CH 14

Chapter 14
The Statement of Cash Flows
MULTIPLE CHOICE QUESTIONS
1. How will a company classify ‘proceeds received from the issuance of long-term bonds’
on its statement of cash flows?
a. Cash provided from operations
b. Cash used in operations
c. Cash provided from investing activities
d. Cash provided from financing activities
Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Reporting
2. How will a company classify the exchange of common stock for land on its statement of
cash flows?
a. An operating activity
b. An investing activity
c. A financing activity
d. A footnote

3. How will a company classify money paid for the acquisition of land on its statement of
cash flows?
b. Cash used in financing activities
d. Cash used for investing activities

14-1
14-2 Test Bank – Chapter 14 – The Statement of Cash Flows
4. Equipment that cost $10,000 that had a book value of $6,000 was sold for $7,000. Data
from the comparative balance sheets are:
12/31/09 12/31/08
Equipment $420,000 $310,000
Accumulated Depreciation 59,000 36,000
Equipment purchased during 2009 cost
a. $120,000.
b. $110,000.
c. $145,000.
d. $10,000.
Ans: A KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

5. If an investor is interested in the solvency of a company, he/she should analyze the

a. balance sheet and income statement.
b. income statement, balance sheet, and statement of cash flows.
c. balance sheet and statement of cash flows.
d. statement of cash flows only.
Ans: C KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

6. How will a company classify the sale of treasury stock at an amount equal to its cost on
its statement of cash flows?
a. Operating activity
b. Investing activity
c. Extraordinary activity
d. Financing activity

7. How will a company classify money paid to suppliers on its statement of cash flows?
d. Cash used in financing activities
Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Test Bank – Chapter 14 – The Statement of Cash Flows 14-3
8. Payments for purchases of property, plant, and equipment and other productive assets
are classified as cash outflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

9. How will a company classify money paid for inventory acquisitions on its statement of
cash flows?

10. How will a company classify money received from selling equipment no longer used in
operations on its statement of cash flows?
b. Cash provided from financing activities

11. A company uses the indirect method of preparing the statement of cash flows. Current
year depreciation expense can be found on the
a. income statement and statement of cash flows.
b. balance sheet and income statement.
c. statement of cash flows and balance sheet.
d. income statement and statement of comprehensive income.

12. A company uses the direct method of preparing the statement of cash flows. Current
year depreciation expense can be found on the
a. balance sheet and income statement.
b. income statement and statement of cash flows.
c. statement of cash flows and balance sheet.
d. income statement only.
e. statement of cash flows only.

13. An investor is interested in assessing the effectiveness of a company’s cash

management. Where will the investor look to evaluate this?
a. Statement of cash flows
b. Income statement
c. Balance sheet
d. Company’s bank statements

14. A company declares cash dividends on the last day of the year. Payment will be made
during the following fiscal period. Cash flows
a. from operations will be less than if dividends were not declared.
b. from operations will be more than if dividends were not declared.
c. from investing activities will be less than if dividends were not declared.
d. from financing activities will be less than if dividends were not declared.
e. will be the same as if dividends had not been declared.
Ans: E KP 5,6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

15. What is reported on the statement of cash flows?

a. Operating, investing, and financing activities of an entity for a period of time
b. All revenues and expense listed by operating, financing, and operating activity
c. Operating, investing, and financing activities of an entity at the balance sheet date
d. A detail of all incoming and outgoing cash flows of a business

16. Which statement is true with respect to the preparation of the cash flows from operating
activities’ section?
a. It can be calculated by using the direct or indirect methods.
b. Cash flows are calculated as the difference between revenues and expenses.
c. It is always equal to accrual accounting income.
d. Cash payments for depreciation and dividends are reported in the operating
activates sections.

17. Which one of the following transactions is an investing activity?

a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of cash dividend
d. Issuance of bonds payable at a discount

18. How will a company classify the income tax payments on its statement of cash flows?
a. Operating activities
b. Taxing activities
c. Lending activities
d. Financing activities

19. A company uses straight-line instead of the units of production method of depreciation.
Assuming a tax rate of zero, which statement is true as a result of its choice of
depreciation methods?
a. Cash flows from operations will be less than under the straight-line method
b. Cash flows from operations will be more than under the straight-line method
c. Cash used for investing activities will be more than under the straight-line method
d. Cash used for investing activities will be less than under the straight-line method.
e. Cash flows are the same as if the straight-line method had been used.
Ans: E KP 5,6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

20. An acquisition of land by signing a 10-year mortgage payable is reported on the

statement of cash flows as
a. an operating activity.
b. an investing activity.
c. a financing activity.
d. a footnote.

21. Which one of the following is consistent with a company recording a large operating loss
but still having healthy cash flows from operations?
a. A large amount of depreciation and/or amortization expense
b. An increase in accounts receivable and inventory
c. A decrease in accounts payable
d. All sales are on a cash basis.

22. Which one of the following is consistent with a company recording a large operating
income but having a net cash outflow from operations?
a. A great amount of depreciation expense
b. An increase in accounts receivable and inventory
c. An increase in accounts payable
d. Acquisition of new plant assets for cash

23. Which one of the following is added to net income in determining cash flows from
operations?
a. Decrease in amounts paid to reduce long-term notes
b. Decrease in accounts payable
c. Depreciation or amortization
d. Cash received from selling treasury stock

operations?
a. Amortization of intangibles
b. Decrease in accounts payable
c. Increase in accounts receivable
d. A gain on the sale of plant assets

operations?
a. Cash dividends paid
b. Increase in accounts payable and decrease in accounts receivable
c. Decrease in accounts receivable and cash dividends declared
d. Increase in prepaid expenses

operations?
a. Increase in inventory
b. Decrease in wages payable
c. Loss from sale of land
d. Gain from selling treasury stock above its original cost

27. Which one of the following is subtracted from net income in determining cash flows from
operations?
a. Loss from sale of land
b. Depreciation expense
c. Stock dividends declared and distributed
d. Gain from sale of equipment

28. Which one of the following is subtracted from net income in determining cash flows from
operations?
a. Increase in prepaid insurance
b. Increase in accounts payable
c. Decrease in accounts receivable
d. Decrease in prepaid insurance

29. The primary purpose of the statement of cash flows is to provide information
a. about the revenue and expenses of an entity’s operations during a period.
b. that predicts future cash flows.
c. about the operating, investing, and financing activities of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its
needs for external financing.

30. An increase in inventory is reported in a statement of cash flows using the indirect
method as a(n)
a. addition to net income in arriving at net cash flows from operating activities.
b. deduction from net income in arriving at net cash flows from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.

31. Which one of the following would you expect to find as part of cash flows from investing
activities?
a. The issuance of common stock in exchange for a factory
b. Cash dividends paid
c. Cash inflows from the proceeds of a sale of a building
d. The write-off of accounts receivable

32. When preparing a statement of cash flows using the indirect method, an increase in
inventory will result in an adjustment to reported net income because
a. cost of goods sold on an accrual basis is less than on a cash basis.
b. inventory was paid for with cash, but is still on hand at the end of the period.
c. acquisition of inventory is an investment activity.
d. inventory purchased created smaller cash outflows than cash inflows received from
inventory sales.

33. In determining cash flow from operating activities, which of the following adjustments will
be made as a result of an increase in accounts receivable during a period?
a. An addition to net income when the direct method is used
b. An addition to net income when the indirect method is used
c. A deduction to net income when the direct method is used
d. A deduction to net income when the indirect method is used

34. In determining net cash flows from operating activities, a decrease in salaries payable
during a period
a. means that income on an accrual basis is equal to income on a cash basis.
b. must be added to net income under the indirect method.
c. creates a cash outflow to pay for salaries that were previously accrued.
d. creates a cash inflow from employees.

Use the information that follows concerning Calvin Corporation for the year ending
December 31, 2009, to answer questions 35 and 36.
Calvin Company provided the following information during 2009:

Purchase of land by issuing bonds $ 550,000
Proceeds from issuing long-term debt 300,000
Dividends paid to shareholders 120,000
Proceeds from issuing stock 300,000
Proceeds from sale of building 360,000
Purchases of inventories 800,000
Purchase of treasury stock 430,000
35. How much is ‘net cash provided (used) by investing activities’ during 2009?
a. $790,000
b. $360,000
c. $910,000
d. $(120,000)
Ans: B KP 2,6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

36. How much is ‘net cash provided by financing activities’ during 2009?
a. $(500,000)
b. $550,000
c. $50,000
d. $600,000
Solution: $300,000  $120,000 + $300,000  $430,000 = $50,000

Ans: C KP 2,6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic
37. Which of the following is subtracted from income in determining cash flows from
operations?
a. Decrease in accounts payable
b. Depreciation
c. Cash dividends declared and distributed
d. Amounts due from customers at yearend

38. Selected information from Hsu Inc. is provided below for the years ending December 31,
2009 and 2008.
2009 2008
Accumulated depreciation $32,000 $29,000
Equipment 60,000 55,000
During 2009, depreciation expense was recorded. New equipment was acquired for
cash. Old equipment which was 70% depreciated with an original cost of $26,000 was
sold for a gain of $4,000. For how much was the equipment sold?
a. $11,800
b. $5,000
c. $3,800
d. $31,000

Use the information that follows concerning Martinez Corporation for the year ending December
31, 2009, to answer questions 39 and 43.
Relevant account balances for Martinez Corporation are:
12/31/09 1/01/09
Accounts receivable $18,000 $14,000
Inventory 24,000 26,000
Prepaid insurance 1,500 2,100
Accounts payable 25,000 26,000
Income information:
Revenue $120,000
Cost of goods sold $60,000
Insurance expense 6,000
Operating expenses 18,000
Depreciation 10,000 94,000
Net income $ 26,000
39. How much cash was received from customers during 2009?
a. $120,000
b. $116,000
c. $138,000
d. $124,000

40. How much cash was paid to suppliers for inventory during 2009?
a. $2,000
b. $59,000
c. $63,000
d. $61,000

41. How much cash was paid for insurance during 2009?
a. $5,400
b. $6,000
c. $6,600
d. $600

42. How will depreciation appear on Martinez’s statement of cash flows under the direct
method?
a. Added in the operating activities section
b. Subtracted in the operating activities section
c. In the investing activities section since it relates to plant assets
d. It will not be reported since it is not a cash flow.

43. How much is Martinez’s cash flows from operations for 2009?
a. $28,400
b. $38,400
c. $23,600
d. $33,600

44. Selected information from Cooke Inc. is provided below for the years ending December
31, 2009 and 2008.
2009 2008
Equipment 60,000 55,000
During 2009, depreciation expense was recorded. New equipment was acquired for
sold for a gain of $4,000. What is the cost of the new equipment acquired?
a. $11,800
b. $5,000
c. $21,000
d. $31,000

45. The May 1 and May 31 balances in accounts receivable are $35,000 and $36,000,
respectively. During May, the company reported sales totaling $235,000 from its
customers. The company incurred $211,000 of expenses, although $12,000 was not
paid as of May 31. How much is cash flows from operations for May?
a. $24,000
b. $37,000
c. $11,000
d. $35,000

Use the information for Forman Incorporated for the year ending December 31, 2009 that
follows to answers questions 46 and 47.
The following are relevant account balances from Forman Incorporated’s comparative balance
sheet and 2009 income statement:
December 31, 2009 January 1, 2009
Accounts receivable $ 22,000 $19,000
Unearned revenue 3,000 4,000
Salaries payable 8,000 5,000
Sales revenue 154,000
Salaries expense 88,000
46. Determine the amount of cash that Forman Incorporated collected from customers
during 2009.
a. $150,000
b. $158,000
c. $151,000
d. $156,000

47. Determine the amount of cash that Forman Incorporated paid for salaries during 2009.
a. $91,000
b. $88,000
c. $85,000
d. $80,000

48. Johnson Company engaged in the following transactions during 2010:
1. Johnson wrote off an open receivable as uncollected.

2. Johnson purchased a piece of plant equipment
3. Johnson reacquired 5,000 shares of its common stock.
4. Johnson sold a building at a loss in exchange for a five-year note.
5. Johnson declared, but did not pay a cash dividend.
If Johnson uses the indirect method, which of these transactions or parts of these
transactions would be included in the operating activity section of the statement of cash
flows?
a. Transaction 4
b. Transaction 1
c. More than one of these transactions would be found in the operating activity section.
d. None of these transactions would be found in the operating activity section.
Ans: A KP 1,2,4,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic


Which of these transactions or parts of these transactions would be included in the

financing activity section of the statement of cash flows?
a. Transactions 2 and 4.
b. Transactions 2 through 5
c. Transaction 3
d. None of these choices are correct.
Ans: C KP 1,2,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic


If Johnson uses the indirect method, which of these transactions or parts of these
transactions would not appear on the statement of cash flows?
a. Transaction 1 and 5 only.

b. Transactions 4 and 5 only.
c. Transactions 1, 4, and 5.
d. None of these would appear on the statement of cash flows.
Ans: C KP 1,2,4,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

51. Denver Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Denver retired bonds payable by issuing common stock.

2. Denver collected on a long-term note receivable.
3. Denver issued a stock dividend.
4. Denver recorded depreciation on fixed assets.
5. Denver paid interest on long-term debt.

operating activity section of the statement of cash flows?
a. Transaction 2
b. Transaction 5
c. Transaction 4
d. None of these choices is correct.
Ans: B KP 1,2,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic


Which of these transactions or parts of these transactions would not appear on the
statement of cash flows?
a. Transactions 1 & 2
b. Transactions 2 & 3
c. Transactions 1, 2, 3, & 4
d. Transactions 1, 3, & 4
Ans: D KP 1,2,4,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic



a. Transaction 1
b. Transaction 3
c. Transactions 1 & 3
d. None of these transactions would be found in the financing activity section.

54. Samuels Company prepares its statement of cash flows using the direct method and
1. Samuels purchased inventory on account.

2. Samuels collected open accounts receivable.
3. Samuels exchanged a building for land and realized a gain.
4. Samuels issued 75,000 shares of preferred stock.
5. Samuels purchased a three-year fire insurance policy.

operating activity section of the statement of cash flows?
a. Transactions 1,2 & 5

b. Transactions 2 & 5 only
c. Transactions 2, 3, & 5
d. None of these choices is correct.
Ans: B KP 1,2,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic



a. Transaction 3 only.
b. Transaction 4 only.
c. Transactions 3 & 4
d. None of these transactions would be found in the financing activity section.
Ans: B KP 1,2,4,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic



investing activity section of the statement of cash flows?
c. Transactions 3 & 4.
d. None of these transactions would be found in the investing activity section.


Which of these transactions or parts of these transactions would not be included on the
statement of cash flows?
c. Transactions 1, 3, & 5.
d. Transactions 1 & 3.

58. The following information was taken from the records of Albert’s Fine Coffee:
2010 2009
Machinery $90,000 $40,000
Accumulated depreciation (30,000) (20,000)
Depreciation expense 14,000 12,000
Gain on sale of machinery 4,000 1,000
During 2010, machinery with a cost of $16,000 was sold.
Based on this information, how much machinery was purchased during 2010?
a. $50,000
b. $66,000
c. $40,000
d. $60,000
Solution:
2010 Ending machinery = 2010 Beginning machinery + Cost of machinery purchased

during 2010 – Cost of machinery sold during 2010
$90,000 = $40,000 + Machinery purchased – $16,000
Machinery purchased = $66,000
Ans: B KP 6 BT: AN Difficulty: Difficult TOT: 2 min. AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement
2010 2009
Machinery $90,000 $40,000
Based on this information, how much cash was collected on the sale of the machinery
during 2010?
a. $10,000
b. $20,000
c. $4,000
d. $16,000
Solution:
When the machinery was sold during 2010, Albert’s would prepare the appropriate entry
using the following format.
Cash (+A) ............................................. XX

Accumulated Depreciation (+A) ............ XX
Machinery (–A) ................................ XX
Gain on Sale of Machinery (Ga, +SE) XX
We can find the cash collected for the sale of the machinery by first calculating the other
three amounts.
Machinery
It is given in the exercise that the cost of the machinery sold was $16,000.
Gain on Sale of Machinery

It is given in the exercise that the gain on the sale was $4,000.
Accumulated Depreciation
2010 Ending accumulated depreciation = 2010 Beginning accumulated depreciation +
2010 Depreciation expense – Accumulated
depreciation on items sold
$30,000 = $20,000 + $14,000 – Accumulated
depreciation on items sold
Accumulated depreciation on items sold = $4,000
From the entry given above,

Cash = Cost of machinery sold + Gain on sale of machinery – Accumulated depreciation
on machinery sold
= $16,000 + $4,000 – $4,000
= $16,000
Ans: D KP 6 BT: AN Difficulty: Difficult TOT: 2 min. AACSB: Analytic

2010 2009
Machinery $90,000 $40,000
The journal entry to record the sale of the machinery would include:
a. a debit to Accumulated Depreciation of $4,000.

b. a debit to Cash of $2,000.
c. a debit to Machinery for $16,000.
d. a credit to Gain on Sale for $3,000.
Solution:
Cash (+A) ............................................................................ 16,000

Accumulated Depreciation (+A) ........................................... 4,000
Machinery (–A) .............................................................. 16,000
Gain on Sale of Machinery (Ga, +SE)............................ 4,000
Ans: A KP 6 BT: AN Difficulty: Difficult TOT: 2 min. AACSB: Analytic

61. The following year-end totals were taken from the records of Langston Company.
2010 2009
Prepaid insurance $8,000 $5,200
Wages payable 7,000 0
Insurance expense 4,000 5,700
Wage expense 9,500 4,000
What is the amount of cash outflow associated with insurance during 2010?
a. $4,000
b. $2,800
c. $1,700
d. $6,800
Solution:
Insurance
2010 Ending prepaid insurance = 2010 Beginning prepaid insurance + Insurance
purchases during 2010 – 2010 Insurance expense
$8,000 =$5,200 + Insurance purchases – $4,000; Insurance purchases = $6,800
Ans: D KP 6 BT: AN Difficulty: Difficult TOT: 2 min. AACSB: Analytic

62. The following year-end totals were taken from the records of Langston Company.
2010 2009
Prepaid insurance $8,000 $5,200
Wages payable 7,000 0
Insurance expense 4,000 5,700
Wage expense 9,500 4,000
What is the amount of cash outflow associated with wages during 2010?
a. $9,500
b. $2,500
c. $5,500
d. $7,000
Solution:
Wages
2010 Ending wages payable = 2010 Beginning wages payable + 2010 Wage expense
– Wages paid during 2010
$7,000 = $0 + $9,500 – Wages paid; Wages paid = $2,500
Ans: B KP 6 BT: AN Difficulty: Difficult TOT: 2 min. AACSB: Analytic

MATCHING QUESTIONS
1. For each transaction provided in items 1 through 12, select the proper section of the
statement of cash flows in which it should be reported from the reporting categories
provided below.
Reporting Categories
A. Cash provided/used by financing activities
B Cash provided/used by investing activities
C. Cash provided/used by operating activities
D. Disclosed in notes
1. Principal payment on long-term note payable
2. Customers paid cash for inventory items
3. Cash dividends paid to investors
4. Issuance of stock for more than its par value
5. Payment of employees' salaries
6. Issuance of common stock for cash
7. Payment of income taxes
8. Issuance of bonds at a premium
9. Sale of available-for-sale securities (long-term)
10. Purchase of equipment
11. Purchase of treasury stock
12. Sale of long-term investment
Solution:
1. A
2. C
3. A
4. A
5. C
6. A
7. C
8. A
9. B
10. B
11. A
12. B
KP 2 BT: K Difficulty: Easy TOT: 8 min. AACSB: Analytic

statement of cash flows in which it should be reported using the indirect method from the
reporting categories provided in a through h below. If the item is not required to be
reported on the statement of cash flows, place an ‘X’ in the space provided.
a. Cash flows from operating activities—will be added to net income
b. Cash flows from operating activities—will be subtracted from net income
c. Cash flows from investing activities—increase as a result of cash inflows
d. Cash flows from investing activities—decrease as a result of cash outflows
e. Cash flows from financing activities—increase as a result of cash inflows
f. Cash flows from financing activities—decrease as a result of cash outflows
g. Disclosed as a non-cash transaction in the notes
h. Appears in operating activities only under the direct method
1. Accepted deposit for advance product offering

2. Pays cash dividends
3. Accrued income taxes for the period; to be paid next year
4. Adjustment to increase the book value of trading securities to market
5. Accounts receivable were collected from customers
Solution:
1. a
2. f
3. x
4. x
5. a

reporting categories provided in a through h below. If the item is not required to be
reported on the statement of cash flows, place an ‘X’ in the space provided.
h. Appears in operating activities only under the direct method
1. Retired long-term debt before its maturity date

2. Cash paid for income taxes
3. Recognized loss on the sale of equipment
4. Declared cash dividends
5. Amortization of patent
Solution:
1. f
2. b
3. a
4. g or x
5. a

reporting categories provided in a through h below.
h. Cash flows are already included in net income - not necessary to
separately report on statement of cash flows
1. Loss on sale of old equipment

2. Declaration of stock (not cash) dividends
3. Recorded amortization on intangible assets
4. Sold trading investments at book value (no gain or loss)
5. Paid for salaries for the current period
6. Paid for salaries that were accrued during the previous period
7. Acquired machinery by issuing bonds payable
Solution:
1. a
2. g
3. a
4. c
5. h
6. b
7. g
KP 2,6 BT: K Difficulty: Easy TOT: 5 min. AACSB: Analytic

SHORT PROBLEMS
1. Accrued wages payable on December 31, 2008 and 2009 are $9,000 and $4,000,
respectively. During 2009, wages expense is $36,000. Calculate the amount of cash
paid for wages during 2009.
Solution:
$36,000 + $5,000 = $41,000

2. Graham, Inc. experienced the following changes in its cash balance during the current
calendar year:
Increases in Cash:
From customers $6,000
Sale of investments 3,000
Collection of interest 800
Issue of common stock 3,000
Decreases in Cash:
Payment to suppliers $3,000
Wages 1,000
Purchase of building 3,000
Payment of interest 400
Retirement of long-term debt 600
Payment of dividends 500
Payment of salespersons’ commissions 200
Prepare, in good form, a cash flow statement for the current year.
Solution:
Graham, Inc.
Cash Flow Statement for Current Year
Cash provided by operations:
Add: From customers $6,000
Interest collections 800 $6,800
Less: Payment to suppliers 3,000
Wages paid 1,000
Interest paid 400
Payment to salespersons 200 (4,600)
Cash inflow (outflow) from operations $2,200
Cash flows from investment activities:
Sale of investments $3,000
Purchase of building (3,000) 0
Cash flows from financing activities:
Issuance of stock $3,000
Retirement of debt (600)
Dividend payment (500) 1,900
Net increase (decrease) in cash flows $4,100

3. Beginning and ending balances for relevant balance sheet accounts are as follows:
12/31/09 1/01/09
Merchandise inventory $32,000 $21,000
During 2009, cost of goods sold was $102,000. Calculate the amount of cash paid to
suppliers of merchandise inventory.
Solution:
$102,000 + $11,000 – $7,000 = $106,000

4. The following is the cash ledger account for Jensen Corp., which summarizes events
that impacted the cash account during 2010.
CASH
Balance 1/02/10 15,000 Interest payments 4,000
Receivable collections 26,000 Fixed asset purchases 56,000
Cash sales 59,000 Wages 12,000
Sale of land 48,000 Dividend payments 7,000
Issue of common stock 31,000 Accounts payable payments 36,000
Interest collections 3,000
Using the information contained in the cash ledger, complete the following cash flow
statement.
Cash provided by operations: Amounts
Add:
Less:
Cash inflows (outflows) from operations

Net increase (decrease) cash
Solution:
Cash provided by operations:
Add: From customers $85,000
Interest collections 3,000 $88,000
Less: Interest payments $(4,000)
Wages paid (12,000)
Payment on accounts payable (36,000) (52,000)
Cash inflows (outflows) from operations $36,000
Sale of land $48,000
Fixed asset purchase (56,000) (8,000)
Issuance of stock $31,000
Dividend payment (7,000) 24,000
Net increase in cash $52,000

5. Richards Inc. presented its comparative financial data and other data as follows:
Dec. 31, 2010 Dec. 31, 2009
Cash $ 16,000 $ 9,000
Accounts receivable 22,000 16,000
Prepaid expenses 3,800 3,000
Investment in stock (no fair value) 8,000 21,000
Building and equipment 103,200 80,000
$ 93,000 $ 78,000
Accounts payable $ 9,000 $ 6,000
Notes payable (used for operations) 6,000 8,000
Accrued expenses 13,000 7,000
Mortgage payable 25,000 31,000
Common stock 9,000 5,000
Additional paid-in capital 21,000 16,000
Retained earnings 10,000 5,000
$ 93,000 $78,000
Additional information:
1. Equipment was purchased for $43,200 and was paid in cash. Other equipment
was sold at a $3,000 gain and was 50% depreciated at the time of sale.
2. During 2009, Richards Inc. declared and paid cash dividends.
3. Part of the investment in the stock portfolio was sold at book value. The stock is
closely-held so no fair value adjustments are made.
4. Net income was $49,000.
Prepare a statement of cash flows using the indirect method for 2010. You may omit the
heading.
Solution:
Cash flows from operating activities:
Net income $ 49,000
Depreciation expense 19,000
Gain on sale of equipment (3,000)
Increase in accounts receivable (6,000)
Increase in prepaid expenses (800)
Increase in accounts payable 3,000
Decrease in short-term operating loan (2,000)
Increase in accrued expenses 6,000
Cash provided by operations $ 65,200
Cash flows from investing activities:
Sale of investments $ 13,000
Purchase of building and equipment (43,200)
Sale of building and equipment 13,000
Cash used by investing activities (17,200)
Payments on mortgage $(6,000)
Sale of common stock 9,000
Payment of dividends (44,000)
Cash provided by financing activities (41,000)
Net increase in cash flows $ 7,000
KP 6 BT: K Difficulty: Difficult TOT: 12 min. AACSB: Analytic

6. The comparative balance sheets of Shad Inc. contain prepaid insurance of $48,000 on
January 1, 2009 and $37,000 on December 31, 2009. Shad’s 2009 income statement
contains insurance expense of $15,000. Calculate the amount of cash paid for insurance
premiums during 2009.
Solution:
$15,000 – $11,000 = $4,000

7. Beginning and ending balances for relevant balance sheet accounts are as follows:
12/31/10 1/01/10
Merchandise inventory $32,000 $18,000
During 2010, cost of goods sold was $148,000. Calculate the amount of cash paid to
suppliers of merchandise inventory.
Solution:
$148,000 + $14,000 + $7,000 = $169,000

8. List two distinct examples of investing activities and two distinct examples of financing
activities.
Solution:
Investing activities:
Purchase or sale of noncurrent assets
Purchase or sale of securities of other entities
Loans or collection of principal of loans to other entities
Financing activities:
Issuance or reacquiring stock
Issuance or redeeming debt
Cash dividends paid to shareholders

9. The accounts receivable balances on January 1 and December 31 are $22,000 and
$18,000, respectively. The income statement for the year included sales revenue of
$120,000. Determine the amount of cash collected from customers during the year.
Solution:
$4,000 + $120,000 = $124,000

10. Selected information from Thompson Corporation is provided below for the years ending
December 31, 2009 and 2008.
2009 2008
Equipment 55,000 49,000
During 2009 depreciation expense was recorded. New equipment was acquired for
sold for a loss of $4,000. Prepare the investing activities section of the statement of cash
flows.
Solution:
Purchase of plant assets $(32,000)
Sale of plant assets 6,400
Cash used by investing activities $(25,600)

11. Beginning and ending balances for selected accounts are as follows:
12/31/09 1/01/09
Revenue received in advance 6,000 3,000
During 2009, sales revenue is $110,000. Calculate the cash collected from customers.
Solution:
$110,000 + $3,000 + $5,000 = $118,000

12. The August 1 and August 31 balances in accounts receivable are $21,000 and $18,000,
respectively. During August, the company collected $56,000 from its customers and
incurred $37,000 of expenses, all paid in cash. Calculate the amount of cash flows from
operations for August.
Solution:
$56,000 – $37,000 = $19,000

13. During the current year, Martini Foods reported sales of $250,000, and wrote off $7,000
of accounts receivable as uncollectible under the direct write-off method. On January 1
and December 31 of the current year, Richard Young had accounts receivable of
$26,000 and $14,000, respectively. Determine the amount of cash collected from
customers during the current year.
Solution:
$250,000 – $7,000 + $12,000 = $255,000

14. List two distinct examples of significant noncash transactions and two distinct examples
of transactions not reported directly on a statement of cash flows
Solution:
Significant noncash transactions:
Acquiring assets by issuing stock or liabilities
Acquiring capital leases with plant asset
Conversion of bonds or preferred stock into common stock
Declaring dividends
Not reported directly on a statement of cash flows:

Stock dividends distributed
Appropriations of retained earnings
Fair value adjustments for available-for-sale investments

15. During 2009, equipment was sold for $57,000. This equipment cost $90,000 and had a
book value of $47,000. Accumulated depreciation for equipment was $184,000 at
12/31/05 and $147,000 at 12/31/04. Show how the results of the three items will appear
on the statement of cash flows using the indirect method from this information.
Solution:
Net income $ XX
Gain on sale of equipment ($57,000 – $47,000) (10,000)
Depreciation expense ($147,000 – $43,000 – $184,000) 80,000
Cash from investing activities:
Sale of equipment $57,000

16. Wilson Corporation reported cost of goods sold of $100,000. On January 1, Wilson
Corporation had inventory and accounts payable of $21,000 and $33,000, respectively.
On December 31, inventory and accounts payable were $28,000 and $20,000,
respectively. Calculate cash payments to suppliers of inventory.
Solution:
$7,000 + $13,000 + $100,000 = $120,000

17. Parton Inc.. reported accounting service revenue of $450,000 for 2009. On January 1,
2009, Parton Inc. had $38,000 of accounts receivable and $0 of cash deposits received
from customers. On December 31, 2009, accounts receivable and deposits received
were $49,000 and $6,000, respectively. Calculate the amount of cash collected from
clients during 2009.
Solution:
$450,000 – $11,000 + $6,000 = $445,000

18. Lawson Co. sold equipment that cost $40,000 and a current book value of $18,000, for
$20,000 cash. Lawson purchased additional equipment during the year. Data from the
company’s balance sheets at December 31, 2009 and 2008 are:
12/31/09 12/31/08
Equipment $650,000 $520,000
Accumulated depreciation 106,000 82,000
Show how the results of the transactions will appear on the statement of cash flows
using the indirect method.
Solution:
Net income $ XX
Gain on sale of equipment ($20,000 – $18,000) (2,000)
Depreciation expense ($82,000 – $22,000 – $106,000) 46,000
Sale of machine $ 20,000
Purchase of machine ($520,000 – $40,000 – $650,000) (170,000)

19. Relevant account balances for Jeremy Supply Co. are:

Accounts 12/31/09 1/01/09
Accounts receivable $16,000 $ 9,000
Inventory 6,000 3,000
Income information:
Revenue $ 48,000
Cost of goods sold $27,000
Operating expenses 18,000
Depreciation 5,000 50,000
Net loss $ (2,000)
Determine the amount of cash provided (used) by operations for 2009.

Solution:
Net loss ($2,000)
Depreciation 5,000
Increase in accounts receivable (7,000)
Increase in inventory (3,000)
Decrease in accounts payable (9,000)
Cash used by operations ($16,000)

20. Benton Company reported insurance expense of $301,000 during the current year. On
January 1 and December 31 of the current year, prepaid insurance was $28,000 and
$41,000, respectively. Calculate cash paid for insurance premiums for the current year.
Solution:
$301,000 + $13,000 = $314,000

Use the information for Winthrop Company for the year ending December 31, 2009 that
follows to answers questions 21 through 23.
The following are relevant account balances from Winthrop Company’s comparative
balance sheet and 2009 income statement.
Prepaid insurance 5,000 3,000
Unearned revenue 8,000 11,000
Salaries payable 9,000 6,000
Winthrop’s 2009 income statement includes the following:

Sales revenue $89,000
Insurance expense 4,000
Salaries expense 31,000
21. Determine the amount of cash collected from customers during 2009.
Solution:
$89,000 – $3,000 + $4,000 = $90,000

22. Determine the amount of cash paid for insurance during 2009.
Solution:
$4,000 + $2,000 = $6,000

23. Determine the amount of cash paid for salaries during 2009.
Solution:
$31,000 – $3,000 = $28,000

24. During 2009, Bacon Co. reported a net operating loss of $19,000. The only asset or
liability changes during 2009 were a decrease in accounts receivable of $11,000 and an
increase in accumulated depreciation of $42,000. Calculate cash flows from operations
during 2009 (indicate outflow or inflow).
Solution:
($19,000) + $11,000 + $42,000 = $34,000 cash inflow

Use the information for Hampton Inc. for the year ending December 31, 2009 that follows
to answer questions 25 through 28.
The following are relevant account balances from Hampton’s comparative balance sheet and
2009 income statement. Hampton’s balance sheets:
Cash $ 6,000 $ 9,000
Accounts receivable 8,000 12,000
Merchandise inventory 29,000 18,000
Prepaid rent 6,000 4,000
Equipment 100,000 80,000
Total assets $121,000 $110,000
Accounts payable $ 9,000 $ 25,000

Dividends payable 6,000 4,000
Common stock 38,000 32,000
Retained earnings 68,000 49,000
Total liabilities and shareholders’ equity $121,000 $110,000
Other information:
No equipment was sold or retired during 2009. Hampton’s net income for 2009 was
$33,000.
25. Calculate depreciation expense for 2009.
Solution:
$28,000 – $13,000 = $15,000
KP 3,6 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic

26. Calculate the amount of dividends paid during 2009.
Solution:
$49,000 + $33,000 – $68,000 = $14,000 declared; $4,000 + $14,000 – $6,000 = $12,000
paid

27. Determine the cost of the equipment purchased during 2009.
Solution:
$100,000 – $80,000 = $20,000

28. Calculate the cash proceeds from the issuance of common stock during 2009.
Solution:
$38,000 – $32,000 = $6,000
29. Selected information from the 2008 and 2009 accounting records of Roman Corp. is
provided below:
12/31/09 12/31/08
Net cash provided by operations $38,000 $7,000
Net cash provided (used) by investing activities (19,000) 16,000
Net cash provided (used) by financing activities 43,000 (9,000)
Cash balance ? 23,000
Calculate the December 31, 2009 ending cash balance.
Solution:
$38,000 – $19,000 + $43,000 + $23,000 = $85,000

SHORT ESSAY QUESTIONS

1. How is the statement of cash flows linked to the balance sheet?
Solution:
The net increase or decrease on the statement of cash flows is linked to the change in
the cash balance from one year to the next on the company’s comparative balance
sheets. The statement of cash flows adds the beginning cash balance to the change in
cash during the period (detailed by activity on the statement of cash flows) to determine
the ending cash balance. The beginning and ending cash balances appear on the
balance sheet as the current year and previous year’s cash balances. Under the indirect
method, net income (loss) from the income statement is the starting point for the
determination of net cash inflows (outflows) for operating activities on the statement of
cash flows. The amount of net income also appears on the statement of retained
earnings, which appears as the ending retained earnings balance on the balance sheet.
The investing section of the statement of cash flows is closely related to the balance
sheet in that it analyses changes in non-current assets. The financing section of the
statement of cash flows is closely related to the liabilities and equity sections of the
balance sheet because it analyses changes in non-current liabilities and equity

accounts.
KP 3 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic, Communication

2. How do 'cash equivalents' fit into the statement of cash flows?
Solution:
Cash equivalents include typical cash items such as coins, currency, available funds on
deposit in the bank, money orders, certified checks, cashier's checks, personal checks,
bank drafts, and certain short-term financial instruments including commercial paper and
other debt investments with maturities of less than three months. These items can be
converted to cash immediately and for all intents and purposes, they are virtually the
same as cash. A statement of cash flows explains not only the change in cash but also
the changes in cash equivalents. This means that instead of ‘net cash provided or used
by operating activities,’ the statement of cash flows explains the change in ‘net cash and
cash equivalents’ for the period.

3. How does the direct method of preparing the statement of cash flows differ from the
indirect method?
Solution:
The direct method is so called because the computation of cash provided (used) by
operating activities consists of cash inflows and outflows that can be directly traced to
the cash T-account. The indirect method begins with net income and shows adjustments
for non-cash items. These adjustments consist of additions and subtractions from net
income to negate the effects of non-cash items. In essence, the accrual basis income
statement is converted to a cash basis statement.

4. In the operating activities section of a statement of cash flows prepared using the
indirect method certain items are added to net income. Why is depreciation added?
Solution:
Depreciation is added to net income because it is a non-cash item that was subtracted
as an expense in order to determine net income on the income statement. Since the
cash account is not impacted in the journal entry to record depreciation, there is no
effect on cash. Adding back depreciation expense negates the expense that was
subtracted on the income statement in order to convert net income to the cash basis.

5. In the operating activities section of a statement of cash flows prepared using the
indirect method certain items are added to, or subtracted from, net income. Why are
changes in current accounts added or subtracted?
Solution:
The operating activities section of the statement of cash flows somewhat resembles an
income statement prepared on the cash basis. The traditional income statement reflects
the accrual basis, which includes accruals and deferrals as necessary to reflect accrual
income for the period. Most accrual and deferral effects appear as current assets and
liabilities. These items appear as additions and subtractions in the operating activities
section of the cash flow statement to reflect the removal of accrual and deferral aspects
included in net of income for the period.
KP 3,6 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic, Communication

6. The international financial reporting standards are requiring a statement of cash flows.
Why is this and what are some of the unique issues that multinational companies must
understand when interpreting these statements?
Solution:
The importance of debt capital to many foreign companies places a premium on cash
flow information, used by banks and other lenders to assess solvency. Interpreting a
statement of cash flows for a multinational company can be difficult due to so many
currencies used and received. The changes in the value of these currencies give rise to
gains or losses reported on the income statement. However, foreign currency exchange
gains and losses involve no cash flow. Consequently, when the statement of cash flows
is prepared under the indirect method, an adjustment must be made to net income.
Partly because these adjustments are becoming more significant, accounting
pronouncements now require that they be disclosed separately at the bottom of the
statement, immediately before “net increase or decrease in cash and cash equivalents.”
KP 5 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic, Communication, Diversity

7. Why is cash generated from operating activities more important than cash generated
from other sources?
Solution:
Cash generated from operating activities is a normality in business and is expected to
recur. Funding a business through shareholders may not always be an option because
shareholders may be unwilling to purchase stock in certain economic situations. Debt
financing becomes very expensive, and is subject to economic pressures as well as the
ability of the company to maintain a good credit rating. Not only is cash generated from
operating activities less expensive, it is expected to provide the means on a long-term
basis of maintaining and improving solvency.

8. Presented below is a partial statement of cash flows for Santiago Company for the year
ending June 30,2009.
Net income $44,000
Adjustments to net income:
Add: Depreciation 7,000
Decrease in accounts receivable 12,000
Increase in salaries payable 5,000
Less: Gain on sale of equipment (1,000)
Increase in inventories (2,000)
Decrease in accounts payable (5,000)
Net cash inflows from operating activities $60,000
Mr. Santiago, the president of the Company, is puzzled by why a difference exists on the
statement presented above, as compared to the company’s income statement for the
same period that shows net income of $44,000. Provide justification why the two
amounts might not be equal.
Solution:
The operating activities section of the statement of cash flows reflects only the cash
basis of revenues—the cash inflows, and the cash basis of expenses—the cash
outflows. The income statement reflects the accrual basis of accounting which
recognizes revenues when they are earned instead of when received and expenses
when incurred, instead of when paid. The indirect method used on the statement of cash
flows begins with net income and removes all non-cash items in order to convert to cash
basis income. The Company experienced non-cash items during the year. Non-cash
items reduce net income, but have no impact on cash flows. This result is the
appearance that something may be wrong with the amounts reported.

9. Explain financial flexibility and what information it provides.
Solution:
The ability to generate cash is determined by the strength of the company’s operating
activities, as well as its financial flexibility. Financial flexibility reflects a company's
capacity to borrow, issue equity, and sell nonoperating assets. This requires effective
cash management of two competing objectives. On one hand, cash must be available to
meet debt obligations as they come due, i.e., solvency must be maintained. On the other
hand, cash must be invested in productive assets to provide returns. A company with
financial flexibility provides a high return without creating a risk of insolvency.

10. How are changes in foreign currency valuations reported on a statement of cash flows?
Solution:
If a U.S. corporation sells goods or services to a customer in foreign country, a gain or
loss on that transaction can result. These foreign currency exchange gains and losses
are included in the computation of net income for the period. Since neither a gain nor a
loss affect actual cash flows, the effects of the gains and losses must be removed in
order to convert net income to the cash basis in determining cash flows from operating
activities. U.S. GAAP currently requires disclosure to appear separately at the bottom of
the statement of cash flows, immediately before the net increase (decrease) in cash and
cash equivalents.
KP 5 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic, Communication, Diversity

11. Explain the ways in which management can ‘window dress’ the statement of cash flows.
Solution:
In the short run, it is relatively easy for management to present a favorable cash
position. Delayed payments on short-term payables can significantly boost the amount of
cash provided (used) by operating activities. Selling investments can increase cash
inflows from investing activities, while dealing with debt payments and dividends can
temporarily inflate cash from financing activities. Cash flows of a particular accounting
period should not carry too much weight in assessing the company's cash position.
Current period management decisions will likely impact future reporting periods
negatively.


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CH 14

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Chapter 14

The Statement of Cash Flows

MULTIPLE CHOICE QUESTIONS

Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

5. If an investor is interested in the solvency of a company, he/she should analyze the

Ans: C KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

13. An investor is interested in assessing the effectiveness of a company’s cash

Ans: A KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: E KP 5,6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

15. What is reported on the statement of cash flows?

Ans: A KP 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

17. Which one of the following transactions is an investing activity?

Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: E KP 5,6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

20. An acquisition of land by signing a 10-year mortgage payable is reported on the

Ans: D KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Calvin Company provided the following information during 2009:

Ans: B KP 2,6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Solution: $300,000  $120,000 + $300,000  $430,000 = $50,000

Ans: A KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: B KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: B KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: D KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: A KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

Ans: C KP 6 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic

48. Johnson Company engaged in the following transactions during 2010:

1. Johnson wrote off an open receivable as uncollected.

Ans: A KP 1,2,4,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

49. Johnson Company engaged in the following transactions during 2010:

1. Johnson wrote off an open receivable as uncollected.

Which of these transactions or parts of these transactions would be included in the

Ans: C KP 1,2,6 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic