operating activities when using the direct method?

A) Credit sales.
B) Cash collections from customers.
C) Depreciation expense.
D) Cash received from the sale of a building.
E) Cash received from the sale of treasury stock.

F) A) and B)
G) C) and D)

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Question 42

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A company's Inventory balance at the end of the year was $188,000 and $200,000 at the beginning of the year. Its Accounts Payable balance at the end of the year was $84,000 and $80,000 at the beginning of the year, and its cost of goods sold for the year was $720,000. The company's total amount of cash payments for merchandise during the year equals:

A) $704,000.
B) $712,000.
C) $720,000.
D) $728,000.
E) $736,000.

F) None of the above
G) A) and B)

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Question 43

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Based on the information in the following income statement and balance sheet for Monterey Corporation, determine the cash flows from operating activities using the direct method. $\begin{array} { c } \text { Monterey Corporation } \\\text { Income Statement }\\ { \text { For Year Ended December 31, 20X2 } } \\ \begin{array} { | l | l | l | } \hline \text { Sales } & & \$504,000\\\hline \text { Cost of goods sold } & 327,600& \\\hline \text { Depreciation } & 42,000& \\\hline \text { Other operating expenses } &\underline{125,500} &(495,100) \\\hline \text { Other gains (losses): } & & \\\hline \text { Gain on sale of equipment } & & \underline{7,200}\\\hline \text { Income before taxes } & &16,100 \\\hline \text { Income tax expense } & &\underline{(4,800) }\\\hline \text { Net income } & & \underline{\$11,300}\\\hline &\\\hline\end{array}\end{array}$ $\begin{array}{c}\text {Monterey Corporation}\\\text {Balance Sheets}\\\text {At December 31}\\ \begin{array}{|l|l|l|}\hline& 20 \mathrm{X} 2 & 20 \mathrm{X} 1 \\\hline \text { Cash } & \$ 64,650 & \$ 55,800 \\ \hline \text { Accounts receivable } & 21,000 & 29,000 \\\hline \text { Inventory } & 58,000 & 52,100 \\\hline \text { Equipment }& 440,000 & 222,000 \\\hline\text { Accumulated depreciation } &\underline{ (106,000)} & \underline{(96,000)} \\\hline \text { Total assets } & \underline{\$ 277,650 }&\underline{ \$ 262,900 }\\\hline\\\hline \text { Liabilities: } & & \\\hline \text { Accounts payable } & \$ 28,400 & \$ 23,700 \\\hline \text { Income taxes payable } &1,050 & 1,200 \\\hline \text { Total liabilities } & \$ 29,450 & \$ 24,900 \\\hline \text { Equity: } & \\\hline \text { Common stock } & \$ 106,000 & \$ 106,000 \\\hline \text { Paid-in Capital in Excess of Par.......... } & 18,000 & 18,000 \\\hline \text { Retained earnings } &\underline{124,000}&\underline{114,000} \\\hline \text { Total equity } & \underline{\$ 248,200 }&\underline{ \$ 238,000 }\\\hline \text { Total liabilities and equity } & \underline{\$ 277,650 }&\underline{ \$ 262,900} \\\hline\end{array}\end{array}$

Use the following information to calculate cash received from dividends: $\begin{array}{llcc} \text { Divdends reveruse } & \$29,800 \\ \text {Dividends receivable, January I } &2,600\\ \text { Dividends receivable, December 31 } &3,400\\\end{array}$

If a company borrows money from a bank, the interest paid on this loan should be reported on the statement of cash flows as a(n) :

Bagwell's net income for the year ended December 31, Year 2 was $175,000. Information from Bagwell's comparative balance sheets is given below. Compute the cash paid for dividends during Year 2. $\begin{array} { | l | c | c | } \hline \text { At December 31 } & \text { Year } 2 & \text { Year } 1 \\\hline \text { Common Stock, } \$ 5 \text { par value } & \$ 500,000 & \$ 450,000 \\\hline \text { Paid-in capital in excess of par } & 948,000 & 853,000 \\\hline \text { Retained earnings } & 688,000 & 582,000 \\\hline\end{array}$

Northington, Inc. is preparing the company's statement of cash flows for the fiscal year just ended. Using the following information, determine the amount of cash flows from investing activities: $\begin{array} { | l | r | } \hline \text { Net income } & \$ 182,000 \\\hline \text { Gain on the sale of equipment } & 12,300 \\\hline \text { Proceeds from the sale of equipment } & 92,300 \\\hline \text { Depreciation expense- equipment } & 50,000 \\\hline \text { Payment of bonds at maturity } & 100,000 \\\hline \text { Purchase of land } & 200,000 \\\hline \text { Issuance of common stock } & 300,000 \\\hline \text { Increase in merchandise inventory } & 35,400 \\\hline \text { Decrease in accountsreceivable } & 28,800 \\\hline \text { Increase in accounts payable } & 23,700 \\\hline \text { Payment of cash dividends } & 32,000\\\hline \end{array}$

Use the following financial statements and additional information to (1) prepare a complete statement of cash flows for the year ended December 31, 20X2. The cash provided or used by operating activities should be reported using the direct method, and (2) compute the company's cash flow on total assets ratio for 20X2. $\begin{array}{c} \text {Derby Company Balance Sheets}\\ \text {At December 31}\\\begin{array}{|l|l|l|}\hline & 20 \mathrm{X} 2 & \text { 20X1 } \\\hline \text { Assets: } & & \\\hline&\$&\$\\ \text { Cash } & \$ 85,600 & \$ 65,200 \\\hline \text { Accounts receivable, net } & 72,850 & 56,750 \\\hline \text { Merchandise inventory } & 157,750 & 144,850 \\\hline \text { Prepaid expenses } & 6,080 & 12,680 \\\hline \text { Equipment } & 280,600 & 145,600 \\\hline \text { Accumulated depreciation-Equipment } & \underline{(80,600)} & \underline{(97,600)} \\\hline \text { Total assets } & \underline{\$ 522,280} & \underline{\$ 427,480 }\\\hline\\\hline \text { Liabilities: } & & \\\hline&\$&\$\\ \text { Accounts payable } & 52,850&45,450 \\\hline \text { Income taxes payable } &15,240 &12,240 \\\hline&\underline{\quad\quad}&\underline{\quad\quad}\\ \text { Notes payable (long term) } &\underline{59,200 }&\underline{ 79,200} \\\hline \text { Total liabilities } & \$127,290& \$136,890 \\\hline \text { Equity: } & \\\hline \text { Common stock } & 200,000&150,000 \\\hline \text { Paid-in capital in excess of par } &53,000 &40,000 \\\hline \text { Retained earnings } &\underline{ \$ 141,980 }& \underline{100,590}\\\hline \text { Total equity } &\underline{ \$ 394,990 }& \underline{\$290,590 }\\\hline \text { Total liabilities and equity } &\underline{\$522,280}& \underline{\$427,480} \\\hline\end{array}\end{array}$ $\begin{array}{c}\text {Derby Company}\\ \text {Income Statement}\\\text {For Year Ended December 31,20X2 }\\\begin{array}{|l|l|cc|} \hline \text { Sales } & \text { } &\$488,000\\\hline \text {Cost of goods sold } & \$212,540& \text { }\\\hline \text { Depreciation expense } & 43,000\text { }\\ \hline\text { Other operating expenses } & 106,260& \text { }\\\hline&\underline{\quad\quad}&\\ \text { Interest expense } &\underline{4,600 } & (368,200)\\\hline \text {Other gains (losses): } & \text { } & \text { }\\\hline&&\underline{\quad\quad}\\ \text { Gain on sale of equipment } & \text { } & \underline{4,700 }\\ \hline\text {Income before taxes } & \text { } &124,500\\\hline&&\underline{\quad\quad}\\ \text {Income taxes expense } & \text { } & \underline{41,100 }\\\hline&&\$\underline{\quad\quad}\\ \text {Net income } & \text { } &\underline{83,400 }\\\hline \end{array}\end{array}$ Additional Information a. A $20,000 note payable is retired at its carrying value in exchange for cash. b. The only changes affecting retained earnings are net income and cash dividends paid. c. New equipment is acquired for $120,000 cash. d. Received cash for the sale of equipment that had cost $85,000, yielding a gain of $4,700. e. Prepaid expenses relate to Other Expenses on the income statement. f. All purchases and sales of merchandise inventory are on credit.

Equipment costing $200,000 with accumulated depreciation of $160,000 is sold at a loss of $10,000. This implies that $30,000 cash was received from the sale.

Use the following company information to prepare a schedule of significant noncash investing and financing activities: (a) Sold a building with a book value of $300,000 for $225,000 cash and sold land with a book value of $40,000 for $65,000 cash. (b) Issued 15,000 shares of $10 par value common stock in exchange for equipment with a market value of $175,000. (c) Retired a $100,000, 8% bond by issuing another $100,000, 7% bond issue. (d) Acquired land by issuing a twenty-year, 5%, $73,000 note payable.

When preparing the operating activities section of the statement of cash flows using the indirect method, decreases in current operating assets are subtracted from net income.

The cash flow on total assets ratio is calculated by:

The following transactions and events occurred during the year. Assuming that this company uses the indirect method to report cash provided by operating activities, indicate where each item would appear on its statement of cash flows by placing an x in the appropriate column.

The payment of cash dividends to shareholders is classified as a financing activity.

When the operating activities section of the statement of cash flows is reported using the direct method, the FASB requires:

When preparing the operating activities section of the statement of cash flows using the direct method, non-operating gains are added to net income.

When analyzing the changes on a spreadsheet used to prepare a statement of cash flows, the cash flows from operating activities generally affect:

Preparation of the statement of cash flows does not involve:

Define and discuss the differences between operating, investing, and financing activities.

When preparing the operating section of the statement of cash flows using the indirect method, noncash expenses are ________ net income.