10-14-16 Operating Cash Flows—Indirect Method Flashcards
Kresley Co. has provided the following 20X5 current account balances for the preparation of the annual Statement of Cash Flows:
Jan 1 Dec31 A/R $11,500 $14,500 Allow uncoll acCnts 400 500 Prepaid rent exp 6,200 4,100 A/P 9,700 11,200
Kresley’s 20X5 net income is $75,000. Net cash provided by operating activities in the Statement of Cash Flows should be:
A. $72,700
B. $74,300
C. $75,500
D. $75,700
Net income $75,000
Increase in net A/R
($14,500 - $500) - ($11,500 - $400) (2,900)
Decrease in prepaid rent 2,100
Increase in accounts payable 1,500
Net operating cash flow $75,700
Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities:
Beginning inventory $200,000
Ending inventory 150,000
Cost of goods sold 1,200,000
Beginning accounts payable 300,000
Ending accounts payable 200,000
What amount should Baler report as cash paid to suppliers for inventory purchases?
A. $1,200,000
B. $1,250,000
C. $1,300,000
D. $1,350,000
B. $1,250,000
Cash paid to suppliers is determined by adjusting CGS for the effect of the accrual of accounts payable and the increase or decrease in inventory.
CGS 1,200,000
Subtract:
Decrease in inventory (50,000)
- since inventory decreased, more goods were used than purchased
Add: Decrease in A/P 100,000
- since AP decreased, more cash was paid than purchased on account
Cash paid to suppliers 1,250,000
What is the Indirect Method for the statement of cash flows ?
Reconciliation of accrual based net income to derive cash flows from operations.
Metro, Inc. reported net income of $150,000 for 20X5. Changes occurred in several Balance Sheet accounts during 20X5 as follows:
Investment in Videogold, Inc. stock, carried on the equity basis $5,500 increase
Accumulated depreciation, caused by major repair to projection equipment 2,100 decrease
Premium on bonds payable 1,400 decrease
Deferred income tax liability (long-term) 1,800 increase
In Metro’s 20X5 cash flow statement, the reported net cash provided by operating activities should be:
1-The increase in the equity method investment of the undistributed earnings
2-This amount increases net income BUT causes NO cash inflow ** is subtracted.
3-The amortization of bond premiums reduces interest expense relative to cash interest paid. Income, therefore, UNDERSTATES the cash outflow for interest. 4-The subtraction of the premium adjusts income for the difference.
5- increase in the deferred tax liability increases income tax expense without any cash outflow. Therefore, the increase is added to income
Net income $150,000
Less increase in equity investment ( 5,500)
Less amortization of bond premium ( 1,400)
Plus increase in deferred income tax liability 1,800
Net cash flow from operating activities $144,900
.
Karr, Inc. reported net income of $300,000 for 20x2. Changes occurred in several Balance Sheet accounts as follows:
Equipment $25,000 increase
Accumulated depreciation 40,000 increase
Note payable 30,000 increase
Additional information: During 20x2, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. In December 20x2, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. Depreciation expense for the year was $52,000. In Karr’s 20x2 Statement of Cash Flows, net cash used in investing activities should be:
Net cash used in investing activities is: $2,000
= $20,000 down payment on equipment purchased
- $18,000 proceeds on sale of equipment
*The proceeds on sale of equipment equals $18,000: $13,000 carrying value ($25,000 - $12,000) + $5,000 gain.
- *The change in equipment is fully explained by the sale and purchase of equipment. The cost of the equipment sold is $25,000, and the cost of the equipment purchased is $50,000, explaining the $25,000 net increase in equipment. Thus, there are no “hidden” (or additional) transactions that must be inferred from the data.
- **Depreciation expense is not an investing activity cash flow, nor is the note payable issuance.
What amounts should Flax report in its Statement of Cash Flows for the year ended December 31, 20X4, for the following:
Cash paid for interest?
Flax Corp. uses the direct method to prepare its Statement of Cash Flows. Flax’s trial balances at December 31, 20X4 and 20X3, are as follows:
December 31
20X4 20X3
Debits:
Cash $ 35,000 $ 32,000
Unamortized bond discount 4,500 5,000
Interest expense 4,300 2,600
*The only account listed that is related to interest expense is unamortized bond discount, which decreased $500.
*No bonds were retired.
*Therefore, the decrease in the discount account represents amortization.
*This amortization causes interest expense to increase without cash-flow effect.
A reconstructed journal entry tells the story:
Interest expense 4,300
Bond discount 500
Cash 3,800
In a Statement of Cash Flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:
A. Less the loss and plus the amount of tax attributable to the loss.
B. Less both the loss and the amount of tax attributable to the loss.
C. Less the loss.
D. With no addition or subtraction.
C. Less the loss.
A journal entry helps to visualize the transaction:
Cash xxx
Loss xxx
Asset (book value) xxx
The investing cash inflow is the book value of the asset less the loss. In actuality, this amount equals the amount of cash received on the sale.
Any tax effects are accounted for in income tax payments, an operating cash outflow.
Which of the following is the purpose of the liquidation basis accounting?
A. To report the amount of net cash flows expected to be received in the process of bankruptcy.
B. To distinguish which assets the entity will sell and which assets will be kept.
C. To inform the financial statement users that liquidation is imminent.
D. To help management decide which assets are valuable.
C. To inform the financial statement users that liquidation is imminent.
Liquidation basis of accounting is focused on informing the financial statement users that liquidation is imminent.
Which of the following are not measured at the expected cash to be paid or received?
A. Notes payable.
B. Equipment in use.
C. Unrecorded patent.
D. Equipment held for sale.
A. Notes payable.
Liabilities are to be measured using existing GAAP and not written down based on “expectations” unless legally forgiven.
True /False Cash and Cash equivalent consist of :
Cash in the checking account to any commercial paper maturity of less than three months, the only cash equivalent
True
True /False
The correct cash balance is the balance per the checkbook plus the $1,800 check written to the vendor since it was not mailed till the next year.
True
On October 31, 2005, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, 2005, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo’s October 31, 2005, classified balance sheet?
A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
C. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
D. The segregated and regular accounts should be reported as current assets net of the overdraft.
A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
** KEY WORD is “different banks” The accounts are with different banks. Thus, the accounts CANNOT be offset against one another.
The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.
The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.
On June 1, 2005, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%.
Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation.
On June 12, 2005, Pitt received from Burr a remittance in full payment amounting to
A. $2,744
B. $2,940
C. $2,944
D. $3,140
C. $2,944
$5,000(1 - .30)(1 - .20)(.98) + $200 = $2,944.
The chain trade discounts are applied to each successive net amount as shown in the calculation, and the cash discount of 2% is then applied to the final invoice amount.
The cash discount applies because the payment was made within 15 days of purchase. The goods were shipped FOB shipping point. Therefore, title transferred to Burr at the shipping point, meaning Burr bears the shipping charges. Because Pitt prepaid them as an accommodation, Burr must reimburse Pitt for the $200, the last term in the calculation leading to $2,944.
In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.
What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance sheet risk?
Risk of accounting loss Off-balance sheet risk
$0 $0
$230,000 $0
$230,000 $20,000
$250,000 $20,000
Risk of accounting loss Off-balance sheet risk
$230,000 $0
This question requires an understanding of two accounting concepts:
1. Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler’s net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.
On January 1, 2006, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts.
Based on past experience, 2% of Jamin’s credit sales have been uncollectible. During 2006, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 2006 were $9,000,000.
In its December 31, 2006 balance sheet, what amount should Jamin report as allowance for uncollectible accounts?
115,000
The ending allowance balance equals:
Beginning balance - write-offs + 2% of credit sales =
$260,000 - $325,000 + .02($9,000,000) = $115,000
Write-offs reduce the allowance balance, and the adjusting entry at the end of the year recognizes 2% of credit sales as bad debt expense by increasing the allowance balance.
