16.8: Practice Questions

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Multiple Choice

LO 16.1Which of the following statements is false?

Noncash activities should be reported in accrual basis financial statements.
Net cash flow from operating activities relates to normal business operations.
Net income usually equals net cash flow from operating activities.
The statement of cash flows is an essential part of the basic financial statements.

LO 16.2Which of these transactions would not be part of the cash flows from the operating activities section of the statement of cash flows?

credit purchase of inventory
sales of product, for cash
cash paid for purchase of equipment
salary payments to employees

LO 16.2Which is the proper order of the sections of the statement of cash flows?

financing, investing, operating
operating, investing, financing
investing, operating, financing
operating, financing, investing

LO 16.2Which of these transactions would be part of the financing section?

inventory purchased for cash
sales of product, for cash
cash paid for purchase of equipment
dividend payments to shareholders, paid in cash

LO 16.2Which of these transactions would be part of the operating section?

land purchased, with note payable
sales of product, for cash
cash paid for purchase of equipment
dividend payments to shareholders, paid in cash

LO 16.2Which of these transactions would be part of the investing section?

land purchased, with note payable
sales of product, for cash
cash paid for purchase of equipment
dividend payments to shareholders, paid in cash

LO 16.3What is the effect on cash when current noncash operating assets increase?

Cash increases by the same amount.
Cash decreases by the same amount.
Cash decreases by twice as much.
Cash does not change.

LO 16.3What is the effect on cash when current liabilities increase?

Cash increases by the same amount.
Cash decreases by the same amount.
Cash decreases by twice as much.
Cash does not change.

LO 16.3What is the effect on cash when current noncash operating assets decrease?

Cash increases by the same amount.
Cash decreases by the same amount.
Cash decreases by twice as much.
Cash does not change.

10.

LO 16.3What is the effect on cash when current liabilities decrease?

Cash increases by the same amount.
Cash decreases by the same amount.
Cash decreases by twice as much.
Cash does not change.

11.

LO 16.3Which of the following would trigger a subtraction in the indirect operating section?

gain on sale of investments
depreciation expense
decrease in accounts receivable
decrease in bonds payable

12.

LO 16.3Which of the following represents a source of cash in the investing section?

sale of investments
depreciation expense
decrease in accounts receivable
decrease in bonds payable

13.

LO 16.3Which of the following would be included in the financing section?

loss on sale of investments
depreciation expense
increase in notes receivable
decrease in notes payable

14.

LO 16.4If beginning cash equaled $10,000 and ending cash equals $19,000, which is true?

Operating cash flow 9,000; Investing cash flow (3,500); Financing cash flow (2,500)
Operating cash flow 4,500; Investing cash flow 9,000; Financing cash flow (4,500)
Operating cash flow 2,000; Investing cash flow (13,000); Financing cash flow 2,000
none of the above

15.

LO 16.5Which of the following is a stronger indicator of cash flow flexibility?

cash flow from operating activities
cash flow to sales ratio
free cash flow
all three indicate comparable degrees of flexibility

Questions

LO 16.1What function does the statement of cash flows serve, as one of the four basic financial statements?

LO 16.1Is it possible for a company to have significant net income in the same time period that net cash flows are negative? Explain.

LO 16.2What categories of activities are reported on the statement of cash flows? Does it matter in what order these sections are presented?

LO 16.2Describe three examples of operating activities, and identify whether each of them represents cash collected or cash spent.

LO 16.2Describe three examples of investing activities, and identify whether each of them represents cash collected or cash spent.

LO 16.2Describe three examples of financing activities, and identify whether each of them represents cash collected or cash spent.

LO 16.3Explain the difference between the two methods used to prepare the operating section of the statement of cash flows. How do the results of these two approaches compare?

LO 16.3Why is depreciation an addition in the operating section of the statement of cash flows, when prepared by the indirect method?

LO 16.3When preparing the operating section of the statement of cash flows, using the indirect method, how must gains and losses be handled? Why?

10.

LO 16.3If a company reports a gain/(loss) from the sale of assets, as part of the net income on the income statement, and the net book value of those assets on the date of the sale is known, can the amount of the cash proceeds from the sale be determined? If so, how?

11.

LO 16.3Note payments reduce cash and are related to long-term debt. Do these facts automatically lead to their inclusion as elements of the financing section of the statement of cash flows? Explain.

12.

LO 16.4Is there any significance that can be attributed to whether net cash flows are generated from operating activities, versus investing and/or financing activities? Explain.

13.

LO 16.4Would there ever be activities that relate to operating, investing, or financing activities that would not be reported in their respective sections of the statement of cash flows? Explain. If a company had any such activities, how would they be reported in the financial statements, if at all?

14.

LO 16.5What insight does the calculation of free cash flow provide about the company’s cash flow position?

15.

LO 16.6Why is using the direct method to prepare the operating section of the statement of cash flows more challenging for accountants than preparing the balance sheet, income statement, and retained earnings statement?

Exercise Set A

EA1.

LO 16.1Provide journal entries to record each of the following transactions. For each, identify whether the transaction represents a source of cash (S), a use of cash (U), or neither (N).

Declared and paid to shareholders, a dividend of $24,000.
Issued common stock at par value for $12,000 cash.
Sold a tract of land that had cost $10,000, for $16,000.
Purchased a company truck, with a note payable of $38,000.
Collected $8,000 from customer accounts receivable.

EA2.

LO 16.2In which section of the statement of cash flows would each of the following transactions be included? For each, identify the appropriate section of the statement of cash flows as operating (O), investing (I), financing (F), or none (N). (Note: some transactions might involve two sections.)

paid advertising expense
paid dividends to shareholders
purchased business equipment
sold merchandise to customers
purchased plant assets

EA3.

borrowed from the bank for business loan
declared dividends, to be paid next year
purchased treasury stock
purchased a two-year insurance policy
purchased plant assets

EA4.

LO 16.3Use the following information from Albuquerque Company’s financial statements to determine operating net cash flows (indirect method).

Net income $325,000. Change in accumulated depreciation (no sale of depreciable assets this year) 26,200. Loss on sale of company truck 7,800.

EA5.

LO 16.3What adjustment(s) should be made to reconcile net income to net cash flows from operating activities (indirect method) considering the following balances in current assets?

Accounts receivable, beginning of year $20,000. Accounts receivable, end of year 25,000. Prepaid insurance, beginning of year 12,000. Prepaid insurance, end of year 9,000.

EA6.

LO 16.3Use the following information from Birch Company’s balance sheets to determine net cash flows from operating activities (indirect method), assuming net income for 2018 of $122,000.

Accounts Receivable, Prepaid Insurance, Accounts Payable, and Accrued Liabilities December 31, 2018, respectively: $12,800, 4,000, 9,000, 2,500. Accounts Receivable, Prepaid Insurance, Accounts Payable, and Accrued Liabilities December 31, 2017, respectively: $15,000, 3,500, 8,200, 2,800.

EA7.

LO 16.3Use the following information from Chocolate Company’s financial statements to determine operating net cash flows (indirect method).

Income Statement items: Sales $98,500. Cost of Goods Sold (62,000). Salaries Expense (18,000). Depreciation Expense (9,000). Net Income 9,500. Balance Sheet items: Accounts Receivable increase $2,000. Merchandise Inventory decrease 1,600. Salaries Payable increase 450.

EA8.

LO 16.3Use the following information from Denmark Company’s financial statements to determine operating net cash flows (indirect method).

Net income $145,000. Depreciation expense 16,500. Loss on sale of land 5,000. Decrease in accounts receivable 1,500. Decrease in accounts payable 1,250.

EA9.

LO 16.3Use the following excerpts from Eagle Company’s financial records to determine net cash flows from financing activities.

Acquired new plant assets $18,000. Borrowed from bank, note payable 40,000. Declared and paid dividends to shareholders 15,000.

EA10.

LO 16.3Use the following excerpts from Fruitcake Company’s financial records to determine net cash flows from investing activities.

Acquired new plant assets $18,000. Collected interest on investment assets 4,000. Sold land used in business 36,500.

EA11.

LO 16.3Use the following excerpts from Grenada Company’s financial records to determine net cash flows from operating activities and net cash flows from investing activities.

Net income this year $158,750. Purchased plant assets this year 40,000. Sold track of land this year 35,000. Original cost of land that was sold 25,000.

EA12.

LO 16.4Provide the missing piece of information for the following statement of cash flows puzzle.

Cash flows from operating activities $60,000. Cash flows from investing activities (28,500). Cash flows from financing activities ?. Cash at the beginning of the year 12,000. Cash at the end of the year 19,500.

EA13.

LO 16.4Provide the missing piece of information for the following statement of cash flows puzzle.

Cash flows from operating activities $ ?. Cash flows from investing activities 8,900. Cash flows from financing activities (25,000). Cash at the beginning of the year 24,000. Cash at the end of the year 22,100.

EA14.

LO 16.5Use the following excerpts from Kirsten Company’s Statement of Cash Flows and other financial records to determine the company’s free cash flow.

Statement of cash flows: Cash flow from operating activities $135,000 minus cash flows from investing activities of (50,000) plus cash flows from financing activities of 65,000. From other records: Cash capital expenditures 75,000 and cash dividends paid 15,000.

EA15.

LO 16.5Use the following excerpts from Franklin Company’s statement of cash flows and other financial records to determine the company’s free cash flow for 2018 and 2017.

Cash flows from operating activities 2018: $222,000; 2017: $200,000; cash flows from investing activities 2018: (33,000); 2017: (35,000); cash flows from financing activities 2018: 66,000; 2017: 60,000. Capital expenditures were 50 percent of investing activities, both years and cash dividends paid were $15,000, both years.

EA16.

LO 16.5The following are excerpts from Hamburg Company’s statement of cash flows and other financial records.

Statement of cash flows: Cash flow from operating activities $100,000; cash flows from investing activities (50,000); cash flows from financing activities (25,000). From other records: Cash capital expenditure costs 20,000; cash dividend payments 22,500; sales revenue 221,000; and total assets 302,500.

Compute the following for the company:

free cash flow
cash flows to sales ratio
cash flows to assets ratio

EA17.

LO 16.6Use the following excerpts from Algona Company’s financial statements to determine cash received from customers in 2018.

From Balance Sheets on December 31, 2018: Accounts Receivable 85,000. December 31, 2017: Accounts Receivable $105,000. From Income Statement of 2018: Sales 700,000.

EA18.

LO 16.6Use the following excerpts from Huckleberry Company’s financial statements to determine cash paid to suppliers for inventory in 2018.

From Balance Sheet on December 31, 2018: Inventory $74,000; Accounts Payable 55,000. December 31, 2017: Inventory $82,000; Accounts Payable 58,000. From Income Statement of 2018: Cost of Goods Sold $520,000.

Exercise Set B

EB1.

LO 16.1Provide journal entries to record each of the following transactions. For each, identify whether the transaction represents a source of cash (S), a use of cash (U), or neither (N).

Paid $22,000 cash on bonds payable.
Collected $12,600 cash for a note receivable.
Declared a dividend to shareholders for $16,000, to be paid in the future.
Paid $26,500 to suppliers for purchases on account.
Purchased treasury stock for $18,000 cash.

EB2.

collected accounts receivable from customers
issued common stock for cash
declared and paid dividends
paid accounts payable balance
sold a long-term asset for the same amount as purchased

EB3.

purchased stock in Xerox Corporation
purchased office supplies
issued common stock
sold plant assets for cash
sold equipment for cash

EB4.

LO 16.3Use the following information from Hamlin Company’s financial statements to determine operating net cash flows (indirect method).

Net income $113,750. Change in accumulated depreciation (no sale of depreciable assets this year) 9,800. Gain on sale of investments 11,400.

EB5.

LO 16.3What adjustment(s) should be made to reconcile net income to net cash flows from operating activities (indirect method) considering the following balances in current assets?

Accounts payable, beginning of year $18,000. Accounts payable, end of year 28,000. Salaries payable, beginning of year 6,000. Salaries payable, end of year 4,000.

EB6.

LO 16.3Use the following excerpts from Indigo Company’s balance sheets to determine net cash flows from operating activities (indirect method), assuming net income for 2018 of $225,000.

Accounts Receivable, Prepaid Insurance, Accounts Payable, Accrued Liabilities December 31, 2018, respectively: $33,000, 17,000, 19,000, 11,700. Accounts Receivable, Prepaid Insurance, Accounts Payable, Accrued Liabilities December 31, 2017, respectively: $31,500, 18,000, 19,500, 11,000.

EB7.

LO 16.3Use the following information from Jumper Company’s financial statements to determine operating net cash flows (indirect method).

Income Statement items: Sales $111,000. Cost of Goods Sold (73,000). Salaries Expense (12,000). Depreciation Expense (8,000). Net Income 18,000. Balance Sheet items: Accounts Receivable decrease $3,500. Merchandise Inventory increase 2,200. Salaries Payable increase 925.

EB8.

LO 16.3Use the following information from Kentucky Company’s financial statements to determine operating net cash flows (indirect method).

Net income $176,000. Depreciation expense 18,750. Gain on sale of plant assets 15,000. Increase in accounts receivable 12,000. Decrease in accounts payable 5,500.

EB9.

LO 16.3Use the following excerpts from Leopard Company’s financial records to determine net cash flows from investing activities.

Collected payments on a customer note receivable $27,500. Purchased plant assets 19,000. Received dividend income from stocks owned 2,500.

EB10.

LO 16.3Use the following information from Manuscript Company’s financial records to determine net cash flows from financing activities.

Repaid principal on bank loan $16,500. Issued common stock, at par value 32,000. Declared dividends, to be paid to shareholders next year 9,000.

EB11.

LO 16.3Use the following excerpts from Nutmeg Company’s financial records to determine net cash flows from operating activities and net cash flows from investing activities.

Net income this year $83,700. Purchased land this year 20,000. Sold investments this year 31,500. Original cost of investments that were sold 33,000.

EB12.

LO 16.4Provide the missing piece of information for the following statement of cash flows puzzle.

Cash flows from operating activities $75,000. Cash flows from investing activities 13,300. Cash flows from financing activities (33,000). Cash at the beginning of the year ?. Cash at the end of the year 65,000.

EB13.

LO 16.4Provide the missing piece of information for the following statement of cash flows puzzle.

Cash flows from operating activities $88,000. Cash flows from investing activities ?. Cash flows from financing activities (45,000). Cash at the beginning of the year 77,000. Cash at the end of the year 113,000.

EB14.

LO 16.5Use the following excerpts from Indira Company’s Statement of Cash Flows and other financial records to determine the company’s free cash flow.

Statement of cash flows: Cash flow from operating activities $98,700; cash flows from investing activities 125,000; cash flows from financing activities (16,500). From other records: Cash capital expenditures 40,000 and cash dividends paid 12,000.

EB15.

LO 16.5Use the following excerpts from Bolognese Company’s statement of cash flows and other financial records to determine the company’s free cash flow for 2018 and 2017.

Cash flows from operating activities, cash flows from investing activities, cash flows from financing activities 2018, respectively: $121,000, (56,000), (12,000). Cash flows from operating activities, cash flows from investing activities, cash flows from financing activities 2017, respectively: $114,000, (40,000), (15,000). Capital expenditures were 40% of investing activities, both years. Cash dividends paid were $20,000, both years.

EB16.

LO 16.5The following shows excerpts from Camole Company’s statement of cash flows and other financial records.

From statement of cash flows: Cash flows from operating activities 225,000. Cash flows from investing activities (75,000). Cash flows from financing activities 61,500. From other records: Capital expenditure costs 144,000. Cash dividends payments 36,000. Sales revenues 642,000. Total assets 450,000.

Compute the following for the company:

free cash flow
cash flows to sales ratio
cash flows to assets ratio

EB17.

LO 16.6Use the following excerpts from Brownstone Company’s financial statements to determine cash received from customers in 2018.

From Balance Sheet on December 31, 2018: Accounts Receivable $25,000. December 31, 2017: Accounts Receivable $20,000. From Income Statement of 2018: Sales 220,000.

EB18.

LO 16.6Use the following excerpts from Jasper Company’s financial statements to determine cash paid to suppliers for inventory in 2018.

From Balance Sheet on December 31, 2018: Inventory $35,000; Accounts Payable 22,000. December 31, 2017: Inventory 31,000; Accounts Payable 20,500. From Income Statement of 2018: Cost of Goods Sold 175,900.

Problem Set A

PA1.

LO 16.2Provide journal entries to record each of the following transactions. For each, also identify *the appropriate section of the statement of cash flows, and **whether the transaction represents a source of cash (S), a use of cash (U), or neither (N).

paid $12,000 of accounts payable
collected $6,000 from a customer
issued common stock at par for $24,000 cash
paid $6,000 cash dividend to shareholders
sold products to customers for $15,000
paid current month’s utility bill, $1,500

PA2.

LO 16.3Use the following information from Acorn Company’s financial statements to determine operating net cash flows (indirect method).

Income Statement items: Sales $453,000. Cost of Goods Sold (359,000). Operating Expenses, other than depreciation expense (65,000). Depreciation Expense (8,000). Loss on Sale of Plant Assets (11,900). Net Income 9,100. Balance Sheet items: December 31, 2018: Accounts Receivable 29,500. Accounts Payable 13,250. December 31, 2017: Accounts Receivable 26,500. Accounts Payable 11,750.

PA3.

LO 16.3Use the following information from Berlin Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Cash, Accounts Receivable, Prepaid Assets, Total Assets, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $29,000, 11,500, 1,200, 41,700, 1,700, 33,000, 7,000, 41,700. Additional information: Net Income and Dividends Paid, respectively: 5,800, 4,000. Cash, Accounts Receivable, Prepaid Assets, Total Assets, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $ 24,000, 12,000, 1,000, 37,000, 1,800, 30,000, 5,200, 37,000.

PA4.

LO 16.3Use the following information from Coconut Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Cash, Accounts Receivable, Inventory, Prepaid Rent, Accounts Payable December 31, 2018, respectively: $201,000, 22,000 33,750, 6,000, 19,500. Additional information: Net Income, Depreciation Expense, respectively: 55,000, 11,500. Cash, Accounts Receivable, Inventory, Prepaid Rent, Accounts Payable December 31, 2017, respectively: $175,000, 21,500, 30,500, 2,000, 28,750.

PA5.

LO 16.3Use the following information from Dubuque Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

From the December 31, 2018 balance sheet, changes from prior year: Accounts Receivable $7,600, Inventory 3,200, Prepaid Insurance (2,000), Accounts Payable (4,000), Sales Tax Payable 1,900. From the 2018 Income Statement: Gain from sale of investments 12,000, Depreciation Expense 26,500, Net Income 79,300.

PA6.

LO 16.3Use the following information from Eiffel Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $299,000. Cost of Goods Sold (135,000). Operating Expenses, other than depreciation expense (27,000). Depreciation Expense (17,000). Gain on Sale of Plant Assets 16,500. Net Income 136,500. Balance Sheet items: December 31, 2018: Accounts Receivable 45,300. Inventory 1,600. Accounts Payable 22,500. Accrued Liabilities 900. December 31, 2017: Accounts Receivable 43,400. Inventory 1,800. Accounts Payable 21,250. Accrued Liabilities 1,150.

PA7.

LO 16.3Analysis of Forest Company’s accounts revealed the following activity for its Land account, with descriptions added for clarity of analysis. How would these two transactions be reported for cash flow purposes? Note the section of the statement of cash flow, if applicable, and if the transaction represents a cash source, cash use, or noncash transaction.

Land items: Account balance, beginning of year $220,000. Purchase of land this year, for cash 95,000. Purchase of land this year, with note payable 75,000. Account balance, end of year 390,000.

PA8.

LO 16.4Use the following excerpts from Zowleski Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $92,300, 22,000, 140,000, 180,000, (25,000), 409,300, 18,500, 135,500, 20,000, 235,300, 409,300. Additional information: Net Income for 2018, Depreciation Expense for 2018 (Accumulated Depreciation increase), Plant Assets purchased (Plant Assets increase), financed by note, Notes Payable increased by amount of plant asset purchase, Notes Payable decreased by amount of principal note payments: 28,400, 4,000, 30,000, 30,000, 14,500. Cash, Account Receivable, Merchandise Inventory, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $85,000, 22,900, 131,000, 150,000, (21,000), 367,900, 21,000,120,000,20,000, 206,900, 367,900.

PA9.

LO 16.4Use the following excerpts from Yardley Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $455,000. Cost of goods sold (221,500). Operating expenses, other than depreciation expense (58,600). Depreciation expense (24,000). Gain on sale of plant assets 23,500. Net income 174,400. Balance Sheet items: December 31, 2018: Cash $321,450. Accounts receivable 39,750. Inventory 33,000. Accounts payable 17,550. Accrued liabilities 3,500. December 31, 2017: Cash $133,500. Accounts receivable 36,500. Inventory 35,000. Accounts payable 19,550. Accrued liabilities 2,200. Additional information: Plant assets were sold for $40,000; book value $16,500. Dividends of $25,000 were declared and paid.

PA10.

LO 16.4Use the following excerpts from Wickham Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $225,000, 38,350, 59,500, 150,000, 160,000, (49,000), 583,850, 29,100, 15,500, 45,000, 494,250, 583,850. Additional information: Net Income for 2018, Depreciation Expense for 2018, Land purchased, for cash, Stock issued in exchange for cash, at par value, Dividends declared and paid, respectively: 98,000, 12,000, 100,000, 25,000,11,000. Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $200,000, 35,350, 58,200, 50,000, 160,000, (37,000), 466,550, 27,300, 12,000, 20,000, 407,250, 466,550.

PA11.

LO 16.4Use the following excerpts from Tungsten Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Beginning cash $18,444. Net Income 36,500. Depreciation expense 11,000. Accounts receivable change (8,300). Inventory change 4,900. Prepaid assets change 3,400. Investments change (no asset sales) 10,000. Accounts payable change 450. Note payable principal balance change (no new loans) (9,400). Common stock balance change (due to stock issuance) 20,000.

PA12.

LO 16.5The following shows excerpts from financial information relating to Aspen Company and Bergamot Company.

Aspen Company Net Cash Flows from Operating Activities $320,000. Total Assets 450,400. Net Income 300,000. Sales Revenue 463,500. Capital Expenditures 120,750. Dividend Payments 25,000. Bergamot Company Net Cash Flows from operating activities $486,900. Total Assets 625,000. Net Income 550,200. Sales Revenue 875,000. Capital Expenditures 250,000. Dividend Payments 65,700.

Compute the following for both companies. Compare your results.

free cash flow
cash flows to sales ratio
cash flows to assets ratio

PA13.

LO 16.6Use the following excerpts from Fromera Company’s financial information to prepare the operating section of the statement of cash flows (direct method) for the year 2018.

2018 Income Statement items: Sales $299,000. Cost of goods sold (135,000). Operating expenses, other than depreciation expense (27,000). Depreciation expense (17,000). Gain on sale of plant assets 16,500. Net income 136,500. Balance Sheet items: December 31, 2018: Accounts receivable (associated with sales) $45,300. Inventory (associated with inventory) 1,600. Accounts payable (associated with inventory) 22,500. Accrued liabilities (associated with other expenses) 900. December 31, 2017: Accounts receivable (associated with sales) $43,400. Inventory (associated with inventory) 1,800. Accounts payable (associated with inventory) 21,250. Accrued liabilities (associated with other expenses) 1,150.

PA14.

LO 16.6Use the following excerpts from Victrolia Company’s financial information to prepare a statement of cash flows (direct method) for the year 2018.

2018 Income Statement items: Sales $455,000. Cost of goods sold (221,500). Operating expenses, other than depreciation expense (58,600). Depreciation expense (24,000). Gain on sale of plant assets 23,500. Net income 174,400. Balance Sheet items: December 31, 2018: Cash $321,450. Accounts receivable 39,750. Inventory 33,000. Accounts payable 17,550. Accrued liabilities 3,500. December 31, 2017: Cash $133,500. Accounts receivable 36,500. Inventory 35,000. Accounts payable 19,550. Accrued liabilities 2,200. Additional information: Plant assets were sold for $40,000; book value $16,500. Dividends of $25,000 were declared and paid.

PA15.

LO 16.6Use the following cash transactions relating to Lucknow Company to determine the cash flows from operating, using the direct method.

Beginning cash balance $122,000. Collected from customers 33,000. Paid dividends to stockholders 3,000. Paid for interest on notes payable 4,750. Collected dividends from stock owned 3,500. Collected cash from sale of land 20,000. Paid principal payments on notes payable 12,000. Collected cash from issuance of stock 40,000. Paid suppliers for merchandise 29,400. Ending cash balance 169,350.

Problem Set B

PB1.

LO 16.2Provide journal entries to record each of the following transactions. For each, also identify: *the appropriate section of the statement of cash flows, and **whether the transaction represents a source of cash (S), a use of cash (U), or neither (N).

reacquired $30,000 treasury stock
purchased inventory for $20,000
issued common stock of $40,000 at par
purchased land for $25,000
collected $22,000 from customers for accounts receivable
paid $33,000 principal payment toward note payable to bank

PB2.

LO 16.3Use the following information from Grenada Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $286,000. Cost of Goods Sold (159,000). Operating Expenses, other than depreciation expense (77,500). Depreciation Expense (9,500). Gain on Sale of Investments 14,200. Net Income 54,200. Balance Sheet items: December 31, 2018: Accounts Receivable 16,500. Accounts Payable 7,400. December 31, 2017: Accounts Receivable 18,250. Accounts Payable 8,800.

PB3.

LO 16.3Use the following information from Honolulu Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

PB4.

LO 16.3Use the following information from Isthmus Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Cash, Accounts Receivable, Inventory, Accounts Payable, Salaries Payable December 31, 2018, respectively: $295,000, 45,300, 92,200, 23,000, 1,700. Additional information: Net Income, Depreciation Expense: 45,200, 33,300. Cash, Accounts Receivable, Inventory, Accounts Payable, Salaries Payable December 31, 2017, respectively: $259,000, 48,700, 91,000, 26,300, 1,500.

PB5.

LO 16.3Use the following information from Juniper Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

From the December 31, 2018 balance sheet, changes from prior year: Accounts Receivable 4,000, Inventory (5,500), Prepaid Insurance 4,000, Accounts Payable 3,000, Sales Tax Payable (200). From the 2018 Income Statement: Loss from sale of land 4,200, Depreciation Expense 17,250, Net Income 22,222.

PB6.

LO 16.3Use the following excerpts from Kayak Company’s financial information to prepare the operating section of the statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $777,000. Cost of Goods Sold (555,000). Operating Expenses, other than depreciation expense (22,000). Depreciation Expense (44,000). Loss on Sale of Plant Assets (11,000). Net Income 145,000. Balance Sheet items: December 31, 2018: Accounts Receivable 63,300. Inventory 2,400. Accounts Payable 35,000. Accrued Liabilities 2,100. December 31, 2017: Accounts Receivable 63,000. Inventory 2,800. Accounts Payable 37,400. Accrued Liabilities 2,650.

PB7.

LO 16.3Analysis of Longmind Company’s accounts revealed the following activity for Equipment, with descriptions added for clarity of analysis. How would these two transactions be reported for cash flow purposes? Note the section of the statement of cash flow, if applicable, and if the transaction represents a cash source, cash use, or noncash transaction.

Equipment items: Account balance, beginning of year $88,000; Purchase of equipment this year, for cash 29,500; Purchase of equipment this year, with note payable 34,750; Account balance, end of year 152,250.

	Equipment
Account balance, beginning of year	$ 88,000
• Purchase of equipment this year, for cash	29,500
• Purchase of equipment this year, with note payable	34,750
Account balance, end of year	152,250

PB8.

LO 16.4Use the following excerpts from Stern Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $121,000, 37,200, 120,000, 304,000, (85,000), 497,200, 23,200, 179,500, 30,000, 264,500, 497,200. Additional Information: Net Income for 2018, Depreciation Expense for 2018 (Accumulated Depreciation increase), Plant Assets purchased (Plant Assets increase), financed by note, Notes Payable increased by amount of plant asset purchase, Notes Payable decreased by amount of principal note payments, respectively: 3,400, 21,000, 50,000, 50,000, 14,500. Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $101,000, 35,3000, 128,700, 254,000, (64,000), 455,000, 19,900, 144,000, 30,000, 261,100, 455,000.

PB9.

LO 16.4Use the following excerpts from Unigen Company’s financial information to prepare the operating section of the statement of cash flows (indirect method) for the year 2018.

2018 Income Statement items: Sales $777,000. Cost of goods sold (555,000). Operating expenses, other than depreciation expense (22,000). Depreciation expense (44,000). Loss on sale of plant assets (11,000). Net income 145,000. Balance Sheet items: December 31, 2018: Cash 429,850. Accounts receivable 63,300. Inventory 2,400. Accounts payable 35,000. Accrued liabilities 2,100. December 31, 2017: Cash 228,700. Accounts receivable 63,000. Inventory 2,800. Accounts payable 37,400. Accrued liabilities 2,650. Additional information: Plant assets were sold for $22,000; book value $33,000. Dividends of $18,000 were declared and paid.

PB10.

LO 16.4Use the following excerpts from Mountain Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Investments, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $100,000, 19,000, 29,000, 132,000, 90,000, (37,000), 333,000, 12,100, 2,400, 81,000, 237,500, 333,000. Additional information: Net Income (loss) for 2018, Depreciation Expense for 2018, Investments purchased, Common Stock issued for cash, at par value for cash, Dividends declared and paid, respectively: (5,700), 14,000, 12,000, 18,000, 8,000. Cash, Account Receivable, Merchandise Inventory, Investments, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $93,000, 18,000, 31,500, 120,000, 90,000, (23,000), 329,500, 13,400, 1,900, 63,000, 251,200, 329,500.

PB11.

LO 16.4Use the following excerpts from OpenAir Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Beginning cash $120,000. Net Income 87,500. Depreciation expense 22,000. Accounts Receivable change 8,900. Inventory change (6,500). Prepaid assets change 2,400. Investments change (no asset sales) 30,000. Accounts payable change (800). Note payable principal balance change (no new loans) (21,000). Common stock balance change (due to stock issuance) 36,000.

PB12.

LO 16.5The following shows excerpts from financial information relating to Stanwell Company and Thodes Company.

Stanwell Company Net Cash Flows from Operating Activities $138,000. Total Assets 272,000. Net Income 35,000. Sales Revenue 385,000. Capital Expenditures 28,000. Dividend Payments 17,000. Thodes Company Net Cash Flows from Operating Activities $115,000. Total Assets 350,000. Net Income 32,000. Sales Revenue 250,000. Capital Expenditures 60,000. Dividend Payments 13,000.

Compute the following for both companies. Compare your results.

free cash flow
cash flows to sales ratio
cash flows to assets ratio

PB13.

LO 16.6Use the following excerpts from Swansea Company’s financial information to prepare the operating section of the statement of cash flows (direct method) for the year 2018.

PB14.

LO 16.6Use the following excerpts from Swahilia Company’s financial information to prepare a statement of cash flows (direct method) for the year 2018.

PB15.

LO 16.6Use the following cash transactions relating to Warthoff Company to determine the cash flows from operating, using the direct method.

Beginning cash balance $45,000. Collected from customers 24,500. Paid dividends to stockholders 5,000. Paid for interest on notes payable 3,200. Collected dividends from stock owned 1,800. Collected cash from sale of land 15,000. Pain principal payments on notes payable 18,800. Collected cash from issuance of stock 25,000. Paid suppliers for merchandise 31,000. Ending cash balance 53,300.

Thought Provokers

TP1.

LO 16.2Use the EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) search tools on the US Securities and Exchange Commission website to locate the latest Form 10-K for a company you would like to analyze. Submit a short memo that provides the following information:

the name and ticker symbol of the company you have chosen
the following information from the company’s statement of cash flows:
1. amount of cash flows from operating activities
2. amount of cash flows from investing activities
3. amount of cash flows from financing activities
the URL to the company’s Form 10-K to allow accurate verification of your answers

TP2.

LO 16.3Use a spreadsheet and the following financial information from Mineola Company’s financial statements to build a template that automatically calculates the net operating cash flow. It should be suitable for use in preparing the operating section of the statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Prepaid Assets, Total Assets, Accounts Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $57,000, 12,500, 1,500, 71,000, 2,700, 39,000, 29,3000, 71,000. Additional information: Net income, Dividends paid: 7,000, 4,000. Cash, Account Receivable, Prepaid Assets, Total Assets, Accounts Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $42,000, 15,000, 1,100, 58,100, 1,800, 30,000, 26,300, 58,100.

TP3.

LO 16.3Consider the dilemma you might someday face if you are the chief financial officer of a company that is struggling to maintain a positive cash flow, despite the fact that the company is reporting a substantial positive net income. Maybe the problem is so severe that there is often insufficient cash to pay ordinary business expenses, like utilities, salaries, and payments to suppliers. Assume that you have been asked to communicate to your board of directors about your company’s year, in retrospect, as well as your vision for the company’s future. Write a memo that expresses your insights about past experience and present prospects for the company. Note that the challenge of the assignment is to keep your integrity intact, while putting a positive spin on the situation, as much as is reasonably possible. How can you envision the situation turning into a success story?

TP4.

LO 16.4Use the EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) search tools on the US Securities and Exchange Commission website to locate the latest Form 10-K for a company you would like to analyze. Pick a company and submit a short memo that provides the following information:

The name and ticker symbol of the company you have chosen.
A description of two items from the company’s statement of cash flows:
- One familiar item that you expected to be reported on the statement, based on what you’ve learned about cash flows
- One unfamiliar item that you did not expect to be on the statement, based on what you’ve learned about cash flows
The URL to the company’s Form 10-K to allow accurate verification of your answers

TP5.

LO 16.5If you had $100,000 available for investing, which of these companies would you choose to invest with? Support your answer with analysis of free cash flow, based on the data provided, and include in your decision whatever other reasoning you chose to utilize.

Aswan Company From Statement of Cash Flows: Cash flow from operating activities 88,000. Cash flows from investing activities (30,000). Cash flows from financing activities 58,000. From other records: Capital expenditure costs 30,000. Cash dividends payments 32,000. Sales revenue 326,000. Net income 65,000. Total assets 150,000. Merrick Company From Statement of Cash Flows: Cash flow from operating activities 146,500. Cash flows from investing activities (50,000). Cash flows from financing activities (24,750). From other records: Capital expenditure costs 50,000. Cash dividends payments 52,000. Sales revenue 542,000. Net income 160,500. Total assets 350,000.