Questions Flashcards
Direct method (direct cash approach)
Take every income statement item and convert from the Accrual method of accounting back to Cash.
- Cash collected from Customers (A/R increased by 80):
CASH (Plug) 520
A/R (Change in A/R) 80
Sales 600
2.Payments for Purchases (Inventory increased by 30 and A/P increased by 20):
COGS 200
Inventory (change) 30
A/P (change) 20
CASH (plug) 210
3.Payments for Selling expenses (Allowance for bad debts increased by 20, bad debts is considered a selling expense):
Selling expenses 100
Allowance for Uncollectible receivables 20
CASH 80
4.Payments for G&A expense:
G&A expense 40
CASH 40
- Depreciation expense Ignore under the direct method, since there was no effect on cash.
Depreciation expense 50
Accumulated depreciation 50
- Interest expense (amortization of Discounts or Premiums changed by 5. Is covered in more detail in the Bond section):
Interest expense 30
Amortization of bond discount 5
CASH 25
- Equity in earnings: When an investment is accounted for under the Equity method, as the Investee earns income, the investor recognizes their share of the income on their Income Statement, even though they have not yet received cash:
Investment under the equity method 10
Equity in earnings of Investee 10
Income tax expense (Deferred tax liability decreased by 10, taxes payable increased by 40)
Income tax expense 60
Deferred tax liability 10
Income taxes payable 40
CASH 30
- Gain on sale of investment Assume an Available-for-sale (AFS) investment that had an original cost of $50, was sold for $60. The cash proceeds would be considered an Investing activity, so the gain is a non-operating gain and should not be part of Operating activities.
CASH 60
Investment 50 (cost)
Gain on sale of AFS. 10
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities $520 $385 ==========================================>> $135
- Mend Co. purchased a three-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?
a. As an outflow from operating activities.
b. As an outflow from investing activities.
c. As an outflow from financing activities.
d. Not reported.I
- (d) The purchase of a 3 month US Treasury bill is an exchange of one cash equivalent, cash, for another, a highly liquid instrument with an original maturity of 3 months or less.
As a result, there is no inflow or outflow of cash or cash equivalents and the transaction would not be reported in a statement of cash flows.
Payments for Purchases (Inventory increased by 30 and A/P increased by 20)
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
COGS 200
Inventory (change) 30
A/P (change) 20
CASH (plug) 210
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities $520 $385 ==========================================>> $135
3.Payments for Selling expenses (Allowance for bad debts increased by 20, bad debts is considered a selling expense):
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
Selling expenses 100
Allowance for Uncollectible receivables 20
CASH 80
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities $520 $385 ==========================================>> $135
4.Payments for G&A expense:
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
G&A expense 40
CASH 40
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities $520 $385 ==========================================>> $135
- Depreciation expense
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
Depreciation expense 50
Accumulated depreciation 50
Ignore under the direct method, since there was no effect on cash.
- Interest expense (amortization of Discounts or Premiums changed by 5. Is covered in more detail in the Bond section):
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
Interest expense 30
Amortization of bond discount 5
CASH 25
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities $520 $385 ==========================================>> $135
Income tax expense (Deferred tax liability decreased by 10, taxes payable increased by 40)
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
Income tax expense 60
Deferred tax liability 10
Income taxes payable 40
CASH 30
Operating Activities (direct method) Dr. Cr.
Change: Cash collected from customers $520
Payments for purchases $210
Payments for selling expenses $80
Payments for G&A expenses $40
Payments for Interest $25
Payments for Taxes $30
Net cash provided by Oper activities == $520 $385 ==========================================>> $135
- Equity in earnings: When an investment is accounted for under the Equity method, as the Investee earns income, the investor recognizes their share of the income on their Income Statement, even though they have not yet received cash:
Setup Journal Entry and effect on Direct Method Statement of Cash Flows
Investment under the equity method 10
Equity in earnings of Investee 10
No effect on cash until received
Indirect Method:
Items 2 through 4 are based on the following information: The differences in Beal Inc.’s balance sheet accounts at December 31, 20x10 and 20x9, are presented below:
- *Increase**
- * Assets** (Decrease)
Cash and cash equivalents $ 120,000
ST invest in mkt sec AFS 300,000
Accounts receivable, net —–
Inventory 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation ———============================= $ 1,100,000
Liabilities and Stockholders’ Equity
Accounts Payable/Accrue liabilities $ (5,000)
Dividends payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Common stock, $10 par 100,000
Additional paid-in capital 120,000
Retained earnings 290,000 ============================== $1,100,000
The following additional information relates to 20x10:
- The ST investments are classified as available for sale.
- Net income was $790,000.
- Cash dividends of $500,000 were declared.
- Building costing $600,000 and having a carrying amount of $350,000 was sold for $350,000.
- Equipment costing $110,000 was acquired through issuance of long-term debt.
- A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments.
- 10,000 shares of common stock were issued for $22 a share
- In Beal’s 20X10 statement of cash flows, net cash provided by operating activities was…
a. $920,000
b. $740,000
c. $620,000
d. $405,000 - In Beal’s 20X10 statement of cash flows, net cash used by investing activities was
a. $1,005,000
b. $1,190,000
c. $1,275,000
d. $1,600,000 - In Beal’s 20X10 statement of cash flows, net cash provided by financing activities was
a. $ 20,000
b. $ 45,000
c. $150,000
d. $205,000
2.(a) In calculating net cash provided by operating activities, net income of $790,000 will be adjusted by the following:
—– There is a gain on the sale of long-term investments since they had a carrying value of $100,000 and were sold for $135,000. The gain is included in net income but is reported as part of the inflow from investing activities. Deduct $35,000.
—– The increase in inventory indicates that more inventory was purchased than sold. Deduct $80,000.
—— The decrease in accounts payable and accrued liabilities indicates that more was paid for these items than included in the income statement. Deduct $5,000.
In addition, the accumulated depreciation account must be analyzed.
Since a building was sold that had a cost of $600,000 and a carrying amount of $350,000 the accumulated depreciation on it must have been $250,000 which would have reduced the balance.
There is no net change in the balance indicating there was also an increase of $250,000 from depreciation expense. This is an expense that does not require the use of cash and should be added back to income.
As a result, cash provided by operating activities is $790,000 - $35,000 - $80,000 - $5,000 + $250,000 or $920,000.
Indirect Method:
Items 2 through 4 are based on the following information: The differences in Beal Inc.’s balance sheet accounts at December 31, 20x10 and 20x9, are presented below:
Increase
Assets (Decrease)
Cash and cash equivalents $ 120,000
ST invest in mkt sec AFS 300,000
Accounts receivable, net —–
Inventory 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation ———============================= $ 1,100,000
Liabilities and Stockholders’ Equity
Accounts Payable/Accrue liabilities $ (5,000)
Dividends payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Common stock, $10 par 100,000
Additional paid-in capital 120,000
Retained earnings 290,000 ============================== $1,100,000
The following additional information relates to 20x10:
- The ST investments are classified as available for sale.
- Net income was $790,000.
- Cash dividends of $500,000 were declared.
- Building costing $600,000 and having a carrying amount of $350,000 was sold for $350,000.
- Equipment costing $110,000 was acquired through issuance of long-term debt.
- A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments.
- 10,000 shares of common stock were issued for $22 a share
- In Beal’s 20X10 statement of cash flows, net cash used by investing activities was
a. $1,005,000
b. $1,190,000
c. $1,275,000
d. $1,600,000
3.(a) Investing activities included the following:
— The increase in short-term investments is an outflow from investing activities of $300,000.
— The proceeds from the sale of the building is an inflow from investing activities of $350,000.
— The proceeds from the sale of the long-term investment is an inflow from investing activities of $135,000.
In addition, the increase in plant assets must be reconciled. There was a decrease of $600,000 due to the building sold.
With a net increase of $700,000, there must have been increases of $1,300,000. Of this, $110,000 resulted from the issuance of a note which has no cash effect.
The remaining $1,190,000 would be an outflow due to the purchase of plant assets.
Indirect Method:
Items 2 through 4 are based on the following information: The differences in Beal Inc.’s balance sheet accounts at December 31, 20x10 and 20x9, are presented below:
Increase
Assets (Decrease)
Cash and cash equivalents $ 120,000
ST invest in mkt sec AFS 300,000
Accounts receivable, net —–
Inventory 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation ———============================= $ 1,100,000
Liabilities and Stockholders’ Equity
Accounts Payable/Accrue liabilities $ (5,000)
Dividends payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Common stock, $10 par 100,000
Additional paid-in capital 120,000
Retained earnings 290,000 ============================== $1,100,000
The following additional information relates to 20x10:
- The ST investments are classified as available for sale.
- Net income was $790,000.
- Cash dividends of $500,000 were declared.
- Building costing $600,000 and having a carrying amount of $350,000 was sold for $350,000.
- Equipment costing $110,000 was acquired through issuance of long-term debt.
- A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments.
- 10,000 shares of common stock were issued for $22 a share
- In Beal’s 20X10 statement of cash flows, net cash provided by financing activities was
a. $ 20,000
b. $ 45,000
c. $150,000
d. $205,000
4.(d) Financing activities included the following:
— Dividends were declared in the amount of $500,000. Since there is an increase in dividends payable of $160,000, the amount paid was $340,000.
— The increase in short-term bank debt indicates that $325,000 was an inflow from borrowing.
— The issuance of common stock for $220,000 was also an inflow.
The increase in long-term debt resulted from the acquisition of equipment and did not involve cash.
As a result there is a net inflow from financing activities of $325,000 + $220,000 - $340,000 or $205,000
- In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment
a. Plus the gain.
b. Plus the gain and less the amount of tax attributable to the gain.
c. Plus both the gain and the amount of tax attributable to the gain.
d. With no addition or subtraction.
- (a)The sale of equipment for cash results in a cash inflow from investing activities equal to the amount received.
If the asset is sold at a gain, the proceeds will be the carrying value plus the gain. If it is sold at a loss, they will be the carrying value minus the loss.
Answers (b) and (c) are incorrect because payments for income taxes, including the tax on a gain on sale of equipment, are reported as operating outflows.
Answer (d) is incorrect because there is an addition for the gain or a subtraction for the loss in this case.
- Lino Co’s worksheet for the preparation of its 20X3 statement of cash flows included the following:
December 31 January 1
Accounts receivable $29,000 $23,000
Allowance for UA 1,000 800
Prepaid rent expense 8,200 12,400
Accounts payable 22,400 19,400
Lino’s 20X3 net income is $150,000. What amoutn should Lino include as net cash provided by operating activities in the statement of cash flows?
a. $151,400
b. $151,000
c. $148,600
d. $145,400
6.(a) A $6,000 increase in accounts receivable indicates that collections were actually lower than sales for the period. In calculating cash flows from operating activities, the increase would decrease net income.
A $200 increase in the allowance for doubtful accounts results from the recognition of bad debts expense, which reduced income without requiring the use of cash. It will be added to income.
A $4,200 decrease in prepaid rent indicates that some of the rent that had been prepaid in also be added to income.
A $3,000 increase in accounts payable indicates that the entity did not pay for all of the purchases included in cost of sales, requiring the use of less cash. It will also be added to income.
As a result, cash flows from operating activities will be ($150,000 - $6,000 + $200 + $4,200 + $3,000) $151,400.
- Alp, Inc. had the following activities during 20X3:
– Acquired 2,000 shares of stock in Maybel, Inc. for $26,000. Alp intends to hold the stock as a long-term investment.
– Sold an investment in Rate Motors for $35,000 when the carrying value was $33,000.
– Acquired a $50,000, four-year certificate of deposit from a bank. (During the year, interest of $3,750 was paid to Alp.)
– Collected dividends of $1,200 on stock investments.
In Alp’s 20X3 statement of cash flows, net cash used in investing activities should be…
a. $37,250
b. $38,050
c. $39,800
d. $41,000
- (d) Cash flows from investing activities will include an outflow of $26,000 to purchase stock, an inflow of the $35,000 in proceeds from the sale of an investment, and an outflow of $50,000 to purchase a 4-year certificate of deposit, which is not a cash equivalent because of the long-term maturity.
Dividends collected are inflows from operating activities. As a result, net cash outflows for investing activities are (-$26,000 + $35,000 - $50,000) $41,000.
