59 SURGENT MCQ

Question 1

Abbott Co. is preparing its statement of cash flows for the year. Abbott’s cash disbursements during the year included the following:

Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of
Marks Co. common stock 100,000

What should Abbott report as total cash outflows for financing activities in its statement of cash flows?

$0

$800,000

$900,000

$300,000

Question #300145

Answer 1

$300,000

Interest payments are included in operating activities. Cash payments to acquire equity instruments of another entity are included in investing activities. Only payments of dividends to stockholders are included in financing activities.

Reference
2115.09

Authorities
FASB ASC 230-10-05-2
FASB ASC 230-10-45-12, 45-14

Question 2

A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration: $1,000,000 after year 1, $1,000,000 after year 2, and $500,000 after year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent-based consideration portion is $2,100,000.

What is the total consideration transferred for this business combination?

$13,000,000

$5,100,000

$15,500,000

$15,100,000

Question #301815

Answer 2

$15,100,000

A contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquired entity only if certain specified future events occur or conditions are met. The amount of contingent consideration paid is recorded at its fair value. Total consideration would be $15,100,000 ($3,000,000 cash + $10,000,000 in stock + $2,100,000 contingent-based consideration).

Relevant Terms
Business Combination
Contingent Liability
Equity
Fair Value

Reference
2115.08

Question 3

A company calculated the following data for the period:

Cash received from customers $25,000
Cash received from sale of equipment 1,000
Interest paid to bank on note 3,000
Cash paid to employees 8,000
What amount should the company report as net cash provided by operating activities in its statement of cash flows?

$26,000

$15,000

$18,000

$14,000

Question #300146

Answer 3

$14,000

Cash provided by operating activities is computed as follows:

Cash received from customers $25,000

Total cash received $25,000

Interest paid to bank on note 3,000

Cash paid to employees 8,000

Total cash paid out 11,000

Net cash provided 14,000

Cash received from sale of equipment is included in investing activities.

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-05-2
FASB ASC 230-10-45-12, 45-14

Question 4

A company had the following transactions during the year:

Principal payments on notes payable $48,000
Interest payments on notes payable 8,000
Cash payment to purchase 100 shares of
another company’s common stock 25,000

What amount is classified as cash outflow for financing activities in the company’s statement of cash flows?

$73,000

$56,000

$81,000
$48,000

Question #302663

Answer 4

$48,000

Financing activities are those activities that provide financing or use financing. They include the issuance and repurchase of a company’s own stock, cash dividend payments to shareholders, and the issuance and repurchase of debt. Interest on debt is an operating activity while purchase of another company’s stock is an investing activity.

The only answer choice that meets the definition of financing is principal payments on notes payable for $48,000, which is a form of debt repayment.

Relevant Terms
Cash Flow
Statement of Cash Flows

Reference
2115.09

Question 5

A company has the following accrual-basis balances at the end of its first year of operation:

Unearned consulting fees $ 2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
The company’s cash-basis consulting revenue is what amount?

$19,500

$30,500

$26,500

$23,500

Question #300158

Answer 5

$23,500
My answer:
Net Income is the sales revenue of $25,000, [increase in current asset - subtract {($3,500)}
[increase in current liability - add {$2,000}. So, $25,000 - 3500 + 2000 = $23,500
The company’s cash-basis consulting revenue is $23,500:

Accrual basis consulting fee revenue $25,000

Unearned consulting fee–
cash received with no revenue 2,000

Consulting fees receivable–
revenue with no cash received (3,500)

Cash basis revenue $23,500

Reference: 2150.04
Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed. No income or expense is accrued or deferred, and assets are not capitalized and subsequently depreciated.

Relevant Terms
Accrual Basis Accounting
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.17
2150.04

Authorities
FASB ASC 230-10-45-28

Question 6

A company reports the following information for year 1:

Sale of equipment $20,000
Issuance of the company’s bonds 10,000
Dividends paid 5,000
Purchase of stock of another company 2,000
Purchase of U.S. Treasury note 2,000
Income taxes paid 2,000
Interest income received 500

What is the company’s net cash flow from financing activities?

($9,000)

$5,500

$15,000

$5,000

Question #301725

Answer 6

$5,000

Partial Statement of Cash Flows:

Cash Flows from Financing Activities:
Issuance of the company’s bonds $10,000
Dividends paid (5,000)
Net Cash Flows from Financing Activities $ 5,000
========
The statement of cash flows is presented in three sections: cash flows from operating activities, from investing activities, and from financing activities. The change in cash resulting from the total of these three sections reconciles the change in cash for the period.

The financing activities section of the statement of cash flows presents positive and negative cash flows for transactions resulting from sources of financing for the company, primarily debt and equity financing. This section includes an increase from the issuance of the company’s bonds and a decrease from dividends paid (as shown in the partial statement of cash flows above).

The operating activities section of the statement of cash flows presents the positive and negative cash flows from the company’s primary operating activities. This section includes income taxes paid and interest income received.

The investing activities section of the statement of cash flows presents positive and negative cash flows for transactions involving assets that are not held for resale (i.e., inventories). The most significant investing activities involve investments in debt and equity securities, plant assets, and intangible assets. This section includes the sale of equipment, the purchase of stock of another company, and the purchase of a U.S. Treasury note.

Relevant Terms
Cash Flow
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows
Treasury Bonds

Reference
2115.01
2115.02
2115.03
2115.04
2115.05

Authorities
FASB ASC 230-10-45

Question 7

A company’s accounts receivable decreased from the beginning to the end of the year. In the company’s statement of cash flows (direct method), the cash collected from customers would be:

the same as sales revenues.

sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

sales revenues less the decrease in accounts receivable from the beginning to the end of the year.

sales revenues plus accounts receivable at the beginning of the year.

sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

Question #301628

Answer 7

sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

Cash collected from customers includes:

sales revenue,
plus collections of accounts receivable from the prior year,
less recorded sales not yet received in cash.
A decrease in accounts receivable would indicate less collections than recorded sales not yet collected.

Relevant Terms
Customer
Indirect Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10
2115.11
2115.12
2115.13

Authorities
FASB ASC 230-10-45-16

Question 8

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in financ­ing activities for the transaction?

Mortgage amount

Acquisition price

Cash payment

Zero

Question #301631

Answer 8

Zero

The only cash involved in this transaction is the cash paid. It would be included in cash flows from investing activities. The cash purchase of the building is an investing activity. The issuance of the note payable has no impact on cash as we are issuing debt for the remaining purchase price. When the company pays down the note payable in cash, that would be a financing activity. Any interest paid on the note would be an operating activity.

Helpful Hint: For cash flow problems, write down a hypothetical journal entry. If cash isn’t in your journal entry, it has no cash flow impact. If it does, ask yourself, what is the cash going towards?

Relevant Terms
Financing Activities
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-13

Question 9

Ace Co. issued 1,000 shares of its $10 par value common stock for $15 per share in cash. How should this transaction be reported in Ace’s statement of cash flows for the year of issuance?

$10,000 cash inflow from financing activities and $5,000 adjustment to arrive at cash flows from operating activities

$15,000 cash inflow from financing activities

$10,000 cash flow from investing activities and $5,000 adjustment to arrive at cash flows from operating activities

$15,000 cash flow from investing activities

$15,000 cash inflow from financing activities

Question #302568

Answer 9

$15,000 cash inflow from financing activities

Cash inflows from issuing a company’s own equity instruments such as common stock and preferred stock are reported as financing activities in the statement of cash flows. The full cash proceeds of $15,000 ($15 per share × $1,000 shares) would be reported as cash inflows from financing activities. The par value is not used because it does not impact the cash received.

Relevant Terms
Common Stock
Financing Activities
Par Value
Statement of Cash Flows

Reference
2115.09

Question 10

Baker’s net income for the current year was $78,000 and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year? SEE PHOTO FOR REST OF INFO

$192,000

$250,000

$50,000

$20,000

Answer 10

$20,000

Baker should report $20,000 as net cash provided by operating activities:

Net income $78,000
Adjustments
Increase in accounts receivable ($82,000)
Increase in accounts payable 24,000 (58,000)
Net cash provided by operating activities $20,000

Relevant Terms
Cash Flow
Financial Statements
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-28

Question 11

Bay Manufacturing Co. purchased a 3-month U.S. Treasury bill. In preparing Bay’s statement of cash flows, this purchase would:

be treated as an outflow from financing activities.

be treated as an outflow from operating activities.

be treated as an outflow from investing activities.

have no effect.

Question #300122

Answer 11

have no effect.

FASB ASC 230-10-20 focuses on cash and cash equivalents. The following explanation is offered: “Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an enterprise with banking operations).”

Thus, the purchase of U.S. Treasury bills would have no effect on the statement of cash flows.

Relevant Terms
Cash Equivalents
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-20

Question 12

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows?

Operating activities: $100,000 subtraction from net income; Investing activities: $500,000 cash inflow

Operating activities: $100,000 subtraction from net income; Investing activities: $400,000 cash inflow

Operating activities: $100,000 addition to net income; Investing activities: $500,000 cash inflow

Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow

Question #301446

Answer 12

Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow

The net loss ($400,000 – $500,000 = $(100,000)) would be removed (added back) from net income.

The cash from the sale would be included as a cash inflow from investing activities.

Relevant Terms
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10
2115.11

Authorities
FASB ASC 230-10-45-11 to 45-17

Question 13

Bruft Co. purchased treasury stock for $78,000 during the year. Net income for the year was $94,000. The following information is also available:

Manufacturing equipment – purchase $79,000 increase
Accounts receivable 41,000 decrease
Common stock – issuance 51,000 increase
Accrued expenses payable 53,000 decrease
What amount should Bruft report as net cash provided by operating activities in its statement of cash flows for the year?

$54,000

$82,000

$3,000

$106,000

$82,000

Question #302289

Answer 13

$82,000

The information provided supports the indirect method of computing net cash provided by operating activities. Only the decrease in accounts receivable and the decrease in accrued expenses payable affect operating activities. The manufacturing equipment purchase is an investing activity; the stock issuance and treasury stock purchase are both financing activities.

Net income $94,000
Accounts receivable decrease 41,000
Accrued expenses payable decrease (53,000)
Net cash provided by
operating activities $82,000

Buying treasury stock is considered a financing activity rather than an operating or investing activity.

Financing activities are transactions that involve the company’s financing structure, including interactions with shareholders and creditors. Buying back treasury stock involves using funds to repurchase shares of the company’s own stock from the open market or from shareholders. This reduces the number of outstanding shares, which can potentially increase earnings per share and return value to shareholders.

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 14

Brown Company reported net income of $165,000 for 20X4. Changes occurred in several balance sheet accounts as follows:

Equipment $33,000 increase

Accumulated depreciation 51,000
increase

Note payable 38,000 increase

Additional Information:

During 20X4, Brown sold equipment costing $42,000, with accumulated depreciation of $8,500, for a loss of $4,000.

In December 20X4, Brown purchased equipment costing $75,000 with $37,000 cash and a 12% note payable of $38,000.

Depreciation expense for the year was $59,500.

In Brown’s 20X4 statement of cash flows, net cash provided by operating activities should be:

$224,500.

$220,500.

$228,500.

$233,000.

$228,500.

Question #302285

Answer 14

$228,500.

Using the indirect method, Brown computes cash flow from operating activities as follows:

Reported 20X4 net income $165,000
Add depreciation expense 59,500
Add loss on sale of equipment 4,000
Net cash flow from operating activities $228,500
========
Note: All items that are included in net income that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets require adjustment in the operating section of the statement of cash flows. Losses from the sale of equipment are added back in the operating section of the statement of cash flows (gains would be subtracted).

The sale of equipment would be reported as a cash inflow in the investing activities section of the statement of cash flows.

The cash portion of the purchase of equipment of $37,000 would be reported as a cash outflow in the investing activities section of the statement of cash flows. The note payable portion of the purchase of equipment of $38,000 would be reported as a supplemental disclosure because cash was not involved in the transaction.

Relevant Terms
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 15

Brown Company reported net income of $165,000 for 20X4. Changes occurred in several balance sheet accounts as follows:

Equipment $33,000 increase
Accumulated depreciation 51,000 increase
Note payable 38,000 increase
Additional Information:

During 20X4, Brown sold equipment costing $42,000, with accumulated depreciation of $8,500, for a loss of $4,000.
In December 20X4, Brown purchased equipment costing $75,000 with $37,000 cash and a 12% note payable of $38,000.
Depreciation expense for the year was $59,500.
In Brown’s 20X4 statement of cash flows, net cash provided (used) in investing activities should be:

$(38,000).

$(4,500).

$(33,500).

$(7,500).

Answer 15

$(7,500).

Net cash provided (used) in investing activities should be $(7,500):

Cash paid for purchase of equipment $(37,000)
Add: cash received from sale of equipment
($42,000 - $8,500 - $4,000 loss) 29,500
Net cash outflow from investing activities $ (7,500)
=========
All of the following are cash inflows from investing activities: receipts from sales of property, plant, and equipment, and other productive assets. All of the following are cash outflows for investing activities: payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment, and other productive assets.

To find the cash received for the sale of equipment, the following entry would have been made:

Cash 29,500 (to balance)
Accumulated depreciation 8,500
Loss on sale 4,000
Equipment 42,000

Question 16

Duke Co. reported cost of goods sold of $270,000 for 20X1. Additional information is as follows:

December 31 January 1
Inventory $60,000 $45,000
Accounts payable 26,000 39,000

If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 20X1 statement of cash flows?

$242,000

$268,000

$272,000

$298,000

Question #300131

Answer 16

$298,000

Duke should report $298,000, calculated as follows:

Reported cost of goods sold for 20X1 $270,000
Add increase in inventory ($60,000 − $45,000) 15,000
Decrease in accounts payable ($39,000 − $26,000) 13,000
Cash paid to suppliers in 20X1 $298,000
========

Relevant Terms
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-45-17

Question 17

Dunbarn Co. had the following activities during the year:

Purchase of inventory $120,000
Purchase of equipment 80,000
Purchase of available-for-sale
debt securities 60,000
Purchase of treasury stock 70,000
Issuance of common stock 150,000

What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year?

$150,000

$(120,000)

$(210,000)

$(140,000)

Question #301668

Answer 17

$(140,000)

A statement of cash flows reflects an entity’s cash receipts and cash payments classified by major uses (i.e., operating, investing, and financing activities). The investing activities section shows positive and negative cash flows for transactions involving assets that are not held for resale (i.e., inventory), such as investments in debt and equity securities; plant, property, and equipment; and intangible assets.

Dunbarn should report $(140,000) in investing activities related to the purchase (i.e., use of cash) of equipment and AFS (available for sale) debt securities. Inventory transactions are classified as operating activities; treasury stock and common stock transactions are classified as financing activities.

Relevant Terms
Cash Flow
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12
FASB ASC 230-10-45-13

Question 18

During 20X1, Beck Co. purchased equipment for cash of $47,000, and sold equipment with a $10,000 carrying value for a gain of $5,000.

How should these transactions be reported in Beck’s 20X1 statement of cash flows?

Cash outflow of $42,000

Cash inflow of $5,000 and cash outflow of $47,000

Cash outflow of $32,000

Cash inflow of $5,000 and cash outflow of $47,000

Cash inflow of $15,000 and cash outflow of $47,000

Question #300117

Answer 18

Cash inflow of $15,000 and cash outflow of $47,000

According to FASB ASC 230-10-45-13, cash flows associated with transactions involving long-term assets are classified as cash flows from investing activities. Cash inflows are not to be netted against cash outflows.

There is a cash outflow of $47,000 to purchase equipment given directly in the problem.

The cash inflow must be determined from the facts as given. A gain on disposal indicates that the cash received is higher than the carrying value.

Carrying value $10,000
Gain on disposal + 5,000
Cash selling price $15,000
=======

Reference
2115.09

Authorities
FASB ASC 230-10-45-13

Question 19

During 20X2, Solomon Co. purchased equipment for cash of $128,000, and sold equipment with a $38,000 carrying value for a loss of $14,000. How should these transactions be reported in Solomon’s 20X2 statement of cash flows?

Cash outflow of $152,000

Cash inflow of $24,000 and cash outflow of $128,000

Cash outflow of $104,000

Cash outflow of $142,000

Cash inflow of $24,000 and cash outflow of $128,000

Question #302062

Answer 19

Cash inflow of $24,000 and cash outflow of $128,000

According to FASB ASC 230-10-45-13, cash flows associated with transactions involving long-term assets are classified as cash flows from investing activities. Cash inflows are not to be netted against cash outflows. There is a cash outflow of $128,000 to purchase equipment given directly in the problem. The cash inflow must be determined from the facts as given. A loss on disposal indicates that the cash received is lower than the carrying value.

Carrying value $38,000
Loss on disposal (14,000)
Cash selling price $24,000
=======

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-13

Question 20

During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of cash flows using the indirect method. In which section of the statement should Ace report the amortization of the bond discount?

Operating activities

Financing activities

Supplemental disclosures

Investing activities

Operating activities

Question #300142

Answer 20

Operating activities

The amortization of the bond discount is classified as interest expense and has been deducted in arriving at net income. Using the indirect method, this amortization must be added to net income to compute net cash provided by operating activities.

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-16, 45-17
FASB ASC 230-10-55-1

Question 21

During the current year, Xan, Inc., had the following activities related to its financial operations:

Payment for the early retirement of long-term bonds
payable (carrying amount $370,000) $375,000
Distribution of cash dividend declared in previous
year to preferred shareholders 31,000
Carrying amount of convertible preferred stock
in Xan, converted into common shares 60,000
Proceeds from sale of treasury stock (carrying
amount at cost, $43,000) 50,000
In Xan’s current-year statement of cash flows, net cash used in financing operations should be:

$265,000.

$358,000.

$356,000.

$296,000.

$356,000.

Question #301633

Answer 21

$356,000.

The net cash used in financing operations is $356,000, calculated as follows:

Payment for early retirement of long-term bonds

$375,000

Dividend paid 31,000

Proceeds for sale of treasury stock (50,000)

Net cash used $356,000

There is no cash involved in the conversion of stock.

Relevant Terms
Financing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-14
FASB ASC 230-10-45-15

Question 22

During the year, Granite Co. sold a building for $100,000, resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite’s financing activities section because of the building sale?

$100,000

$80,000

$20,000

$0

Question #302531

Answer 22

$0

Cash flows from financing activities involve debt and equity financing. Cash flows from investing activities involve asset transactions other than cash and those assets related directly to the determination of operating results (e.g., inventories, receivables).

The proceeds from the sale of the building are classified as an investing activity; gains are an operating activity adjustment for noncash items under the indirect method of cash flow presentation. Therefore, the amount that would be included in the financing section is $0.

Relevant Terms
Financing Activities
Gains
Net Book Value
Statement of Cash Flows

Reference
2115.09
2115.10

Question 23

During the year, Verity Co. purchased $200,000 of Otra Co. bonds at par and $50,000 of U.S. Treasury bills. Verity classified the Otra bonds as available-for-sale securities and the Treasury bills as cash equivalents. In Verity’s statement of cash flows, what amount should it report as net cash used in investing activities?

$250,000

$150,000

$0

$200,000

Question #302567

Answer 23

$200,000

Cash payments to acquire debt instruments of other entities are classified as cash outflows from investing activities on the statement of cash flows. The purchase of Otra Co. bonds would represent a net cash used of $200,000.

Cash paid for items classified as cash and cash equivalents are not reported on the statement of cash flows because they are merely a transfer of one type of cash for another type of cash.

Relevant Terms
Available-for-Sale Debt Securities
Cash Equivalents
Investing Activities
Statement of Cash Flows
Treasury Bonds

Reference
2115.07
2115.09

Question 24

Fara Co. reported bonds payable of $47,000 on December 31, 20X1, and $50,000 on December 31, 20X2. During 20X2, Fara issued $20,000 of bonds payable in exchange for equipment. There was no amortization of bond premium or discount during the year. What amount should Fara report in its 20X2 statement of cash flows for redemption of bonds payable?

$3,000

$23,000

$20,000

$17,000

Question #300133

Answer 24

$17,000

Using the basic accounting equation, Beginning balance + Additions - Deletions = Ending balance:

Bonds payable on 12/31/X1 (beginning inventory) $47,000
Plus bonds issued in 20X2 20,000
Subtotal 67,000
Less bonds payable on 12/31/X2 (ending inventory) 50,000
Bonds redeemed in 20X2 (presumably for cash) $17,000
=======

Relevant Terms
Amortization
Bond
Discount
Premium

Reference
2115.09

Authorities
FASB ASC 230-10-45-13

Question 25

Glass Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available:

Accounts receivable increase $20,000
Equipment gain on sale (sale price $100,000) 10,000 increase
Nontrade notes payable increase 50,000
Equipment purchases 40,000 increase
Accounts payable increase 30,000
What amount should Glass report as net cash provided by investing activities in its statement of cash flows for the year?

$(40,000)

$10,000

$50,000

$60,000

Question #302623

Answer 25

$60,000

Cash flows from investing activities involve the use and receipt related to nonoperating assets (i.e., property, plant, and equipment; equity and debt securities; notes receivable; etc.). Cash provided by investing activities is found in an identical manner under the direct or indirect method of preparing the statement of cash flows.

In this example, only two items would be classified as investing activities: the equipment purchase and equipment sale. The sale resulted in a $100,000 cash inflow and the purchase resulted in a $40,000 cash outflow, for a net cash provided amount $60,000 ($100,000 inflow − $40,000 outflow).

The change in accounts receivable and accounts payable balances would be captured in the operating section of the statement of cash flows. The change in notes payable would be captured in the financing section.

Relevant Terms
Cash Flow
Direct Method for Statement of Cash Flows
Indirect Method for Statement of Cash Flows
Investing Activities

Reference
2115.09
2115.10
2115.11
2115.12

Question 26

Green Co. had the following equity transactions at December 31:

Cash proceeds from sale of investment in Blue Co.
(carrying value $60,000) $75,000
Dividends received on Grey Co. stock 10,500
Common stock purchased from Brown Co. 38,000
What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31?

$37,000

$85,500

$75,000

$47,500

$37,000

Question #300154

Answer 26

$37,000

Cash proceeds from the sale of an investment are a cash inflow and cash paid to purchase stock is a cash outflow. Both are investing activities.

$75,000 - $38,000 = $37,000

Relevant Terms
Cash Flow
Financial Statements
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-11 to 45-13

Question 27

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?

In operating activities as an addition to income

In investment activities as a cash outflow

In operating activities as a deduction from income

In investment activities as a reduction of the cash inflow from the sale

In operating activities as a deduction from income

Question #300125

Answer 27

In operating activities as a deduction from income

The cash proceeds from a sale of used equipment would be treated as a cash inflow from investing activities. Since these cash proceeds include both carrying value of the equipment and the gain from the sale, this gain would need to be deducted from income in order to avoid “double counting.”

Relevant Terms
Carrying Amount (Book Value)
Indirect Method for Statement of Cash Flows
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-28
FASB ASC 230-10-55-1

Question 28

How should a loss from the sale of an investment in equity securities for cash be reported in a statement of cash flows using the indirect method?

In operating activities as a deduction from income

In operating activities as an addition to income

In investment activities as a cash outflow

In investment activities as a reduction of the cash inflow from the sale

In operating activities as an addition to income

Question #302284

Answer 28

In operating activities as an addition to income

The cash proceeds from a sale of an investment in equity securities would be treated as a cash inflow from investing activities. The loss from the sale must be added back to net income in the operating activities section as it is a “paper” or accounting loss, not an additional loss of cash. Since these cash proceeds include both carrying value of the investment and the loss from the sale, this loss would need to be added to income in order to avoid “double counting.”

Another way to look at it is to realize that a loss is a noncash item that reduced net income; therefore, it needs to be “added back” to net income to derive the true cash impact.

Relevant Terms
Indirect Method for Statement of Cash Flows
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 29

How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method?

As a financing activities inflow

In operating activities as an addition to income

In operating activities as a deduction from income

As a financing activities outflow

In operating activities as an addition to income

Question #300152

Answer 29

In operating activities as an addition to income

Interest paid would be an expense included in the determination of net income, and therefore a cash outflow from operating activities. Amortization of bond discount is noncash interest expense. Net income must be increased by noncash expenses that did not result from a cash outflow.

Relevant Terms
Cash Flow
Financial Statements
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-28

Question 30

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities?

I. Payments to retire mortgage notes
II. Interest payments on mortgage notes
III. Dividend payments

I, II, and III

II and III

I only

I and III

Question #301632

Answer 30

I and III

Cash outflows from financing activities include cash payments for dividends and principal payments to creditors. Interest payments are cash flows from operating activities.

Relevant Terms
Financing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-17

Question 31

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method (Ignore income tax considerations.)?

Change from straight-line to accelerated depreciation

Gain on sale of equipment

Gain on early retirement of bonds

Dividends received from investments

Question #300123

Answer 31

Dividends received from investments

FASB ASC 230-10-45-25 identifies several classes of receipts and payments that should be used in reporting cash flows from operating activities using the direct method. Included in the list of items are interest and dividends received.

The transactions or events related to the other items listed are not reported in the operating activities section.

Term: Direct Method for Statement of Cash Flows
The direct method is one of the two optional methods of presentation of the statement of cash flows, the method preferred by the Financial Accounting Standards Board (FASB). The direct method presents gross cash receipts and payments from operating activities; cash amounts may be derived from accrual based records by adjusting income statement items for changes in the related balance sheet accounts, e.g., cash collected from customers is found by adjusting sales for the change in accounts receivable during the period. (FASB ASC 230-10-45-25)

In governmental accounting, cash flow statements presented for proprietary funds and governmental entities engaged in business-type activities must use the direct method. (GASB 2450)

The direct method presents major classes of cash flows: cash collected from customers, interest and dividends received, interest paid, cash paid to employees and suppliers, income taxes paid, and other cash payments.

If the direct method is used, a reconciliation of net income to net cash provided by operating activities must be presented as a supplemental disclosure. This reconciliation must present all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payable), deferrals of past cash receipts and payments (inventory, prepaid items, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt).

CHATGPT4
When using the direct method for the statement of cash flows, the focus is on the specific cash flows related to operating activities, including cash received from customers, cash paid to suppliers and employees, and other cash payments and receipts directly related to the core business operations. Here’s how each of the listed items would affect reported cash flows from operating activities, ignoring income tax considerations:

Change from straight-line to accelerated depreciation: This change affects the calculation of depreciation expense on the income statement but does not have a direct impact on cash flows from operating activities since depreciation is a non-cash expense. Under the direct method, depreciation adjustments are not made because it focuses on actual cash transactions.

Gain on sale of equipment: A gain on the sale of equipment is considered an investing activity, not an operating activity. Therefore, it would not increase reported cash flows from operating activities under the direct method. The cash received from the sale would be reported in the investing activities section.

Gain on early retirement of bonds: A gain on the early retirement of bonds is associated with financing activities, not operating activities. It would not directly affect the cash flows from operating activities under the direct method and would instead be reflected in the financing activities section of the statement of cash flows.

Dividends received from investments: Dividends received from investments are typically considered an operating activity for non-financial companies (and an investing activity for investment and certain financial companies). Therefore, dividends received would increase reported cash flows from operating activities under the direct method for a non-financial company.

Based on the options provided and ignoring income tax considerations, dividends received from investments would increase reported cash flows from operating activities using the direct method.

Relevant Terms
Direct Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-45-25

Question 32

In Brown’s 20X4 statement of cash flows, net cash provided (used) in investing activities should be:

$(4,500).

$(38,000).

$(33,500).

$(7,500).

Answer 32

$(7,500).

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 33

In Brown’s 20X4 statement of cash flows, net cash provided by operating activities should be:

$220,500.

$224,500.

$228,500.

$233,000.

$228,500.

Answer 33

$228,500.

Using the indirect method, Brown computes cash flow from operating activities as follows:

Reported 20X4 net income $165,000
Add depreciation expense 59,500
Add loss on sale of equipment 4,000
Net cash flow from operating activities $228,500
========
Note: All items that are included in net income that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets require adjustment in the operating section of the statement of cash flows. Losses from the sale of equipment are added back in the operating section of the statement of cash flows (gains would be subtracted).

The sale of equipment would be reported as a cash inflow in the investing activities section of the statement of cash flows.

The cash portion of the purchase of equipment of $37,000 would be reported as a cash outflow in the investing activities section of the statement of cash flows. The note payable portion of the purchase of equipment of $38,000 would be reported as a supplemental disclosure because cash was not involved in the transaction.

Relevant Terms
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 34

In its 20X1 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows:

Inventory $160,000 decrease
Accounts payable—suppliers 40,000 decrease
What amount should Kilm report as cash paid to suppliers in its 20X1 cash flow statement, prepared under the direct method?

$250,000

$650,000

$570,000

$330,000

Question #300116

Answer 34

$330,000

The requirement is to determine the current period’s amount of cash paid for goods acquired from suppliers no matter when the goods were acquired. Therefore, the total purchases made during the current period (whether on credit or for cash) and the amount of purchases from the previous period not paid for in the previous period must be examined because they represent the amount that could have been paid to suppliers during the current period.

A decrease in inventory during the period indicates that purchases were less than the cost of goods sold. Therefore, the current period’s amount of purchases is determined by subtracting the decrease in inventory from cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. A decrease in accounts payable during the current period indicates that suppliers were paid an amount of cash greater than the amount of the current period’s purchases. Therefore, adding the decrease in accounts payable to purchases of the period yields the cash paid to suppliers in the current period.

Cost of Goods Sold $450,000
Inventory decrease (160,000)
Purchases $290,000
========
Purchases $290,000
Accounts Payable decrease 40,000
Cash paid to suppliers $330,000
========

Relevant Terms
Accounts Payable
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-55-3

Question 35

In its 20X3 income statement, Banks Company reported cost of goods sold of $254,000. Changes occurred in several balance sheet accounts as follows:

Inventory $37,000 decrease
Accounts payable–suppliers 71,000 increase
What amount should Banks Company report as cash paid to suppliers in its 20X3 cash flow statement, prepared under the direct method?

$288,000

$362,000

$220,000

$146,000

Question #302282

Answer 35

$146,000

CAREFUL YOU MADE TWO MISTAKES

A decrease in inventory during the period indicates that purchases were less than the cost of goods sold. Therefore, the current period’s amount of purchases is determined by subtracting the decrease in inventory from cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. An increase in accounts payable during the current period indicates that suppliers were paid an amount of cash less than the amount of the current period’s purchases. Therefore, subtracting the increase in accounts payable from purchases of the period yields the cash paid to suppliers in the current period.

Cost of goods sold $254,000
Inventory decrease (37,000)
Purchases $217,000
Accounts payable increase (71,000)
Cash paid to suppliers $146,000
========

													 Term: Direct Method for Statement of Cash Flows The direct method is one of the two optional methods of presentation of the statement of cash flows, the method preferred by the Financial Accounting Standards Board (FASB). The direct method presents gross cash receipts and payments from operating activities; cash amounts may be derived from accrual based records by adjusting income statement items for changes in the related balance sheet accounts, e.g., cash collected from customers is found by adjusting sales for the change in accounts receivable during the period. (FASB ASC 230-10-45-25)

In governmental accounting, cash flow statements presented for proprietary funds and governmental entities engaged in business-type activities must use the direct method. (GASB 2450)

The direct method presents major classes of cash flows: cash collected from customers, interest and dividends received, interest paid, cash paid to employees and suppliers, income taxes paid, and other cash payments.

If the direct method is used, a reconciliation of net income to net cash provided by operating activities must be presented as a supplemental disclosure. This reconciliation must present all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payable), deferrals of past cash receipts and payments (inventory, prepaid items, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt).

Relevant Terms
Accounts Payable
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.01
2115.10
2115.11
2115.12
2115.13

Question 36

In its 20X5 income statement, Hadid Corporation reported cost of goods sold of $875,000. Changes occurred in several balance sheet accounts as follows:

Inventory $ 93,000 increase
Accounts payable–suppliers 159,000 decrease
What amount should Hadid Corporation report as cash paid to suppliers in its 20X5 cash flow statement, prepared under the direct method?

$809,000

$623,000

$941,000

$1,127,000

$1,127,000

Question #302281

Answer 36

$1,127,000

An increase in inventory during the period indicates that purchases were more than the cost of goods sold. Therefore, the current period’s amount of purchases is determined by adding the increase in inventory to cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. A decrease in accounts payable during the current period indicates that suppliers were paid an amount of cash greater than the amount of the current period’s purchases. Therefore, adding the decrease in accounts payable to purchases of the period yields the cash paid to suppliers in the current period.

Cost of goods sold $ 875,000
Inventory increase 93,000
Purchases $ 968,000
Accounts payable decrease 159,000
Cash paid to suppliers $1,127,000
==========

													Term: Direct Method for Statement of Cash Flows The direct method is one of the two optional methods of presentation of the statement of cash flows, the method preferred by the Financial Accounting Standards Board (FASB). The direct method presents gross cash receipts and payments from operating activities; cash amounts may be derived from accrual based records by adjusting income statement items for changes in the related balance sheet accounts, e.g., cash collected from customers is found by adjusting sales for the change in accounts receivable during the period. (FASB ASC 230-10-45-25)

In governmental accounting, cash flow statements presented for proprietary funds and governmental entities engaged in business-type activities must use the direct method. (GASB 2450)

The direct method presents major classes of cash flows: cash collected from customers, interest and dividends received, interest paid, cash paid to employees and suppliers, income taxes paid, and other cash payments.

If the direct method is used, a reconciliation of net income to net cash provided by operating activities must be presented as a supplemental disclosure. This reconciliation must present all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payable), deferrals of past cash receipts and payments (inventory, prepaid items, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt).

Relevant Terms
Accounts Payable
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.01
2115.10
2115.11
2115.12
2115.13

Question 37

In its 20X7 income statement, Brinkley Company reported cost of goods sold of $625,000. Changes occurred in several balance sheet accounts as follows:

Inventory $79,000 increase
Accounts payable - suppliers 61,000 increase
What amount should Brinkley Company report as cash paid to suppliers in its 20X7 cash flow statement, prepared under the direct method?

$607,000

$643,000

$765,000

$485,000

$643,000

Question #302061

Answer 37

$643,000

An increase in inventory during the period indicates that purchases were more than the cost of goods sold. Therefore, the current period’s amount of purchases is determined by adding the increase in inventory to cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. An increase in accounts payable during the current period indicates that suppliers were paid an amount of cash less than the amount of the current period’s purchases. Therefore, subtracting the increase in accounts payable from purchases of the period yields the cash paid to suppliers in the current period.

Note that this problem could also be solved using t-accounts.

Cost of goods sold $625,000
Inventory increase 79,000
Purchases $704,000
Accounts payable increase (61,000)
Cash paid to suppliers $643,000
========

Relevant Terms
Accounts Payable
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.01
2115.10
2115.11
2115.12
2115.13

Question 38

DON”T UNDERSTAND

In its December 31, 20X1, statement of cash flows, what amount should Reve report as net cash used in investing activities?

$188,000

$176,000

$170,000

$194,000

$170,000

Answer 38

$170,000

Cash inflows from investing activities:
Proceeds from sale of equipment $ 10,000
Cash outflows for investing activities:
Purchase of A.S., Inc., bonds (180,000)
Net cash used in investing activities $170,000

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12
FASB ASC 230-10-45-13

Question 39

In preparing its cash flow statement for the year ending December 31, 20X1, Trove Co. collected the following data:

Loss on sale of equipment $ 4,000
Dividends declared (63,000)
Sale of Bly, Inc., bonds
(par value $110,000) 115,000
Amortization of bond premium (3,000)
Purchase of equipment (73,000)
Dividends paid (81,000)
Purchase of treasury stock (39,000)
In its December 31, 20X1, statement of cash flows, what amount should Trove report as net cash provided (used) by investing activities?

$119,000

$115,000

$(73,000)

$42,000

Question #302287

Answer 39

$42,000

Trove should report $42,000 as net cash provided (used) by investing activities, calculated as follows:

Cash outflows from investing activities:
Purchase of equipment $(73,000)
Cash inflows for investing activities:
Sale of Bly, Inc., bonds 115,000
Net cash provided by investing activities $ 42,000
Dividends declared (but not paid) would be unreported. The amortization of the bond premium and loss on sale would appear in the operating section. Dividends paid and the purchase of treasury stock would appear in the financing section.

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 40

In preparing its cash flow statement for the year ending December 31, 20X1, Reve Co. collected the following data:

Gain on sale of equipment $ (6,000)
Proceeds from sale of equipment 10,000
Purchase of A.S., Inc., bonds
(par value $200,000) (180,000)
Amortization of bond discount 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from sale of Treasury
stock (carrying amount $65,000) 75,000

In its December 31, 20X1, statement of cash flows, what amount should Reve report as net cash provided by financing activities?

$20,000

$27,000

$30,000

$37,000

Answer 40

$37,000

Cash inflows from financing activities:
Proceeds from sale of treasury stock $75,000
Cash outflows from financing activities:
Dividends paid (38,000)
Net cash provided by financing activities $37,000
Dividends declared created a liability, but until they are paid, no cash flows out of the corporation.

Relevant Terms
Financing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-14
FASB ASC 230-10-45-15

Question 41

In preparing its cash flow statement for the year ending December 31, 20X1, Trove Co. collected the following data:

Loss on sale of equipment $ 4,000
Dividends declared (63,000)
Sale of Bly, Inc., bonds
(par value $110,000) 115,000
Amortization of bond premium (3,000)
Purchase of equipment (73,000)
Dividends paid (81,000)
Purchase of treasury stock (39,000)
In its December 31, 20X1, statement of cash flows, what amount should Trove report as net cash provided (used) by financing activities?

$(39,000)

$(81,000)

$(120,000)

$(42,000)

$(120,000)

Question #302102

Answer 41

$(120,000)

Trove should report $(120,000) as net cash provided (used) by financing activities, calculated as follows:

Cash inflows from financing activities:
No listed items are inflows $ 0
Cash outflows from financing activities:
Dividends paid (81,000)
Purchase of treasury stock (39,000)
Net cash provided by financing activities $(120,000)
Dividends declared created a liability, but until they are paid, no cash flows out of the corporation and they will not appear on the cash flow statement until then. Purchase of equipment and the sale of bonds held for investment are investing activities, not financing activities. Loss on sale and amortization of premium are operating activities.

Relevant Terms
Financing Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 42

Karr, Inc., reported net income of $300,000 for 20X1. 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 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
• In December 20X1, 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 20X1 statement of cash flows, net cash used in investing activities should be:

$12,000.

$35,000.

$22,000.

$2,000

Question #300130

Answer 42

$2,000

Cash paid for purchase of equipment $20,000
Less cash received from sale of
equipment ($25,000 - $12,000 + $5,000 gain) 18,000
Net cash outflow from investing activities $ 2,000
=======
All of the following are cash inflows from investing activities: Receipts from sales of property, plant, and equipment and other productive assets (FASB ASC 230-10-45-12)

All of the following are cash outflows for investing activities: Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment, and other productive assets. (FASB ASC 230-10-45-13)

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12
FASB ASC 230-10-45-13

Question 43

Karr, Inc., reported net income of $300,000 for 20X1. 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 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December 20X1, 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 20X1 statement of cash flows, net cash provided by operating activities should be:

$340,000.

$357,000.

$352,000.

$347,000

Question #300129

Answer 43

$347,000

Using the indirect method, Karr computes cash flow from operating activities as follows:

Reported 20X1 net income $300,000
Add depreciation expense 52,000
Deduct gain on sale of equipment ( 5,000)
Net Cash flow from operating activities $347,000
=========

Note: All items that are included in net income that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets. This includes all items whose cash effects are related to investing or financing cash flows, such as gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which relate to financing activities). (FASB ASC 230-10-45-28)
Term: Indirect Method for Statement of Cash Flows
The indirect method is one of the two optional methods of presentation of the statement of cash flows (SCF). It presents a reconciliation of net income to net cash provided by operating activities in all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payables), deferrals of past cash receipts and payments (inventory, prepaids, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt). (FASB ASC 230-10)

The indirect method is allowed by the Financial Accounting Standards Board (FASB) for the statement of cash flows (but the direct method is preferred by the FASB). When the indirect method is used, interest and income taxes paid must be separately disclosed.

In governmental accounting, the direct method for stating cash flows is used and not the indirect method. (GASB 2450)

Relevant Terms
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-28
FASB ASC 230-10-55-1

Question 44

Lino Co.’s worksheet for the preparation of its statement of cash flows included the following:

December 31 January 1
Accounts receivable $29,000 $23,000
Allowance for uncollectible accounts 1,000 800
Prepaid rent expense 8,200 12,400
Accounts payable 22,400 19,400
Lino’s net income is $150,000. What amount should Lino include as net cash provided by operating activ­ities in the statement of cash flows?

$151,000

$148,600

$145,400

$151,400

Answer 44

$151,400

The $151,400 amount is calculated as follows:

Net income $150,000
Increase in accounts receivable ($23,000 – $29,000) (6,000)
Increase in allowance for uncollectible accounts
($800 – $1,000) 200
Decrease in prepaid rent expense ($12,400 – $8,200) 4,200
Increase in accounts payable ($22,400 – $19,400) 3,000
Cash provided by operating activities $151,400

Reference
2115.09

Authorities
FASB ASC 230-10-45-16

Question 45

Marble Co. prepared its statement of cash flows using the following amounts:

Net decrease in fixed assets $(3,750)
Depreciation expense 13,000
Gain on sale of equipment
(net book value, $3,250) 1,250
Capital expenditures 12,500
Marble reported net income of $20,000 at year-end. What amount should Marble report as net cash provided by operating activities?

$33,000

$19,500

$29,250

$31,750

Question #302622

Answer 45

$31,750

Given the limited information provided, the cash provided by operations can be found using the indirect method. The indirect method begins with net income and adjusts for noncash effects and changes in operating assets and operating liabilities, as follows:

Net income $20,000
Depreciation expense 13,000
Gain on sale of equipment (1,250)
Cash provided by operating activities $31,750
The decrease in fixed assets, capital expenditures, and proceeds from the sale of equipment would all be classified as investing activities in the statement of cash flows.

Relevant Terms
Cash Flow
Indirect Method for Statement of Cash Flows
Operating Activities

Reference
2115.09
2115.10

Question 46

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available:

Accounts receivable increase $20,000
Equipment gain on sale increase 10,000
Nontrade notes payable increase 50,000
Prepaid insurance increase 40,000
Accounts payable increase 30,000
What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year?

$50,000

$0

$100,000

$40,000

Question #301692

Answer 46

$40,000

The most common method for presenting cash flows from operating activities is the indirect method, in which net income is adjusted for noncash items that have been included in its determination, as well as the change in current assets and current liabilities.

Martin should report $40,000 as net cash provided by operating activities, as follows:

Net income $70,000
+ Depreciation expense 10,000
- Accounts receivable increase (20,000)
- Equipment gain on sale increase (10,000)
- Prepaid insurance increase (40,000)
+ Accounts payable increase 30,000
$40,000
The nontrade N/P (notes payable) is a financing activity.

Relevant Terms
Accounts Payable
Accounts Receivable
Cash Flow
Current Assets
Current Liability
Financing Activities
Investing Activities
Operating Activities

Reference
2115.09

Authorities
FASB ASC 230-10-45-16

Question 47

Mend Co. purchased a 3-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. How should this purchase be reported in Mend’s statement of cash flows?

As an outflow from investing activities

As an outflow from operating activities

As an outflow from financing activities

Not reported

Question #300127

Answer 47

Not reported

FASB ASC 230-10-45-1 states: “A statement of cash flows shall report the cash effect during a period of an entity’s operations, its investing transactions, and its financing transactions.”

It is further noted that these are the “same amounts as similarly titled line-items or subtotals shown in the statements of financial position as of those dates.” Since Mend’s policy is to treat these investments as cash equivalents, the purchase would not be reported in the statement of cash flows.

Term: Cash Equivalents
Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: they are readily convertible to known amounts of cash AND are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months.

Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).

FASB ASC Glossary

Relevant Terms
Cash Equivalents
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.06
2115.07

Authorities
FASB ASC 230-10-20
FASB ASC 230-10-45-1

Question 48

New England Co. had cash provided by operating activities of $351,000; cash used by investing activities of $420,000; and cash provided by financing activities of $250,000. New England’s cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds of $40,000 were received from the sale. What was New England’s cash balance at the end of the year?

$40,000

$27,000

$248,000

$208,000

Question #300140

Answer 48

$208,000

The main point of this question is that the cash flows focuses on the cash received in the transaction, not on the gain recognized in the transaction. The amount of the gain on the sale of the land does not affect investing activities, as the $420,000 includes all money for investing. Therefore, given the other information about cash and cash flows in the problem, the ending cash balance may be computed as follows:

Cash from operating activities $351,000
Cash from investing activities:
Cash used for investing activities (420,000)
Cash provided by financing activities 250,000
Net increase in cash 181,000
Beginning cash balance 27,000
Ending cash balance $208,000
========

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-4

Question 49

On July 1, 20X1, Dewey Co. signed a 20-year building lease that it reported as an operating lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 20X1 statement of cash flows?

An inflow equal to the present value of future lease payments on July 1, 20X1, less 20X1 principal and interest payments

An outflow equal to the 20X1 principal payments only

An outflow equal to the 20X1 principal and interest payments on the lease

The lease payments should not be reported in the financing activities section.

Question #301911

Answer 49

The lease payments should not be reported in the financing activities section.

Cash outflows for operating activities per FASB ASC 230-10-45-17 include “cash payments to other suppliers or employees for other goods or services.” Operating lease payments are to appear in the operating activity cash flow section.

Relevant Terms
Financing Activities
Interest
Lease
Operating Activities
Present Value
Principal
Statement of Cash Flows

Reference
2363.18

Authorities
FASB ASC 230-10-45-17

Question 50

On September 1, 20X1, Canary Co. sold used equipment for a cash amount equaling its carrying amount for both book and tax purposes. On September 15, 20X1, Canary replaced the equipment by paying cash and signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for the old equipment. How should these equipment transactions be reported in Canary’s 20X1 statement of cash flows?

Cash outflow equal to the cash paid and note payable less the cash received

Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable

Cash outflow equal to the cash paid less the cash received

Cash inflow equal to the cash received and a cash outflow equal to the cash paid

Cash inflow equal to the cash received and a cash outflow equal to the cash paid

Question #300132

Answer 50

Cash inflow equal to the cash received and a cash outflow equal to the cash paid

Included in cash inflows from investing activities per FASB ASC 230-10-45-12 are “receipts from sales of property, plant, and equipment and other productive assets.”

This pronouncement also includes, under the category of cash outflows from investing activities, “payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets.” (FASB ASC 230-10-45-13)

Canary Co. should treat the cash payments related to the equipment separately as both a cash inflow and cash outflow in the statement of cash flows.

Relevant Terms
Carrying Amount (Book Value)
Cash Flow
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12

Question 51

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available:

Mortgage repayment $20,000
Bonds payable–issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year?

$20,000

$30,000

$10,000

$0

Question #300141

Answer 51

$0

Information provided supports the indirect method of computing net cash provided by operating activities. Only the increase in inventory and the decrease in accounts payable affect operating activities. The mortgage payment and the bonds issued are financing activities.

Net income $70,000
Inventory increase (40,000)
Accounts payable decrease (30,000)
Net cash provided by
operating activities $ 0

Relevant Terms
Accounts Payable
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-16, 45-17
FASB ASC 230-10-55-1

Question 52

Payne Co. prepares its statement of cash flows using the indirect method. Payne’s unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows?

As an addition to net income in the operating activities section

As a financing cash outflow

As a subtraction from net income in the operating activities section

As a financing cash inflow

As an addition to net income in the operating activities section

Question #300138

Answer 52

As an addition to net income in the operating activities section

The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.

Relevant Terms
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-55-1

Question 53

Point Co.’s 20X4 statement of cash flows reported cash provided from operating activities of $235,000. For 20X4, gain on the sale of investments was $16,000, amortization of intangible assets was $168,000, and proceeds from the sale of equipment were $95,000. In Point’s 20X4 statement of cash flows, what amount was reported as net income?

$178,000

$514,000

$419,000
$83,000

Question #302288

Answer 53

$83,000

Proceeds on the sale of equipment are reported as investing activities. The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and gains.

Net income − Gain on sale of investment + Amortization expense = Cash provided by operating activities
Net income − $16,000 + $168,000 = $235,000
Net income = $83,000

Relevant Terms
Cash Flow
Operating Activities
Statement of Cash Flows

Reference
2115.01
2115.02

Question 54

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, Year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, Year 1?

$30,000

$12,000

$9,000
$3,000

Question #300150

Answer 54

$3,000

Cash payments to purchase equipment are outflows from investing activities. The $3,000 down payment is an investing activity outflow.

The $27,000 financed and the principal payments are financing activities.

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-11, 45-14, 45-16
FASB ASC Glossary

Question 55

Which of the following should be disclosed as supplemental information in the statement of cash flows?

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period

The amount of cash paid for taxes during the period

Neither the issuance of stock to acquire a new warehouse nor the amount of cash paid for taxes during the period

The issuance of stock to acquire a new warehouse

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period

Question #302063

Answer 55

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period

Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures.

Relevant Terms
Statement of Cash Flows
Supplementary Information

Reference
2115.10
2115.12

Authorities
FASB ASC 230-10-50-3

Question 56

Reed Co.’s 20X1 statement of cash flows reported cash provided from operating activities of $400,000. For 20X1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s 20X1 statement of cash flows, what amount was reported as net income?

$205,000

$105,000

$305,000

$595,000

$205,000

Question #300137

Answer 56

$205,000

Dividends paid are reported as financing activities. The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and losses.

Net income + Depreciation expense + Goodwill impairment loss = Cash provided by operating activities
X + $190,000 + $5,000 = $400,000
X = $205,000

Relevant Terms
Cash Flow
Impairment
Operating Activities
Statement of Cash Flows

Reference
2115.01
2115.02

Authorities
FASB ASC 230-10-45-15
FASB ASC 230-10-55-1

Question 57

Rory Co.’s prepaid insurance was $50,000 at December 31, Year 2, and $25,000 at December 31, Year 1. Insurance expense was $20,000 for Year 2 and $15,000 for Year 1. What amount of cash disbursements for insurance would be reported in Rory’s Year 2 net cash flows from operating activities presented on a direct basis?

$45,000

$20,000

$55,000

$30,000
$45,000

Question #301629

Answer 57

$45,000

The $45,000 amount is calculated as follows:

Insurance expense – Year 2 $20,000
Increase in prepaid insurance
($50,000 – $25,000) 25,000
Total $45,000

Relevant Terms
Indirect Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10
2115.11
2115.12
2115.13

Authorities
FASB ASC 230-10-45-16

Question 58

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni’s cash-basis pretax income is:

lower by $36,000.

higher by $36,000.

higher by $4,000.

lower by $4,000.

higher by $36,000.

Question #300157

Answer 58

higher by $36,000.Relative to accrual basis, a decrease in accounts receivable is an increase in cash because cash must be received to decrease accounts receivable.

Relative to accrual basis, an increase in accounts payable is an increase in cash because accounts payable was increased instead of making cash purchases.

Decrease in accounts receivable $20,000
Increase in accounts payable 16,000
Total increase in cash-basis income $36,000

Term: Accrual Basis Accounting
Accrual basis accounting is a method of accounting that attempts to record the financial effects (substance) of transactions and other events and circumstances in the periods in which they occur rather than only in periods in which cash is received or paid by the entity. Accrual basis accounting recognizes that the earnings process, which consists of buying, selling, producing, distributing, and other operations, often does not coincide with cash receipts and payments. This method of accounting records credit transactions, barter exchanges, nonreciprocal transfers, changes in prices, changes in form of assets or liabilities, and other transactions, events, and circumstances that have eventual cash consequences for the entity but do not involve the concurrent movement of cash. Revenue is recognized when earned and expenses are recognized when incurred, not when cash is received or paid.

SFAC 4.50 and 6.139

Accrual basis accounting uses accrual, deferral, and allocation to attempt to reflect the entity’s performance during a specific period of time, rather than just the receipts and disbursements of cash—to match the recognition of revenues with the related expenses (and the related increases or decreases in assets or liabilities).

Accrual basis accounting makes it possible to recognize expenses and losses at the time that economic benefits are consumed or the loss of future benefits is discovered rather than when payment is made. Accrual accounting uses three expense-recognition principles as appropriate:

• Associated cause-and-effect
• Systematic and rational allocation
• Immediate recognition
  SFAC 5.85–.86

Relevant Terms
Accrual Basis Accounting
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.17
2150.04

Authorities
FASB ASC 230-10-45-28

Question 59

Stamp Company had beginning and ending balances of PP&E (property, plant, and equipment) of $274,000 and $391,000, respectively. The related accumulated depreciation beginning and ending balances were $119,000 and $151,000, respectively. During the year, Stamp purchased a new machine for $160,000. Stamp also sold a machine with a carrying value of $8,000 for $12,000 cash.

How much depreciation expense should be added to net income in the operating section of the statement of cash flows when using the indirect method?

$32,000

$71,000

$63,000

$67,000

Answer 59

$67,000

The first step is to determine the cost of the machine sold. The beginning balance plus the purchase of the new machine minus the ending balance results in the cost of the machine sold ($274,000 + $160,000 − $391,000 = $43,000).

Given that the carrying value of the machine sold is $8,000, the accumulated depreciation on the machine sold must be $35,000 ($43,000 − $8,000).

Depreciation expense is determined by subtracting the beginning accumulated depreciation balance from the ending balance and adding the accumulated depreciation on the machine sold ($151,000 − $119,000 + $35,000 = $67,000).

Term: Indirect Method for Statement of Cash Flows
The indirect method is one of the two optional methods of presentation of the statement of cash flows (SCF). It presents a reconciliation of net income to net cash provided by operating activities in all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payables), deferrals of past cash receipts and payments (inventory, prepaids, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt). (FASB ASC 230-10)

The indirect method is allowed by the Financial Accounting Standards Board (FASB) for the statement of cash flows (but the direct method is preferred by the FASB). When the indirect method is used, interest and income taxes paid must be separately disclosed.

In governmental accounting, the direct method for stating cash flows is used and not the indirect method. (GASB 2450)

Relevant Terms
Financing Activities
Indirect Method for Statement of Cash Flows
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 60

Tam Co. reported the following items in its year-end financial statements:

Capital expenditures $1,000,000
Sales-type lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payments 220,000

What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the indirect method?

$745,000

$545,000

$1,125,000

$1,870,000

$545,000

Question #301912

Answer 60

$545,000

Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed:

Amount of income taxes paid during the period ($325,000)
Amount of interest paid during the period ($220,000)
$325,000 + $220,000 = $545,000

Relevant Terms
Cash Flow
Financial Statements
Income Tax
Interest
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-55-1, 55-3

Question 61

The following information was taken from the current-year financial statements of Planet Corp.:

Accounts receivable, January 1 $ 21,600
Accounts receivable, December 31 30,400
Sales on account and cash sales 438,000
Uncollectible accounts 1,000
No accounts receivable were written off or recovered during the year. If the direct method is used in the current-year statement of cash flows, Planet should report cash collected from customers as:

$428,200.

$429,200.

$446,800.

$447,800.

Question #301627

Answer 61

$429,200.

The cash collected is $429,200, calculated as follows:

Sales $438,000
Increase in accounts receivable
($30,400 – $21,600) – 8,800
Cash collected from customers $429,200
error_outline First Time Score

Reference
2115.10
2115.11
2115.12
2115.13

Authorities
FASB ASC 230-10-45-16

Question 62

The primary purpose of a statement of cash flows is to provide relevant information about:

an enterprise’s ability to meet cash operating needs.

an enterprise’s ability to generate future positive net cash flows.

the cash receipts and cash disbursements of an enterprise during a period.

differences between net income and associated cash receipts and disbursements.

the cash receipts and cash disbursements of an enterprise during a period.

Question #300118

Answer 62

the cash receipts and cash disbursements of an enterprise during a period.

FASB ASC 230-10-10-1 contains standards for the financial accounting and reporting of an enterprise’s cash flows. This pronouncement notes: “The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period.”

The information provided in the statement of cash flows must be used in conjunction with the related disclosures and other financial statements to assess differences between net income and associated cash receipts and disbursements, an enterprise’s ability to generate future positive net cash flows, and an enterprise’s ability to meet cash operating needs.

Relevant Terms
Relevance
Statement of Cash Flows

Reference
2115.03

Authorities
FASB ASC 230-10-10-1

Question 63

What amount is the net increase or decrease in cash?

$(8,000)

$14,000

$22,000

$(2,000)

$14,000

Answer 63

$14,000

Question 64

What is the company’s increase in cash flows provided by financing activities for the year?

$50

$150

$350

$250

Question #300151

Answer 64

$250

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-11, 45-14, 45-16
FASB ASC Glossary

Question 65

When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity?

Investing

Financing

No reconciliation should be provided.

Operating

Question #301749

Answer 65

Operating

Incorrect
A business enterprise that provides a set of financial statements intended to report financial position and results of operations must provide a statement of cash flows (SCF) for each period for which results of operations are presented. The primary purpose of the SCF is to provide information about the cash receipts and cash payments of an enterprise during a period of time. The SCF is presented in three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (in that order). The SCF can be prepared using the direct or indirect method. If the direct method is used, net income and net cash flows from operating activities must be reconciled.

Relevant Terms
Direct Method for Statement of Cash Flows
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.17

Authorities
FASB ASC 230-10-45-28

Question 66

Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?

Statement of cash flows

Income statement

Balance sheet

Statement of changes in stockholders’ equity

Statement of cash flows

Question #300136

Answer 66

Statement of cash flows

FASB ASC 230-10-45-1 requires cash flows to be presented in three categories in the statement of cash flows—operating, investing, and financing. Paragraph 6 states:

“A statement of cash flows should report the cash effects during a period of an enterprise’s operations, its investing transactions, and its financing transactions.” (Emphasis added)

Hence, one of the key purposes of the statement of cash flows is to disclose how a business financed its operations.

Relevant Terms
Debt Security
Equity Security
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-1

Question 67

Which of the following should be disclosed as supplemental information in the statement of cash flows?

The amount of cash paid for taxes during the period

The issuance of stock to acquire a new warehouse

Neither the issuance of stock to acquire a new warehouse nor the amount of cash paid for taxes during the period

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period

Question #302063

Answer 67

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period

Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures.

Term: Supplementary Information
Supplementary information is information presented outside the basic financial statements, excluding required supplementary information that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements. (AU-C 725)

Supplementary information not required by GAAP (by FASB or GASB pronouncements) is provided on a voluntary basis. It may be required by other regulatory agencies, e.g., the Securities and Exchange Commission (SEC) (Regulation S-K).

The auditor has no responsibility to audit supplementary information. However, the auditor does have certain responsibilities with respect to such information, depending on the nature of both the information and the document containing the financial statements. (AU-C 720, 725, and 730)

Relevant Terms
Statement of Cash Flows
Supplementary Information

Reference
2115.10
2115.12

Authorities
FASB ASC 230-10-50-

Question 68

Which of the following cash flows per share should be reported in a statement of cash flows?

Primary cash flows per share only

Both primary and fully diluted cash flows per share

Fully diluted cash flows per share only

Cash flows per share should not be reported.

Question #300124

Answer 68

Cash flows per share should not be reported.

FASB ASC 230-10-45-3 states that “Financial statements shall not report an amount of cash flow per share.”

Reference
2115.10

Authorities
FASB ASC 230-10-45-3

Question 69

Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule?

The major classes of gross cash receipts and gross cash payments

A reconciliation of ending retained earnings to net cash flow from operations

A reconciliation of net income to net cash flow from operations

The amount of income taxes paid

A reconciliation of ending retained earnings to net cash flow from operations

Question #300128

Answer 69

A reconciliation of ending retained earnings to net cash flow from operations

A reconciliation of ending retained earnings to net cash flow from operations would serve no useful purpose and is not required to be disclosed on the statement of cash flows. Each of the other items mentioned would be disclosed under the direct method.

Relevant Terms
Direct Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-45-16
FASB ASC 230-10-45-17

Question 70

Which of the following items is included in the financing activities section of the statement of cash flows?

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment

Cash effects of acquiring and disposing of investments and property, plant, and equipment

Cash effects of transactions that enter into the determination of net income

Cash effects of transactions involving making and collecting loans

Question #300139

Answer 70

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment

Financing activities are associated with a company’s liabilities and stockholders’ equity. The list of financing activities in FASB ASC 230-10-45-14 and 45-15 therefore includes cash effects of transactions obtaining resources from owners and providing them with a return on their investment.

Relevant Terms
Financing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-14
FASB ASC 230-10-45-15

Question 71

Which of the following should be disclosed as supplemental information in the statement of cash flows?

Cash flow per share

Both cash flow per share and conversion of debt to equity

Neither cash flow per share nor conversion of debt to equity

Conversion of debt to equity

Question #300126

Answer 71

Conversion of debt to equity

FASB ASC 230-10-45-3 states very specifically that “financial statements shall not report an amount of cash flow per share.” Also, “information about all investing and financing activities of an enterprise during a period that affects recognized assets or liabilities, but that does not result in cash receipts or cash payments in the period, shall be reported in related disclosures.” (FASB ASC 230-10-50-3)

Converting debt to equity is cited as an example of the latter category of items.

Relevant Terms
Disclosure
Statement of Cash Flows
Supplementary Information

Reference
2115.10

Authorities
FASB ASC 230-10-45-3
FASB ASC 230-10-50-3

Question 72

Which of the following should not be disclosed in an enterprise’s statement of cash flows prepared using the indirect method?

Dividends paid on preferred stock

Income taxes paid

Interest paid, net of amounts capitalized

Cash flow per share

Question #300119

Answer 72

Cash flow per share

Cash flow per share should not be disclosed under either the direct or indirect method. FASB ASC 230-10-45-3 is very specific concerning per share cash flow disclosures: “Financial statements shall not report an amount of cash flow per share.”

Relevant Terms
Direct Method for Statement of Cash Flows
Indirect Method for Statement of Cash Flows
Statement of Cash Flows

Reference
2115.10

Authorities
FASB ASC 230-10-45-3

Question 73

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

Purchase of property, plant, and equipment

Payment of principal on a long-term note payable

Investment revenue recognized on an equity method investment

Purchase of treasury stock

Investment revenue recognized on an equity method investment

Question #302103

Answer 73

Investment revenue recognized on an equity method investment

Investment revenue recognized on an equity method investment is included in net income. If an entity is using the indirect method, an adjustment to remove the investment revenue must be made to remove the effect from operating activities.

Cash paid for the purchase of treasury stock and cash paid for principal on a long-term note payable are included in financing activities. Purchase of property, plant, and equipment is included in investing activities.

Relevant Terms
Financing Activities
Indirect Method for Statement of Cash Flows
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10

Question 74

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

Sale of property, plant, and equipment

Issuance of common stock to the shareholders

Payment of cash dividend to the shareholders

Gain on sale of plant asset

Question #300149

Answer 74

Gain on sale of plant asset

Gain on sale of a plant asset is included in net income. If an entity is using the indirect method, an adjustment to remove the gain on the sale of a plant asset must be made to remove the effect from investment activities.

Cash received from the sale of the plant asset is included in investing activities. Payment of a cash dividend and cash received from issuance of common stock to shareholders are included in financing activities.

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-11, 45-14, 45-16
FASB ASC Glossary

Question 75

Which of the following transactions is not an operating cash flow transaction?

Receiving a payment from a client

Purchase of inventory

Payment of an accounts payable balance

Payment of a cash dividend

Question #302525

Answer 75

Payment of a cash dividend

Cash flows from operating activities include those cash flows resulting from transactions included in the determination of net income, unless specifically classified as financing or investing activities, and include receiving a payment from a client, purchasing inventory, and payment of an accounts payable balance.

Payment of a cash dividend is a financing activity on the statement of cash flow.

error_outline First Time Score

Relevant Terms
Financing Activities
Investing Activities
Operating Activities
Statement of Cash Flows

Reference
2115.09

Question 76

Which of the following transactions should be classified as investing activities on an entity’s statement of cash flows?

Sale of property, plant, and equipment

Issuance of common stock to the shareholders

Increase in accounts receivable

Payment of cash dividend to the shareholders

Sale of property, plant, and equipment

Question #300144

Answer 76

Sale of property, plant, and equipment

Investing activities involve asset transactions other than those related to operating results (e.g., sale of property)

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12

Question 77

Which of the following would be added back to net income when reporting operating activities cash flows by the indirect method?

A decrease in interest payable

An increase in accounts receivable

A loss on the sale of a debt investment

Bond premium amortization

A loss on the sale of a debt investment

Question #302283

Answer 77

A loss on the sale of a debt investment

FASB ASC 230-10-55-1 describes the indirect method briefly as follows: “Given sufficiently detailed information, major classes of operating cash receipts and payments may be determined indirectly by adjusting revenue and expense amounts for the change during the period in related asset and liability accounts.”

The increase in accounts receivable reflects sales made for which cash has not yet been collected. Net income includes these sales and needs to be reduced to reflect cash received from customers. Thus, the increase in accounts receivable needs to be subtracted from net income in the operating section of the statement of cash flows.

The bond premium amortization would be added to interest expense to compute the amount of cash paid for bond interest. The net effect would be to subtract this amortization amount from net income (as a noncash expense).

The loss on the sale will cause net income to be reduced. However, since all of the cash from the sale transaction will be reported in the investing section, the loss’s effect on net income will not accurately reflect cash flow from operating activities. The loss needs to be added to net income in the operating section of the statement of cash flows.

The decrease in interest payable reflects greater cash payments for interest than the amount of interest expense recorded. Because interest expense is less than cash paid for interest, net income needs to be reduced to reflect this difference. Thus, the decrease in interest payable needs to be subtracted from net income in the operating section of the statement of cash flows.

Term: Indirect Method for Statement of Cash Flows
The indirect method is one of the two optional methods of presentation of the statement of cash flows (SCF). It presents a reconciliation of net income to net cash provided by operating activities in all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payables), deferrals of past cash receipts and payments (inventory, prepaids, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt). (FASB ASC 230-10)

The indirect method is allowed by the Financial Accounting Standards Board (FASB) for the statement of cash flows (but the direct method is preferred by the FASB). When the indirect method is used, interest and income taxes paid must be separately disclosed.

In governmental accounting, the direct method for stating cash flows is used and not the indirect method. (GASB 2450)

Relevant Terms
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.10

Question 78

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

Collection of a tax refund from the government

Collection of a note receivable from a related party

Collection of an overdue account receivable from a customer

Collection of proceeds from a note payable

Question #300143

Answer 78

Collection of a note receivable from a related party

Investing activities involve asset transactions other than those related to operating results (e.g., accounts receivables from sales and taxes).

Relevant Terms
Investing Activities
Statement of Cash Flows

Reference
2115.09

Authorities
FASB ASC 230-10-45-12
FASB ASC 230-10-45-21

Question 79

Whitt Co. prepares its statement of cash flows using the indirect method. Whitt’s unamortized bond premium account decreased by $18,500 during the year. How should Whitt report the change in unamortized bond premium in its statement of cash flows?

As a financing cash outflow

As a financing cash inflow

As a subtraction from net income in the operating activities section

As an addition to net income in the operating activities section

As a subtraction from net income in the operating activities section

Question #302064

Answer 79

As a subtraction from net income in the operating activities section

The amortization of a bond premium is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Under the indirect method, interest expense is already included in net income. Amortization of a premium on bonds payable results in the interest expense amount being less than cash paid.

Because less expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be subtracted from income to reconcile to the cash provided or used for operating activities.

Relevant Terms
Cash Flow
Indirect Method for Statement of Cash Flows
Operating Activities
Statement of Cash Flows

Reference
2115.09
2115.10