Study Probes for Statement of Cash Flows and Long-Term Asset Transactions -Solution
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For purposes of a statement of cash flows, cash is defined to include cash and investments such as
those in stock of other companies.
A firm may have a significant amount of net income, as computed under the accrual basis of
accounting, yet have an insignificant net inflow of cash.
A statement of cash flows provides information on cash inflows and outflows for a specified period of
time.
Cash equivalents are short-term investments that are highly liquid and can be readily converted into
cash.
Cash proceeds from issuing a long-term note payable is classified as an operating activity.
Cash used to retire long-term debt that was used to build a new factory is classified as an investing
activity.
Cash payments for salaries to employees are classified as an operating activity.
Financing activities are presented as the first classification on a statement of cash flows because a
company must first obtain financing when it begins operations before it can acquire assets to start
operations.
Financial statement users focus a great deal of attention on cash flows related to operating activities,
because, over the long run, a business must generate positive cash flows from its profit-oriented
activities to be successful.
Cash received from customers includes cash from current period sales plus cash from customer
payments on account.
Cash paid for interest expense is shown as an operating activity under the direct method.
Under the direct method, a gain on the sale of equipment is included in net income and subtracted in
the operating activities section of the statement of cash flows because it is not a cash flow.
The format of a statement of cash flows prepared using the direct method is much like an income
statement prepared on the cash-flow basis.
When the indirect method is used, GAAP requires a separate schedule reconciling cash flows from
operating activities to net income.
Cost of goods sold less any increase in accounts payable equals cash paid for inventory.
A loss on the sale of a building is added to net income in the operating activities section of the
statement of cash flows under the direct method.
Cash paid for wages and salaries is determined by adding a decrease in wages payable or subtracting
an increase in wages payable to the amount of wages and salaries expense.
When the direct method of preparing the statement of cash flows is used, the payment of dividends to
stockholders appears in the operating activities section.
Proceeds from the sale of equipment is reported as an investing activity when using the direct method
to prepare the statement of cash flows.
A decrease in inventory is added to net income when preparing the operating activities section under
the indirect method.
Issuing common stock is an investing activity.
Depreciation expense is added to net income when determining net cash provided by operating
activities under the indirect method.
Under the indirect method of preparing the statement of cash flows, a loss on the sale of equipment is
added to net income in the investing activities section.
The presentation of each the three sections of the statement of cash flows will differ when comparing
the format of the direct and indirect methods of preparing the statement of cash flows.
Increases in receivables and prepaid expenses are added to net income to determine cash
provided/(used) by operating activities when using the indirect method.
An increase in accounts receivable is subtracted from net income to determine cash provided/(used) by
operating activities when using the indirect method.
An increase in accounts payable is added to net income to determine cash provided/(used) by
operating activities when using the indirect method.
Both the direct and indirect method yield the same total amount for net cash provided or used by
operating activities.
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Generally, the most important section of the statement of cash flows is operating activities because a
company is required to have positive cash flows according to GAAP.
If cash flows provided by operating activities are a relatively small amount, a company may offset this
problem on a short-term basis by cutting back on capital expenditures or by borrowing funds or issuing
stock.
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31.
What primary information is provided in the statement of cash flows?
A.
The amount of profits earned during a period
B.
The source and uses of a company’s money
C.
Estimates of future cash flows
D.
Cash receipts and cash payments of an entity’s profitable activities during a period
32.
Which one of the following is an important reason to evaluate a company’s cash flow?
A.
Without positive cash flows, a company is unable to recognize a positive net income.
B.
Minimum cash balances must be maintained by all companies.
C.
Stockholders want to know that the company can generate cash consistent with earning a
reasonable return on their investments.
D.
Creditors want to be assured that the company has significant cash inflows from financing
activities.
33.
Watley Surf Shop provided the following information for the current year:
Proceeds from sale of equipment
Dividends paid to stockholders
Purchase of inventories on account
Borrowing a long-term loan
Loan principal payments made
Interest paid on loan payments
Purchase of land for cash
Payment for inventory previously acquired on account
Cash collected from customers
$120,000
16,000
92,000
60,000
14,000
1,000
65,000
85,000
450,000
How much is the net cash provided/(used) by investing activities during the year?
Answer: $55,000
34.
Watley Surf Shop provided the following information for the current year:
Proceeds from sale of equipment
Dividends paid to stockholders
Purchase of inventories on account
Borrowing a long-term loan
Loan principal payments made
Interest paid on loan payments
Purchase of land for cash
Payment for inventory previously acquired on account
Cash collected from customers
$120,000
16,000
92,000
60,000
14,000
1,000
65,000
85,000
450,000
How much is the net cash provided/(used) by financing activities during the year?
Answer: $30,000
35.
Randolph Retail reported the following results during 2014:
Cash collected from accounts receivable
Cash paid to purchase office supplies
Cash collected from customers for current period sales
Cash paid for dividends
Cash paid for inventory acquisitions
Cash collected from the issuance of common stock
Cash paid to purchase equipment with a 5-year life
$56,000
2,000
98,000
12,000
87,000
50,000
80,000
How much is the company’s net cash provided by operating activities?
Answer: $65,000
26.
Euclid Brewery reported the following balances in its Equipment and Accumulated Depreciation
accounts during 2014:
January 1
December 31
Equipment
$115,000
$140,000
Accumulated depreciation, equipment
30,000
12,000
During 2014, Euclid sold equipment for $18,500 that originally cost $35,000. The book value of the
equipment at the time of sale was $9,000. Net income for 2014 was $380,000.
A.
How much depreciation expense was recorded for equipment by Euclid Brewery during 2014?
B.
What was the cost of equipment purchased during the year?
C.
Show how the effects of these transactions will be reported by preparing Euclid Brewery’s
operating and investing activities sections of its statement of cash flows.
Answer
A.
Beginning accumulated depreciation
Plus depreciation expense for the year
Less accumulated depreciation on the sale
Ending accumulated depreciation
Depreciation expense = $8,000
$ 30,000
?
(26,000)
$ 12,000
B.
Beginning equipment
Plus purchases of equipment
Less cost of equipment sold
Ending equipment
Cost = $60,000
$115,000
?
(35,000)
$140,000
C.
Operating Activities
Net income
$380,000
Adjustments of net income to cash basis:
Depreciation
8,000
Gain on sale of equipment ($18,500 – $9,000) (9,500)
Net cash provided by operating activities
$378,500
Investing Activities
Purchase of equipment
Cash received from sale of equipment
Net cash used in investing activities
($60,000)
18,500
($41,500)
37.
Speedy Supermarket reported net income of $24,000 in 2014. No dividends were declared nor paid
during the year. Changes in the selected accounts during the year are:
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Salaries payable
Increase/(Decrease)
$16,200
11,800
(4,000)
27,300
(3,000)
How much is the company’s net cash provided by operating activities?
Answer: $24,300
38.
Classify each of the following items based on the section of the statement of cash flows in which it will
be reported if the direct method is used, using the respective letter for each activity below:
Operating activities = O;
Investing activities = I;
Financing activities = F
If an item is not reported in any of these activity sections, place an X in the space provided.
______ 1.
Paid cash dividends to stockholders
______ 2.
Purchased of a building by issuing a mortgage payable
______ 3.
Paid interest that had been accrued in a previous period
______ 4.
Purchased another business for cash
______ 6.
Paid suppliers for inventory
______ 7.
Received interest revenue
______ 8.
Collected cash from customers
______ 9.
Collected a principal payment on a long-term note
______ 10. Paid cash to retire long-term debt
______ 11. Paid income taxes
______ 12. Received cash from the sale of a machine no longer in use
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39.
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Harnett Enterprises had a net loss of $14,000 in 2014. Dividends of $15,000 were declared and paid
during the year and the company reported depreciation expense of $15,000. Changes in the following
selected accounts occurred during the year:
Increase/(Decrease)
Accounts receivable
($3,000)
Long-term investments
16,000
Interest payable
(2,000)
Notes payable
65,000
Property, plant, and equipment
42,000
No property, plant, and equipment items were sold during the year. How much is the company’s net
cash provided/(used) by financing activities?
Answer: ($80,000)
40.
Harnett Enterprises had a net loss of $14,000 in 2014. Dividends of $15,000 were declared and paid
during the year and the company reported depreciation expense of $15,000. Changes in the following
selected accounts occurred during the year:
Increase/(Decrease)
Accounts receivable
($3,000)
Long-term investments
16,000
Interest payable
(2,000)
Notes payable
65,000
Property, plant, and equipment
42,000
No property, plant, and equipment were sold during the year. How much is the company’s net cash
provided (used) by investing activities?
Answer: ($58,000)
41.
The following information concerning property, plant, and equipment appeared in Quick Wash
Laundry’s 2014 balance sheet:
December 31 January 1
Equipment
$228,000
$211,000
Accumulated depreciation
(48,900)
(42,600)
Net property, plant, and
$179,100
$168,400
equipment
During 2014, Quick Wash sold equipment that had an original cost of $23,000 and a current book value
of $3,500 for a loss of $2,100. In addition, the company purchased a new machine by making a down
payment of $6,000 and financing the balance by issuing a long-term note payable. Net income for 2014
was $89,000.
a.
How much depreciation expense did Quick Wash Laundry record during 2014?
b.
Prepare the investing activities section of the statement of cash flows for Quick Wash Laundry
for 2014.
c.
Show how the effects of the transactions related to the accounts of the Quick Wash Laundry
presented will be reported in the operating activities section of the statement of cash flows for
2014.
Answer
a.
b.
$42,600 – $48,900 – $19,500 = $25,800
Purchase of equipment: $211,000 – $23,000 – $228,000 = $40,000
Proceeds from sale of equipment: $2,100 + ($23,000 – $3,500) – $23,000 = $1,400
Investing Activities
Proceeds from sale of equipment
$ 1,400
Purchase of equipment (down payment)
(6,000)
Net cash used by investing activities
($4,600)
c.
Operating Activities
Net income
Depreciation expense
Loss on sale of equipment
Net cash provided by operating activities
$ 89,000
25,800
2,100
$116,900
42.
Indicate how each item listed below should be reported in the operating activities section of the
statement of cash flows under the indirect method using the coding that follows:
A.
Added to net income
D.
Deducted from net income
X.
Item does not appear in the operating activities section under the indirect method
______ 1.
Gain on sale of equipment
______ 2.
Loss on sale of building
______ 3. Depreciation expense
______ 4.
Amortization expense
Answer
1.
2.
3.
4.
D
A
A
A
43.
A company purchased factory equipment on April 1, 2014, for $96,000. It is estimated that the
equipment will have a $12,000 salvage value at the end of its 10-year useful life. Using the straight-line
method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014, is
a. $9,600.
b. $8,400.
c. $6,300.
d. $7,200.
44.
Mitchell Corporation bought equipment on January 1, 2014 .The equipment cost $180,000 and had an
expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The
depreciable cost of the equipment is
a. $180,000.
b. $150,000.
c. $30,000.
d. $25,000.
45.Mitchell Corporation bought equipment on January 1, 2014. The equipment cost $180,000 and had an
expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The book
value of the equipment at the beginning of the third year would be
a. $180,000.
b. $150,000.
c. $130,000.
d. $50,000.
46.
Pearson Company bought a machine on January 1, 2014. The machine cost $144,000 and had an
expected salvage value of $24,000. The life of the machine was estimated to be 5 years. The book
value of the machine at the beginning of the third year would be
a. $144,000.
b. $120,000.
c. $96,000.
d. $48,000.
47.
Stine Company purchased machinery with a list price of $64,000. They were given a 10% discount by
the manufacturer. They paid $400 for shipping and sales tax of $3,000. Stine estimates that the
machinery will have a useful life of 10 years and a residual value of $20,000. If Stine uses straight-line
depreciation, annual depreciation will be
a. $4,100.
b. $4,072.
c. $6,100.
d. $3,760.
48.
In 2014, Blanchard Corporation has plant equipment that originally cost $90,000 and has accumulated
depreciation of $36,000. A new processing technique has rendered the equipment obsolete, so it is
retired. Which of the following entries should Blanchard use to record the retirement of the equipment?
a. Loss on Disposal of Plant Assets
54,000
Equipment
54,000
b. Accumulated Depreciation – Equipment
36,000
Loss on Disposal of Plant Assets
54,000
Equipment
90,000
c. Loss on Disposal of Plant Assets
54,000
Accumulated Depreciation – Equipment
54,000
d. Plant Equipment
90,000
Accumulated Depreciation – Equipment
36,000
Loss on Disposal of Plant Assets
54,000
49.A gain or loss on disposal of a plant asset is determined by comparing the
a. replacement cost of the asset with the asset's original cost.
b. book value of the asset with the asset's original cost.
c. original cost of the asset with the proceeds received from its sale.
d. book value of the asset with the proceeds received from its sale.
50.
When an asset is sold, a gain occurs when the
a. sale price exceeds the book value of the asset sold.
b. sale price exceeds the original cost of the asset sold.
c. book value exceeds the sale price of the asset sold.
d. sale price exceeds the depreciable cost of the asset sold.
51.
The book value of a plant asset is the difference between the
a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of depreciation expense for the year.
c. cost of the asset and the accumulated depreciation to date.
d. proceeds received from the sale of the asset and its original cost.
52.
A company sells a plant asset that originally cost $225,000 for $75,000 on December 31, 2014. The
accumulated depreciation account had a balance of $90,000 after the current year's depreciation of
$22,500 had been recorded. The company should recognize a
a. $150,000 loss on disposal.
b. $60,000 gain on disposal.
c. $60,000 loss on disposal.
d. $37,500 loss on disposal.
54.
A company sells a plant asset that originally cost $240,000 for $80,000 on December 31, 2014. The
accumulated depreciation account had a balance of $120,000 after the current year's depreciation of
$20,000 had been recorded. The company should recognize a
a. $40,000 loss on disposal.
b. $40,000 gain on disposal.
c. $80,000 loss on disposal.
d. $80,000 gain on disposal.