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G. International Financial Reporting Standards (IFRS)

G. International Financial Reporting Standards (IFRS)

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Module 17: Statement of Cash Flows



700























2. As in US GAAP, the statement of cash flows is divided into three parts: operating, investing, and financing

activities. At the bottom of the statement of cash flows, a reconciliation must be made with the amounts in the

statement of cash flows and the cash and cash equivalents reported in the statement of financial position.

3. The most significant difference between IFRS and US GAAP is where certain items are presented on the

statement of cash flows.

a. For example, interest and dividends received may be reported on the statement of cash flows as operating or

investing activities.

b. Interest and dividends paid may be reported either in the operating activities or the financing activities

sections.

(1) Although the entity has discretion on where interest and dividends are reported, it must be reported on a

consistent basis.

c. Cash from the purchase and sale of trading securities are classified as operating activities.

d. Cash advances and loans (bank overdrafts) are also usually classified as operating activities.

e. Taxes paid on income must be disclosed separately in operating activities.

(1) However, cash flows from certain taxes may be classified elsewhere if they are related to investing or

financing activities.

f. In addition, the effects of noncash transactions are not reported on the statement of cash flows. Instead,

significant noncash activities must be disclosed in the notes to the financial statements.

NOW REVIEW MULTIPLE-CHOICE QUESTIONS 38 THROUGH 39



KEY TERMS

Cash equivalents. Short-term, highly liquid investments that (1) are readily convertible to known amounts of cash and

(2) are so near their maturity (original of three months or less from date of purchase by the enterprise) that they present

negligible risk of changes in value because of changes in interest rates.

Direct approach. Cash flow elements of operating activities are derived from the accrual basis components of net

income.

Indirect method. Starts with income from continuing operations and adjusts for changes in operating related accounts

(e.g., inventory and accounts payable) and noncash expenses, revenues, losses, and gains.

Statement of Cash Flow. Provides information about an entity’s cash receipts and cash payments and discloses information about the financing and investing activities of an entity.



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Module 17: Statement of Cash Flows



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Multiple-Choice Questions(1–39)

A.  Objectives of the Statement of Cash Flows

1. At December 31, year 1, Kale Co. had the following

balances in the accounts it maintains at First State Bank:

Checking account #101

Checking account #201

Money market account

90-day certificate of deposit, due 2/28/Y2

180-day certificate of deposit, due 3/15/Y2



$175,000

(10,000)

25,000

50,000

80,000













a.$37,250

b.$38,050

c.$39,800

d.$41,000



Kale classifies investments with original maturities of three

months or less as cash equivalents. In its December 31, year 1

balance sheet, what amount should Kale report as cash and

cash equivalents?



5. In year 1, a tornado completely destroyed a building

belonging to Holland Corp. The building cost $100,000 and

had accumulated depreciation of $48,000 at the time of the

loss. Holland received a cash settlement from the insurance

company and reported an extraordinary loss of $21,000. In

Holland’s year 1 cash flow statement, the net change reported

in the cash flows from investing activities section should be a























a.$190,000

b.$200,000

c.$240,000

d.$320,000



2. The primary purpose of a statement of cash flows is to

provide relevant information about











a. Differences between net income and associated cash

receipts and disbursements.

b. An enterprise’s ability to generate future positive net

cash flows.

c. The cash receipts and cash disbursements of an

enterprise during a period.

d. An enterprise’s ability to meet cash operating

needs.



3. Mend Co. purchased a three-month US 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?











a.

b.

c.

d.



As an outflow from operating activities.

As an outflow from investing activities.

As an outflow from financing activities.

Not reported.



B.  Statement of Cash Flows Classification

4.



Alp, Inc. had the following activities during year 1:







• 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.











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I n Alp’s year 1 statement of cash flows, net cash used in

investing activities should be



a.

b.

c.

d.



$10,000 increase.

$21,000 decrease.

$31,000 increase.

$52,000 decrease.



6. 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.



7 . On September 1, year 1, Canary Co. sold used equipment for

a cash amount equaling its carrying amount for both book and tax

purposes. On September 15, year 1, 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 year 1 statement of cash flows?











a. Cash outflow equal to the cash paid less the cash

received.

b. Cash outflow equal to the cash paid and note payable

less the cash received.

c. Cash inflow equal to the cash received and a cash

outflow equal to the cash paid and note payable.

d. Cash inflow equal to the cash received and a cash

outflow equal to the cash paid.



Items 8 and 9 are based on the following:

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.

8. In a statement of cash flows, what amount is included in

investing activities for the above transaction?











a. Cash payment.

b. Acquisition price.

c.Zero.

d. Mortgage amount.



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Module 17: Statement of Cash Flows



702



9. In a statement of cash flows, what amount is included in

financing activities for the above transaction?















a. Cash payment.

b. Acquisition price.

c.Zero.

d. Mortgage amount.



a.$3,000

b.$17,000

c.$20,000

d.$23,000



(180,000)

2,000

(45,000)

(38,000)

75,000



In its December 31, year 1 statement of cash flows,

11. What amount should Reve report as net cash used in

investing activities?











a.$170,000

b.$176,000

c.$188,000

d.$194,000



12. What amount should Reve report as net cash provided by

financing activities?











a.$20,000

b.$27,000

c.$30,000

d.$37,000



13. On July 1, year 1, Dewey Co. signed a twenty-year

building lease that it reported as a capital 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 year 1 statement of cash flows?







c14.indd 702



a. An inflow equal to the present value of future lease

payments at July 1, year 1, less year 1 principal and

interest payments.

b. An outflow equal to the year 1 principal and interest

payments on the lease.



Conversion of

preferred stock

No

Yes

Yes

No



15.Which of the following information should be disclosed

as supplemental information in the statement of cash

flows?



a.

b.

c.

d.



In preparing its cash flow statement for the year ended

December 31, year 1, Reve Co. collected the following data:

$ (6,000)

10,000



Conversion of long-term

debt to common stock

No

No

Yes

Yes



a.

b.

c.

d.



Items 11 and 12 are based on the following:



Gain on sale of equipment

Proceeds from sale of equipment

Purchase of A.S., Inc. bonds (par value

$200,000)

Amortization of bond discount

Dividends declared

Dividends paid

Proceeds from sale of treasury stock

(carrying amount $65,000)



c. An outflow equal to the year 1 principal payments

only.

d. The lease payments should not be reported in the

financing activities section.



14. Which of the following should be reported when

preparing a statement of cash flows?



10. Fara Co. reported bonds payable of $47,000 at December

31, year 1, and $50,000 at December 31, year 2. During year 2,

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 year 2 statement of cash flows for redemption of bonds

payable?















Cash flow

per share

Yes

Yes

No

No



Conversion of

debt to equity

Yes

No

Yes

No



C.  Direct or Indirect Presentation in

Reporting Operating Activities

16. 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?











a. The major classes of gross cash receipts and gross

cash payments.

b. The amount of income taxes paid.

c. A reconciliation of net income to net cash flow from

operations.

d. A reconciliation of ending retained earnings to net

cash flow from operations.



Items 17 through 21 are based on the following:

Flax Corp. uses the direct method to prepare its statement

of cash flows. Flax’s trial balances at December 31, year 2 and

year 1 are as follows:

December 31

Year 2

Year 1

Debits

Cash

Accounts receivable

Inventory

Property, plant, & equipment

Unamortized bond discount

Cost of goods sold

Selling expenses

General and administrative

expenses

Interest expense

Income tax expense



$ 35,000

33,000

31,000

100,000

4,500

250,000

141,500



$ 32,000

30,000

47,000

95,000

5,000

380,000

172,000



137,000

4,300

20,400

$756,700



151,300

2,600

61,200

$976,100



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Module 17: Statement of Cash Flows

December 31

Year 2

Year 1

Credits

Allowance for uncollectible

accounts

Accumulated depreciation

Trade accounts payable

Income taxes payable

Deferred income taxes

8% callable bonds payable

Common stock

Additional paid-in capital

Retained earnings

Sales









$ 1,300

16,500

25,000

21,000

5,300

45,000

50,000

9,100

44,700

538,800

$756,700



$ 1,100

15,000

17,500

27,100

4,600

20,000

40,000

7,500

64,600

778,700

$976,100



• Flax purchased $5,000 in equipment during year 2.

• Flax allocated one third of its depreciation expense

to selling expenses and the remainder to general and

administrative expenses. There were no write-offs of

accounts receivable during year 2.



















18. Cash paid for goods to be sold?











a.$258,500

b.$257,500

c.$242,500

d.$226,500



a. Salary expense plus wages payable at the beginning of

the year.

b. Salary expense plus the increase in wages payable

from the beginning to the end of the year.

c. Salary expense less the increase in wages payable

from the beginning to the end of the year.

d. The same as salary expense.



24. Metro, Inc. reported net income of $150,000 for year 1.

Changes occurred in several balance sheet accounts during

year 1 as follows:

Investment in Videogold, Inc. stock,

carried on the equity basis

Accumulated depreciation, caused by

major repair to projection equipment

Premium on bonds payable

Deferred income tax liability (longterm)



17. Cash collected from customers?

a.$541,800

b.$541,600

c.$536,000

d.$535,800



c. Gain on early retirement of bonds.

d. Change from straight-line to accelerated

depreciation.



23. A company’s wages payable increased from the

beginning to the end of the year. In the company’s statement

of cash flows in which the operating activities section is

prepared under the direct method, the cash paid for wages

would be



What amounts should Flax report in its statement of cash flows

for the year ended December 31, year 2, for the following:































a.$25,800

b.$20,400

c.$19,700

d.$15,000



21. Cash paid for selling expenses?











a.$142,000

b.$141,500

c.$141,000

d.$140,000



22. 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.)







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2,100 decrease

1,400 decrease

1,800 increase



a.$150,400

b.$148,300

c.$144,900

d.$142,800



25. Lino Co.’s worksheet for the preparation of its year 1

statement of cash flows included the following:

Accounts receivable

Allowance for uncollectible accounts

Prepaid rent expense

Accounts payable



a.$4,800

b.$4,300

c.$3,800

d.$1,700



20. Cash paid for income taxes?



$5,500 increase



In Metro’s year 1 cash flow statement, the reported net cash

provided by operating activities should be



19. Cash paid for interest?











703



December 31

$29,000

1,000

8,200

22,400



January 1

$23,000

800

12,400

19,400



Lino’s year 1 net income is $150,000. What amount 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



26. In a statement of cash flows (using indirect approach

for operating activities) an increase in inventories should be

presented as a(n)











a.

b.

c.

d.



Outflow of cash.

Inflow and outflow of cash.

Addition to net income.

Deduction from net income.



a. Dividends received from investments.

b. Gain on sale of equipment.



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Module 17: Statement of Cash Flows



704



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?











a. In investment activities as a reduction of the cash

inflow from the sale.

b. In investment activities as a cash outflow.

c. In operating activities as a deduction from income.

d. In operating activities as an addition to income.



28. Would the following be added back to net income when

reporting operating activities’ cash flows by the indirect

method?



a.

b.

c.

d.



Excess of treasury stock

acquisition cost over sales

proceeds (cost method)

Yes

No

No

Yes



Bond discount

amortization

Yes

No

Yes

No



29. Which of the following should not be disclosed in an

enterprise’s statement of cash flows prepared using the indirect

method?











a.

b.

c.

d.



Interest paid, net of amounts capitalized.

Income taxes paid.

Cash flow per share.

Dividends paid on preferred stock.



D.  Example of Statement of Cash Flows













• 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 year 2 statement of cash flows,

30. Net cash provided by operating activities was











a.$1,160,000

b.$1,040,000

c.$920,000

d.$705,000



31. Net cash used in investing activities was











a.$1,005,000

b.$1,190,000

c.$1,275,000

d.$1,600,000



32. Net cash provided by financing activities was











a.$20,000

b.$45,000

c.$150,000

d.$205,000



I tems 33 through 36 relate to data to be reported in the

statement of cash flows of Debbie Dress Shops, Inc. based on

the following information:

Debbie Dress Shops, Inc.

BALANCE SHEETS



Items 30 through 32 are based on the following:

The differences in Beal Inc.’s balance sheet accounts at

December 31, year 2 and year 1, are presented below.

Increase

(Decrease)

Assets

Cash and cash equivalents

Available-for-sale securities

Accounts receivable, net

Inventory

Long-term investments

Plant assets

Accumulated depreciation

Liabilities and Stockholders’ Equity

Accounts payable and accrued liabilities

Dividends payable

Short-term bank debt

Long-term debt

Common stock, $10 par

Additional paid-in capital

Retained earnings



$ 120,000

300,000



80,000

(100,000)

700,000



$1,100,000

$ (5,000)

160,000

325,000

110,000

100,000

120,000

290,000

$1,100,000



The following additional information relates to year 2:







c14.indd 704



• Net income was $790,000.

• Cash dividends of $500,000 were declared.



December 31

Year 2

Year 1

Assets

Current assets:

Cash

Accounts receivable—net

Merchandise inventory

Prepaid expenses

Total current assets

Long-term investments

Land, buildings, and fixtures

Less accumulated depreciation

Total assets

Equities

Current liabilities:

Accounts payable

Accrued expenses

Dividends payable

Total current liabilities

Note payable—due year 4

Stockholders’ equity:

Common stock

Retained earnings

Total liabilities and stockholders’

equity



$ 300,000

840,000

660,000

100,000

1,900,000

80,000

1,130,000

110,000

1,020,000

$3,000,000



$ 200,000

580,000

420,000

50,000

1,250,000



600,000

50,000

550,000

$1,800,000



$ 530,000

140,000

70,000

740,000

500,000



$ 440,000

130,000



570,000





1,200,000

560,000

1,760,000



900,000

330,000

1,230,000



$3,000,000



$1,800,000



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Module 17: Statement of Cash Flows

36. Net cash used in investing activities during year 2 was



Debbie Dress Shops, Inc.

INCOME STATEMENTS



Net credit sales

Cost of goods sold

Gross profit

Expenses (including

income taxes)

Net income



Year ended December 31

Year 2

Year 1

$6,400,000 $4,000,000

5,000,000 3,200,000

1,400,000

800,000

1,000,000

$ 400,000



520,000

$ 280,000













a.$80,000

b.$530,000

c.$610,000

d.$660,000



37. Bee Co. uses the direct write-off method to account

for uncollectible accounts receivable. During an accounting

period, Bee’s cash collections from customers equal sales

adjusted for the addition or deduction of the following

amounts:



Additional information available included the following:









• All accounts receivable and accounts payable are

related to trade merchandise. Accounts payable are

recorded net and always are paid to take all of the

discount allowed. The allowance for doubtful accounts

at the end of year 2 was the same as at the end of year

1; no receivables were charged against the allowance

during year 2.

• The proceeds from the note payable were used to

finance a new store building. Capital stock was sold to

provide additional working capital.



a.

b.

c.

d.



Accounts

written off

Deduction

Addition

Deduction

Addition



Increase in accounts

receivable balance

Deduction

Deduction

Addition

Addition



G.  International Financial Reporting

Standards (IFRS)



33. Cash collected during year 2 from accounts receivable

amounted to



38. Rice Corporation prepares its financial statements in

accordance with IFRS. Rice must report amounts paid for

interest on a note payable on the statement of cash flows























a.$5,560,000

b.$5,840,000

c.$6,140,000

d.$6,400,000



34. Cash payments during year 2 on accounts payable to

suppliers amounted to











a.$4,670,000

b.$4,910,000

c.$5,000,000

d.$5,150,000



35. Net cash provided by financing activities for year

2 totaled











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705



a.$140,000

b.$300,000

c.$500,000

d.$700,000



a.

b.

c.

d.



In operating activities.

In financing activities.

Either in operating activities or financing activities.

Either in investing activities or financing activities.



39. Filigree Corporation prepares its financial statements in

accordance with IFRS. Filigree acquired equipment by issuing

5,000 shares of its common stock. How should this transaction

be reported on the statement of cash flows?











a. As an outflow of cash from investing activities and an

inflow of cash from financing activities.

b. As an inflow of cash from financing activities and an

outflow of cash from operating activities.

c. At the bottom of the statement of cash flows as a

significant noncash transaction.

d. In the notes to the financial statements as a significant

noncash transaction.



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Multiple-Choice Answers and Explanations

Answers

1.c

2.c

3.d

4.d

5.c

6.a

7.d

8.a

9.c



__

__

__

__

__

__

__

__

__



__

__

__

__

__

__

__

__

__



10.b

11.a

12.d

13.c

14.c

15.c

16.d

17.d

18.d



__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __



19.c

20.a

21.c

22.a

23.c

24.c

25.a

26.d

27.c



Explanations

1.(c) The 12/31/Y1 cash and cash equivalents balance is

$240,000, as computed below.

Checking account #101

Checking account #201

Money market account

90-day CD

Total cash and cash equivalents



$175,000

(10,000)

25,000

50,000

$240,000



Bank overdrafts (like account #201) are normally reported as

a current liability. However, when available cash is present in

another account in the same bank, as in this case, offsetting

is required. The money market account of $25,000 and the 90day CD of $50,000 are considered cash equivalents because

they had original maturities of three months or less. The 180day CD of $80,000 is excluded because its original maturity

was more than three months.

2.(c)The primary purpose of a statement of cash flows

is to provide relevant information about the enterprise’s cash

receipts and cash payments during a period. Answers (a), (b),

and (d) are incorrect because, although they represent uses of

the statement of cash flows, they are not the primary use.

3.(d) The statement of cash flows is required to be

prepared based on inflows and outflows of cash and cash

equivalents during the period. The purchase of a cash

equivalent using cash is not an outflow of cash and cash

equivalents; it is merely a change in the composition of

cash and cash equivalents. Cash has decreased and cash

equivalents have increased, but total cash and cash equivalents

is unchanged. Therefore this purchase is not reported in the

statement of cash flows.

4.(d) Investing activities include all cash flows involving

assets, other than operating items. The investing activities are

Purchase of inv. in stock

Sale of inv. in stock

Acquisition of CD

Net cash used



c14.indd 706



$(26,000)

35,000

(50,000)

(41,000)



__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __



28.c

29.c

30.c

31.a

32.d

33.c

34.d

35.d

36.c



__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __



37.a

38. c

39.d



__ __

__ __

__ __



1st: __/39 = __%

2nd:__/39 = __%



The gain on sale of investment in Rate Motors ($35,000

– $33,000 = $2,000), the interest earned ($3,750), and

dividends earned ($1,200) are all operating items. Note that

the sale of investment is reported in the investing section at

the cash inflow amount ($35,000), not at the carrying value

of the investment ($33,000). If the CD had been for three

months instead of four years, it would be part of “Cash and

Cash equivalents” and would not be shown under investing

activities.

5.(c) The building which was destroyed had a book

value of $52,000 ($100,000 – $48,000). The cash settlement

from the insurance company resulted in a loss of $21,000.

Therefore, the cash inflow from this investing activity must be

$31,000 as shown below.

Proceeds

?

$31,000











Book value

$52,000

$52,000



=

=

=



Loss

($21,000)

($21,000)



Note that the $21,000 extraordinary loss must be before any

income tax effect because ASC Topic 230 requires that any tax

effect be left in operating activities.

6.(a) The cash inflow from the sale of equipment is

the carrying amount plus the gain. Answers (b) and (c) are

incorrect because the tax attributable to the gain is a cash

outflow in the operating activities section of the statement of

cash flows. Note that when using the indirect method, the gain

is deducted from operating activities, as to not double count

the gain.

7.(d) The requirement is to determine how the equipment

transactions should be reported in the statement of cash

flows. Companies are required to report the gross amounts

of cash receipts and cash payments, rather than net amounts.

Therefore, the gross cash inflow from the sale of equipment

and the gross outflow for the payment of new equipment

should be reported. Answer (a) is incorrect because both gross

inflow and outflow should be reported, rather than reporting

the net cash flow from the transaction. Answer (b) is incorrect

because gross cash flows, not net, are reported and because

a note payable is not reported since the transaction results in



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Module 17: Statement of Cash Flows



no actual inflow or outflow in the period in which the payable

occurs. This noncash activity would be reported in a separate

schedule or in the footnotes. Noncash transactions commonly

recognized in a separate schedule in the financial statements

include: conversion of debt to equity and acquisition of assets

by assuming liabilities, including lease obligations. Answer (c)

is incorrect because the note payable is not reported on the

statement of cash flows; rather it is shown in a separate

schedule.

8.(a) Payments at the time of purchase or soon before or

after purchase to acquire property, plant, and equipment and

other productive assets are categorized as cash outflows for

investing activities. Generally, these payments only include

advance payments, down payments, or payments made at the

time of purchase or soon before or after purchase. Therefore,

only the cash payment is considered a cash outflow for

investing activities.

9.(c) Noncash investing and financing activities include

acquiring assets by assuming directly related liabilities, such

as purchasing a building by incurring a mortgage to the seller.

This type of transaction does not involve the flow of cash.

Therefore, cash flows for financing activities related to this

transaction would be zero. Note that the cash down payment

would be reported as a cash outflow for investing activities.

The amount of the mortgage payment would be included in the

noncash activities at the bottom of the statement of cash flows.

10.(b) To determine the cash paid for redemption of bonds

payable, the solutions approach is to set up a T-account for

bonds payable.

Bonds Payable

Bonds redeemed



?



47,000



12/31/Y1



20,000

50,000



Bonds issued

12/31/Y2



The amount of bonds redeemed can be computed as $17,000.

($47,000 + $20,000 – $50,000 = $17,000)

11.(a) Investing activities include all cash flows involving

assets other than operating items. The investing activities are

Proceeds from sale of equipment

Purchase of A.S., Inc. bonds

Net cash used in investing activities



$ 10,000

(180,000)

$(170,000)



The gain on sale of equipment ($6,000) and amortization

of bond discount ($2,000) are net income adjustments in

the operating section, while dividends paid ($38,000) and

proceeds from sale of treasury stock ($75,000) are financing

items. The excess of dividends declared over dividends paid is

a noncash financing activity.

12.(d) Financing activities include all cash flows involving

liabilities and owners’ equity other than operating items. The

financing activities are

Dividends paid

Proceeds from sale of treasury stock

Net cash provided by financing activities



c14.indd 707



$(38,000)

75,000

$ 37,000



707



The excess of dividends declared over dividends paid is a

noncash financing activity. The gain on sale of equipment

($6,000) and amortization of bond discount ($2,000) are

net income adjustments in the operating section, while the

proceeds from sale of equipment ($10,000) and purchase of

A.S., Inc. bonds ($180,000) are investing items.

13.(c) Financing activities include the repayment of debt

principal or, as in this case, the payment of the capital lease

obligation. Thus, the cash outflow is equal to the year 1

principal payments only. The interest on the capital lease is

classified as an operating cash outflow.

14.(c) Information about all investing and financing

activities of an enterprise during a period that affect recognized

assets and liabilities but that do not affect cash receipts or cash

payments in the period should be reported in a supplemental

schedule to the financial statements. This schedule includes

all noncash investing and financing activities for the period.

The conversion of long-term debt into common stock does not

have any effect on cash flow, and it also results in a reduction

of liabilities and an increase in stockholders’ equity. Therefore,

the conversion of long-term debt into common stock should be

reported as a noncash financing activity in the supplemental

schedule. Mandatorily redeemable preferred stock should

be classified as a liability. On the date the preferred stock

is redeemable, it is considered liability. Therefore, when

the preferred stock is converted into common stock, the

conversion should be reported as a noncash financing activity

in the supplemental schedule.

15.(c) Noncash investing and financing activities are

reported as supplemental information to the statement of cash

flows because while they do not affect cash in the current year,

they may have a significant effect on the prospective cash flows

of the company. Therefore, conversion of debt to equity is

disclosed as supplemental information to the statement of cash

flows. However, cash flow per share should not be reported on

the statement of cash flows because it may be misleading and

may be incorrectly used as a measure of profitability.

16. (d) Under either the direct method or indirect method,

the major classes of gross cash receipts and gross cash

payments must be reported in the statement of cash flows.

Under the direct method, the amount of income taxes paid

is one of the components of net cash flows from operating

activities; under the indirect method, it is a required

supplemental disclosure. A reconciliation of net income to

net cash flow from operations is a required supplemental

disclosure under the direct method, and is included in the

body of the statement under the indirect method. Only a

reconciliation of ending retained earnings to net cash flow

from operations is not required under either method.

17.(d) Cash collected from customers can be computed

using either a formula or a T-account. The formula is

Sales

– [End AR

$538,800 – [$33,000









(Beg AR

($30,000









Write-offs)] =

$0) ] =



Collections

$535,800



In the formula above, sales is adjusted for the change in AR,

exclusive of write-offs, because write-offs represent sales



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Module 17: Statement of Cash Flows



708



(and AR) which will never be collected in cash. In this

problem, there were no write-offs, so it must be assumed that

the change in the allowance account results solely from bad

debt expense (no write-offs). Since there are no write-offs, the

increase in AR ($33,000 – $30,000 = $3,000) is subtracted

from sales because those sales increased AR instead of cash.

The T-account solution is below.



expense



538,800



0



Write-offs



?

12/31/Y2



Collections = 535,800



33,000



18. (d) Cash paid for goods to be sold can be computed

using either a formula or T-accounts. The formula is

CGS



+



(End. inv. – Beg. inv.)







(End. AP – Beg. AP)



=



Cash paid



$250,000



+



($31,000 – $47,000)







($25,000 – $17,500)



=



Cash paid



$250,000







$16,000







$7,500



=



$226,500



The decrease in inventory ($16,000) is subtracted from CGS

because that portion of CGS resulted from a use of inventory

purchased in prior years, rather than from a cash payment.

The increase in AP is subtracted because that portion of CGS

was not paid this year. Using T-accounts, first purchases are

computed using the inventory account, then payments are

computed using the accounts payable account.

Inventory

12/31/Y1



47,000



Purchases



?



12/31/Y2



31,000



250,000



CGS



1. Purchases = $234,000

Accounts Payable

Payments



?



17,500



12/31/Y1



234,000



Purchases



25,000



12/31/Y2



2. Payments = $226,500

19.(c) The trial balance does not include prepaid interest or

interest payable, both of which would affect the computation

of cash paid for interest. In the absence of those accounts, cash

paid for interest is equal to interest expense plus (minus) bond

premium (discount) amortization.

Interest expense

$4,300









Discount amortization

($5,000 – $4,500)



=

=



Flax’s year 2 entry to record interest expense was



c14.indd 708







30,000



Sales



Cash paid

$3,800



4,300

3,800

500



20.(a) Cash paid for income taxes can be computed using

the following formula:

Inc. tax



Accounts Receivable

12/31/Y1



Interest expense

Cash

Discount on bonds payable



$20,400







$20,400



+



(



End.   Beg

inc. tax − in. tax

payable



)(





payable



($21,000 − $27,000) −

$6,100







End.   Beg

def. tax − def.tax

liability



)



liability



($5,300 − $4,600)



Cash

= paid

for inc. tax

= Cash paid

= $25,800



$700



The decrease in income taxes payable is added to income tax

expense because cash was used to decrease the liability as well

as to pay tax expense. The increase in the deferred tax liability

is deducted from income tax expense because that portion of

tax expense was deferred (not paid in cash). Flax’s summary

journal entry to record income taxes for year 2 is

Inc. tax expense

Inc. tax payable

Cash

Deferred taxes



20,400

6,100

25,800

700



21.(c) In general, cash paid for selling expenses is affected

by prepaid selling expenses, accrued selling expenses,

depreciation and/or amortization expense, and possibly bad

debts expense. In this case, there are no prepaid or accrued

selling expenses in the trial balances, and bad debts expense

is apparently included in general and administrative expenses

(see discussion below). Therefore, cash paid for selling

expenses is $141,000 ($141,500 selling expenses less $500

depreciation expense). Total depreciation expense can be

determined from the change in the accumulated depreciation

account ($16,500 – $15,000 = $1,500), and 1/3 of that amount

is selling expense (1/3 × $1,500 = $500). Note that bad debt

expense ($1,300 – $1,100 = $200) must be included in general

and administrative expenses, because the answer obtained by

assuming it is part of selling expenses ($141,000 – $200 =

$140,800) is not given as one of the four choices.

22.(a) Businesses are encouraged to use the direct method

of reporting operating activities under which major classes

of cash receipts and cash payments are shown. The minimum

cash flows to be disclosed under this method are cash collected

from customers, interest and dividends received, cash paid to

employees and suppliers, income taxes paid, and interest paid.

23.(c) In a statement of cash flows in which the operating

activities section is prepared using the direct method, the cash

paid for wages would be equal to the accrual-basis salary

expense, plus/minus any decrease/increase in the wages

payable account. (The logic is essentially the same as an

accrual-basis to cash-basis adjustment.)

24.(c) Net income was $150,000. Three of the four

items given are net income adjustments (the major repair

to projection equipment [$2,100] is a cash outflow under



13-05-2014 07:46:17







Module 17: Statement of Cash Flows



investing activities), resulting in net cash provided by

operating activities of $144,900.

Net income

Equity method income

Premium amortization

Increase in def. tax liability

Cash provided by operating activities



$150,000

(5,500)

(1,400)

1,800

$144,900



When equity method income is recorded, the offsetting debit

is to the investment account, not cash; when premium on

bonds payable is amortized, the credit to interest expense is

offset by a debit to the premium account, not cash. Therefore,

both of these items increase income without increasing cash,

and must be deducted as a net income adjustment. For the

deferred tax items, when income tax expense is debited, the

offsetting credit is to deferred tax liability, not cash. Therefore,

this item decreases net income without decreasing cash, and

it must be added back as a net income adjustment. Note that

there should normally be depreciation expense as a net income

adjustment, but it is not given.

25.(a) Based only on the items given, net cash provided by

operating activities is $151,400, as computed below.

Net income

Increase in net AR

[($29,000 – 1,000) – ($23,000 – $800)]

Decrease in prepaid rent ($12,400 – $8,200)

Increase in AP ($22,400 – $19,400)

Cash provided by ops.



$150,000

(5,800)

4,200

3,000

$151,400



The increase in net AR is deducted from net income because

it indicates that cash collected is less than sales revenue.

The decrease in prepaid rent is added because it reflects rent

expense that was not a cash payment, but an allocation of

previously recorded prepaid rent. Finally, the increase in AP

is added because it also represents an expense (cost of goods

sold) that was not yet paid.

26.(d) The objective of a statement of cash flows is to

explain what caused the change in the cash balance. The

first step in this process is to determine cash provided by

operations. When presenting cash from operating activities

under the indirect approach, net income must be adjusted

for changes in current assets other than cash and in current

liabilities. These adjustments are required because items that

resulted from noncash events must be removed from accrualbased income. For example, when inventory increases during

the period, inventory sold is less than inventory purchased.

Considering only the increase in the inventory account, cost of

goods sold on an accrual basis is less than it would have been

if cash basis were being used. In converting to the cash basis,

the increase in inventory must be subtracted from net income

to arrive at cash from operations. Answer (a) is incorrect

because even though an increase in inventories requires an

outflow of cash, inventories are shown as adjustments to net

income under the indirect method. Answer (b) is incorrect

because changes in inventories are shown as adjustments to

net income under the indirect method. Answer (c) is incorrect



c14.indd 709



709



because an increase in an inventory would be a deduction from

net income, not an addition.

27.(c) When using the indirect method for reporting net

cash flows from operations, you start with net income from

continuing operations and adjust for changes in operating

related accounts (i.e., inventory, accounts payable) and

noncash expenses, revenues, gains and losses. The proceeds

from the sale of equipment is reported as an inflow in the

investing section of the statement of cash flows, at its gross

amount. This gross amount includes the gain. Therefore, to

avoid double counting and to properly classify cash inflows,

the gain is subtracted from net income to show the proper cash

balance from operating activities.

28.(c) Under the indirect method of reporting cash flows

from operations, income from continuing operations is

adjusted for changes in operating related accounts and noncash

expenses, revenues, losses, and gains. Noncash items that

were subtracted in determining income must be added back

in. This would include amortization of bond discount, as it is a

charge against income but does not decrease cash. The excess

of treasury stock acquisition cost over sales proceeds would

not be added back to net income. Under the cost method, this

loss would not be included in net income but would be charged

back to a paid-in capital account or retained earnings. The

acquisition and sale of treasury stock, furthermore, would be

financing activities.

29.(c) Cash flow per share should not be reported on

the statement of cash flows because it may be misleading

and may be incorrectly used as a measure of profitability.

Answers (a) and (b) are incorrect because, when the indirect

method is used, separate disclosure is required for interest

paid (net of amounts capitalized) and income taxes paid.

Answer (d) is incorrect because, regardless of the method

used, dividends paid on preferred stock are reported as a

financing activity.

30.(c) Net cash provided by operating activities can be

computed by using either the direct or indirect approach.

In this case, there is not enough information to use the direct

approach. In the indirect approach, net income is adjusted for

noncash items, as shown below.

Net income

Gain on sale of LT investment

Increase in inventory

Depreciation expense

Decrease in AP and accrued liabs.



$790,000

(35,000)

(80,000)

250,000

(5,000)

$920,000



The additional information indicates that a LT investment was

sold for $135,000. The listing of accounts shows a decrease

in LT investments of $100,000. The gain on sale ($135,000 –

$100,000 = $35,000) is deducted because the total cash effect

of this transaction ($135,000) will be reported as an investing

activity. Two of the working capital accounts that changed

are related to net income. The increase in inventory ($80,000)

is deducted because cash was used to increase inventory.

The decrease in accounts payable and accrued liabilities is



13-05-2014 07:46:17



Module 17: Statement of Cash Flows



710



deducted because cash was used to pay these liabilities. The

increase of $300,000 for Available-for-Sale Securities is an

investing activity. The only other information or account

given which affects net income is accumulated depreciation.

Although this account did not show any net decrease or

increase during year 2, we know it was decreased by $250,000

when the building was sold ($600,000 cost less $350,000

carrying amount equals $250,000 accumulated depreciation).

Therefore, depreciation expense of $250,000 must have

increased the accumulated depreciation account to result in

a net effect for the year of $0. Depreciation expense is added

because it is a noncash expense.

  An alternative method of computing net cash provided by

operating activities is to back into the answer after determining

cash used in investing activities and cash provided by

financing activities.

Cash provided by Operating Activities

Cash used in Investing Activities

Cash provided by Financing Activities

Net increase in Cash



$

?

(1,005,000)

205,000

$ 120,000



The problem tells us that cash and cash equivalents increased

by $120,000. Therefore, cash provided by operating activities

is $920,000 ($920,000 – $1,005,000 + $205,000 =

$120,000).

31.(a) Investing activities include all cash flows involving

assets, other than operating items. Financing activities

include all cash flows involving liabilities and equity,

other than operating items. The common stock issued is a

financing activity. In this case, the changes in the inventory

and accumulated depreciation accounts are operating items.

The cash flows involving the other assets, listed below, are

investing activities

Purchase of AFS securities

Sale of LT investments

Sale of plant assets

Purchase of plant assets



$ (300,000)

135,000

350,000

(1,190,000)

$(1,005,000)



The amounts above were given, except for the purchase of

plant assets, the amount of which can be determined from the

following T-account:



The part of the change in retained earnings caused by net

income ($790,000) is also an operating item. The cash flows

involving the other liability and equity accounts, listed below,

are financing activities.

Payment of dividends

($500,000 – $160,000)

Issuance of ST debt

Issuance of common stock (10,000 × $22)



$(340,000)

325,000

220,000

$ 205,000



The problem states that $500,000 of dividends were declared,

and this is confirmed by the change in the retained earnings

account ($790,000 net income – $500,000 dividends declared

= $290,000 net increase). However, since dividends payable

increased by $160,000, only $340,000 of dividends were

paid ($500,000 – $160,000). The issuance of common stock

(10,000 shares × $22 per share = $220,000) is confirmed by

the increases in the common stock and additional paid-in

capital accounts ($100,000 + $120,000 = $220,000). The

issuance of LT debt for equipment ($110,000) is a noncash

financing and investing activity, so it does not affect net cash

provided by financing activities. Note that the answers to the

three related questions can be verified by comparing them to

the increase in cash and cash equivalents ($120,000) given in

the problem.

Cash provided by oper. acts.

Cash used in inv. acts.

Cash provided by fin. acts.

Increase in cash and cash equivalents



$ 920,000

(1,005,000)

205,000

$ 120,000



33. (c) The requirement is to calculate the amount of

cash collected during year 2 from accounts receivable. The

solutions approach is to prepare a T-account for accounts

receivable. The allowance account has no effect on this

analysis, because the problem states that the balance in this

account has not changed and no accounts receivable were

written off. Net credit sales are the only debit to accounts

receivable because all accounts receivable relate to trade

merchandise. In the T-account below, you must solve for the

missing credit to determine that $6,140,000 was collected on

account during year 2.

AR—Net



Plant Assets

Cost of equip. acquired

Cost of plant assets purchased

Net increase



110,000

?



600,000



Cost of



12/31/Y1 balance

Year 2 net credit sales



bldg. sold



12/31/Y2 balance



?



Year 2 Collections



840,000



700,000



The equipment acquired through issuance of LT debt is a

noncash investing and financing activity so it does not affect

net cash used in investing activities.

32.(d) Financing activities include all cash flows involving

liabilities and equity, other than operating items. Investing

activities include all cash flows involving assets, other than

operating items. In this case, the change in the accounts

payable and accrued liabilities account is an operating item.



c14.indd 710



580,000

6,400,000



NOTE: Based on the information given in this problem,

no bad debt expense was recorded during year 2. However

unrealistic this assumption might be, it is important to

simply work with the information as given.



13-05-2014 07:46:17



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