Monday, December 15, 2008

Jensen Limited
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2008
Cash flows from operating activities
Net income $67,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense* $20,000
Gain on sale of investments (AFS) (15,000)
Loss on sale of equipment 3,000
Increase in receivable (net) (17,500)
Increase in merchandise inventory (14,000)
Decrease in future income tax asset 4,500
Increase in accounts payable 12,500
Decrease in accrued pension liability (2,500)
Increase in income taxes payable 2,000 (7,000)
Net cash provided by operating activities 60,000

Cash flows from investing activities
Purchase of investments (AFS) (5,000)
Purchase of equipment (32,000)
Proceeds on sale of investments 50,000
Proceeds on sale of equipment 3,000
Net cash provided by investing activities 16,000

Cash flows from financing activities
Payment of long-term notes payable (8,000)
Dividends paid (74,000)
Proceeds on issuance of
common shares 35,000
Net cash used by financing activities (47,000)

Net increase in cash 29,000
Cash, January 1, 2008 51,000
Cash, December 31, 2008 $80,000
* $21,000 + $4,000 - $14,000 + $37,000 - $28,000

__________________________________________________________________
Cash from Operating:
* Cash receipts from sales or for the performance of services
* Payroll and other payments to employees
* Payments to suppliers and contractors
* Rent payments
* Payments for utilities
* Tax payments

Current Assets:
increase, subtract from net income
decrease, add to net income

Current Liabilities:
increase, add to net income
decrease, subtract from net income

***If you have a gain on disposal of assets, subtract from operating.
***If you have a loss on disposal of assets, add to operating.
Be careful of trick transactions eg: switching loans to shares.. no cash
____________________________________________________________

Cash from Investing:
* Purchases of property, plant and equipment
* Proceeds from the sale of property, plant and equipment
* Purchases of stock or other securities (other than cash equivalents)
* Proceeds from the sale or redemption of investments

changes in long term assets
____________________________________________________________

Cash from Financing:
* Proceeds from loans, notes, and other debt instruments
* Installment payments on loans or other repayment of debts
* Cash received from the issuance of stock or equity in the business
* Dividend payments, purchases of treasury stock, or returns of capital

changes in long term liabilities and equity
____________________________________________________________

MULTIPLE CHOICE—Conceptual

1. It is an objective of the statement of cash flows to
c. provide information about the operating, investing, and financing activities of an entity during a period.

2. The primary purpose of the statement of cash flows is to provide information
c. about the cash receipts and cash payments of an entity during a period.

3. Cash equivalents are
d. all of these.

4. An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
b. deduction from net income in arriving at net cash flow from operating activities.

5. A statement of cash flows typically would not disclose the effects of
b. stock dividends declared and issued.

6. In a statement of cash flows, the cash flows from the investing activities section should report
c. a major repair to machinery charged to accumulated amortization.

7. A company borrows $10,000 and signs a 180-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as
d. a cash inflow from financing activities.

8. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities?
b. A change in dividends payable

9. The declaration of a cash dividend on common shares affects cash flows from operating activities under the direct method and indirect method as follows:
Direct Method Indirect Method
d. No effect No effect

10. When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because
b. cost of goods sold on an accrual basis is lower than on a cash basis.

11. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in determining cash flow from operating activities?
Direct Method Indirect Method
c. Increase Increase

12. In determining net cash flow from operating activities, a decrease in accounts payable during a period
c. requires an increase adjustment to cost of goods sold under the direct method.

13. Arbor Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Arbor's statement of cash flows (indirect method), the $25,000 should
d. be shown as a deduction from net income in the cash flows from operating activities section.

14. When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities?
Indirect Method Direct Method
a. Increase Decrease

15. When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities?
Indirect Method Direct Method
a. Increase Decrease

16. When preparing a statement of cash flows, the following are used for which method in determining cash flows from operating activities?
Gross Accounts Receivable Net Accounts Receivable
b. Direct Indirect

17. Which of the following statements is correct?
c. The direct method is more consistent with the primary purpose of the statement of cash flows.

18. In reporting extraordinary transactions on a statement of cash flows (indirect method), the
a. operating activities should start with income before extraordinary items.

19. Which of the following is shown on a statement of cash flows?
d. None of these

20. Cash flow per share
c. should not be disclosed in the financial statements.

MULTIPLE CHOICE—Computational

21. The net cash provided by operating activities in Tan Company's statement of cash flows for 2006 was $77,000. For 2006, amortization on plant assets was $30,000, amortization of goodwill was $5,000, and cash dividends paid on common shares was $36,000. Based only on the information given above, Tan’s net income for 2006 was
b. $42,000.

22. During 2006, Ellis Corporation, which uses the allowance method of accounting for doubtful accounts, recorded a provision for bad debt expense of $10,000 and in addition it wrote off, as uncollectible, accounts receivable of $4,000. As a result of these transactions, net cash flows from operating activities would be calculated (indirect method) by adjusting net income with a
a. $10,000 increase.

23. Fort Company sold some of its plant assets during 2006. The original cost of the plant assets was $150,000 and the accumulated amortization at date of sale was $140,000. The proceeds from the sale of the plant assets were $21,000. The information concerning the sale of the plant assets should be shown on Fort's statement of cash flows (indirect method) for the year ended December 31, 2006, as a(n)
c. subtraction from net income of $11,000 and a $21,000 increase in cash flows from investing activities.

24. An analysis of the machinery accounts of Bakken Company for 2006 is as follows:
Machinery, Net of
Accumulated Accumulated
Machinery Amortization Amortization
Balance at January 1, 2006 $500,000 $125,000 $375,000
Purchases of new machinery in
2006 for cash 200,000 — 200,000
Amortization in 2006 — 100,000 (100,000)
Balance at Dec. 31, 2006 $700,000 $225,000 $475,000
The information concerning Bakken's machinery accounts should be shown in Bakken's statement of cash flows (indirect method) for the year ended December 31, 2006, as a(n)
b. addition to net income of $100,000 and a $200,000 decrease in cash flows from investing activities.

25. Equipment that cost $92,000 and had accumulated amortization of $49,000 was sold for $48,000. This transaction should be shown on the statement of cash flows (indirect method) as a(n)
c. deduction from net income of $5,000 and a $48,000 cash inflow from investing activities.

26. During 2006, equipment was sold for $78,000. The equipment cost $126,000 and had a book value of $72,000. Accumulated Amortization—Equipment was $344,000 at 12/31/05 and $368,000 at 12/31/06. Amortization expense for 2006 was
c. $78,000.

Use the following information for questions 27 and 28.

Equipment that cost $100,000 and had a book value of $52,000 was sold for $60,000. Data from the comparative balance sheets are:
12/31/06 12/31/05
Equipment $720,000 $650,000
Accumulated Amortization 220,000 190,000

27. Amortization expense for 2006 was
b. $78,000.

28. Equipment purchased during 2006 was
a. $170,000.

Use the following information for questions 29 through 33.

Financial statements for Yentl Company are given below:
Yentl Company
Balance Sheet
January 1, 2006
Assets Equities
Cash $160,000 Accounts payable $ 76,000
Accounts receivable 144,000
Buildings and equipment 600,000
Accumulated amortization—
buildings and equipment (200,000) Common shares 460,000
Patents 72,000 Retained earnings 240,000
$776,000 $776,000

Yentl Company
Statement of Cash Flows
Year Ended December 31, 2006
Increase (Decrease) in Cash

Cash flows from operating activities
Net income $200,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $ (64,000)
Increase in accounts payable 32,000
Amortization—buildings and equipment 60,000
Gain on sale of equipment (24,000)
Amortization of patents 8,000 12,000
Net cash provided by operating activities 212,000

Cash flows from investing activities
Sale of equipment 48,000
Purchase of land (100,000)
Purchase of buildings and equipment (192,000)
Net cash used by investing activities (244,000)
Cash flows from financing activities
Payment of cash dividend (60,000)
Issuance of common shares 160,000
Net cash provided by financing activities 100,000
Net increase in cash 68,000
Cash, January 1, 2006 160,000
Cash, December 31, 2006 $228,000

Total assets on the balance sheet at December 31, 2006 are $1,108,000. Accumulated amortization on the equipment sold was $56,000.

29. When the equipment was sold, the Buildings and Equipment account received a credit of
c. $80,000.

30. The book value of the buildings and equipment at December 31, 2006 was
a. $508,000.

31. The accounts payable at December 31, 2006 were
b. $108,000.

32. The balance in the Retained Earnings account at December 31, 2006 was
c. $380,000.

33. Common shares at December 31, 2006 was
d. $620,000.

Use the following information for questions 34 and 35.

The balance in retained earnings at December 31, 2005 was $540,000 and at December 31, 2006 was $436,000. Net income for 2006 was $375,000. A stock dividend was declared and distributed which increased common shares $233,000. A cash dividend was declared and paid.

34. The amount of the cash dividend was
b. $246,000.

35. The stock dividend should be reported on the statement of cash flows (indirect method) as
d. Stock dividends are not shown on a statement of cash flows.

Use the following information for questions 36 and 37.

A flood damaged a building and contents. Floods are unusual and infrequent in this area. The receipts from insurance companies totaled $300,000, which was $90,000 less than the book values. The tax rate is 30%.

36. On the statement of cash flows (indirect method), the receipts from insurance companies should
c. be shown as an inflow from investing activities of $300,000.

37. On the statement of cash flows (indirect method), the flood loss should be
d. ignored in the operating activity section.

Use the following information for questions 38 and 39.

Hope Co. provided the following information on selected transactions during 2006:
Purchase of land by issuing bonds $100,000
Proceeds from issuing bonds 200,000
Purchases of inventories 380,000
Purchases of treasury stock 60,000
Loans made to affiliated corporations 140,000
Dividends paid to preferred shareholders 40,000
Proceeds from issuing preferred shares 160,000
Proceeds from sale of equipment 20,000

38. The net cash provided (used) by investing activities during 2006 is
b. $(120,000).

39. The net cash provided by financing activities during 2006 is
b. $260,000.

Use the following information for questions 40 through 42.

The balance sheet data of Oslo Company at the end of 2006 and 2005 follow:
2006 2005
Cash $ 75,000 $105,000
Accounts receivable (net) 180,000 135,000
Merchandise inventory 210,000 135,000
Prepaid expenses 30,000 75,000
Land 270,000 120,000
Buildings and equipment 270,000 225,000
Accumulated amortization—buildings and equipment (54,000) (24,000)
Totals $981,000 $771,000

Accounts payable $204,000 $165,000
Accrued expenses 36,000 54,000
Notes payable—bank, long-term 120,000
Mortgage payable 90,000
Common shares, no par 627,000 477,000
Retained earnings (deficit) 24,000 (45,000)
$981,000 $771,000
Land was acquired for $150,000 in exchange for common shares valued at $150,000, during the year; all equipment purchased was for cash. Equipment costing $15,000 was sold for $6,000; book value of the equipment was $12,000 and the loss was reported as an ordinary item in net income. Cash dividends of $30,000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other entry in the Retained Earnings account. In the statement of cash flows for the year ended December 31, 2006, for Oslo Company:

40. The net cash provided by operating activities was
c. $84,000.

41. The net cash provided (used) by investing activities was
d. $(54,000).

42. The net cash provided (used) by financing activities was
c. $(60,000).

43. The following information on selected cash transactions for 2006 has been provided by Raymond Company:
Proceeds from sale of land $200,000
Proceeds from long-term borrowings 500,000
Purchases of plant assets 180,000
Purchases of inventories 850,000
Proceeds from issuance of Raymond common shares 300,000
What is the cash provided (used) by investing activities for the year ended December 31, 2006, as a result of the above information?
a. $20,000

44. Selected information from Glasgow Company's 2006 accounting records is as follows:
Proceeds from issuance of common shares $ 400,000
Proceeds from issuance of bonds 1,200,000
Cash dividends paid on common shares 160,000
Cash dividends paid on preferred shares 60,000
Purchases of treasury stock 120,000
Sale of shares to officers and employees not included above 100,000
Glasgow's statement of cash flows for the year ended December 31, 2006, would show net cash provided (used) by financing activities of
d. $1,360,000.

45. Snow Incorporated, had net income for 2006 of $3,500,000. Additional information is as follows:
Amortization of goodwill $ 30,000
Amortization on plant assets 1,100,000
Long-term debt:
Bond premium amortization 45,000
Interest paid 600,000
Provision for doubtful accounts:
Current receivables 55,000
Long-term nontrade receivables 20,000
What should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2006, based solely on the above information?
c. $4,660,000.

46. The net income for the year ended December 31, 2006, for Slam Company was $600,000. Additional information is as follows:
Amortization on plant assets $300,000
Amortization of leasehold improvements 170,000
Provision for doubtful accounts on short-term receivables 60,000
Provision for doubtful accounts on long-term receivables 50,000
Interest paid on short-term borrowings 40,000
Interest paid on long-term borrowings 30,000
Based solely on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2006?
b. $1,180,000.

Use the following information for questions 47 through 51.

Tomko Mining Company has recently decided to go public and has hired you as an independent accountant. One statement that the company is anxious to have prepared is a statement of cash flows. Financial statements of Tomko Mining Company for 2006 and 2005 are provided below.

BALANCE SHEETS
12/31/06 12/31/05
Cash $ 51,000 $ 24,000
Accounts receivable 45,000 27,000
Merchandise inventory 48,000 60,000
Property, plant and equipment $76,000 $120,000
Less accumulated amortization (40,000) 36,000 (38,000) 82,000
$180,000 $193,000

Accounts payable $ 22,000 $ 12,000
Income taxes payable 44,000 49,000
Bonds payable 45,000 75,000
Common shares 27,000 27,000
Retained earnings 42,000 30,000
$180,000 $193,000

INCOME STATEMENT
Year Ended December 31, 2006
Sales $1,050,000
Cost of sales 894,000
Gross profit 156,000
Selling expenses $75,000
Administrative expenses 24,000 99,000
Income from operations 57,000
Interest expense 9,000
Income before taxes 48,000
Income taxes 12,000
Net income $ 36,000

The following additional data were provided:
1. Dividends for the year 2006 were $24,000.
2. During the year, equipment was sold for $30,000. This equipment cost $44,000 originally and had a book value of $36,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.
3. All amortization expense is in the selling expense category.

The following question(s) relate(s) to a statement of cash flows (direct method) for the year ended December 31, 2006, for Tomko Mining Company.

47. The net cash provided by operating activities is
a. $51,000.

48. The net cash provided (used) by investing activities is
c. $30,000.

49. Under the direct method, the cash received from customers is
b. $1,032,000.

50. Under the direct method, the total taxes paid is
d. $17,000.

51. The net cash provided (used) by financing activities is
c. $(54,000).


DERIVATIONS — Computational

No. Answer Derivation
21. b $77,000 – $30,000 – $5,000 = $42,000.

22. a $10,000.

23. c $21,000 – ($150,000 – $140,000) = $11,000, $21,000 (proceeds).

24. b Conceptual.

25. c $48,000 – ($92,000 – $49,000) = $5,000, $48,000 (proceeds).

26. c $368,000 – $344,000 + ($126,000 – $72,000) = $78,000.

27. b $220,000 – $190,000 + ($100,000 – $52,000) = $78,000.

28. a $720,000 – $650,000 + $100,000 = $170,000.

29. c $48,000 – $24,000 = $24,000 (BV); $24,000 + $56,000 = $80,000.

30. a ($600,000 – $200,000) – $24,000 + $192,000 – $60,000 = $508,000.

31. b $76,000 + $32,000 = $108,000.

32. c $240,000 + $200,000 – $60,000 = $380,000.

33. d $460,000 + $160,000 = $620,000.

34. b $540,000 + $375,000 – ($150,000 + $83,000) – X = $436,000
X = $246,000.

35. d Conceptual.

36. c Conceptual, $300,000 (proceeds)

37. d Conceptual, $390,000 – $300,000 = $90,000 (extraordinary loss); the extraordinary loss does not represent an outflow of cash. In the operating activities section, income before extraordinary items is used, therefore, no adjustment is necessary for the loss.

38. b $20,000 – $140,000 = ($120,000).

39. b $200,000 – $60,000 – $40,000 + $160,000 = $260,000.

40. c $24,000 + $30,000 + $45,000 = $99,000 (NI)
($15,000 – $3,000) – $6,000 = $6,000 (Loss)
$54,000 + $3,000 – $24,000 = $33,000 (Amort. exp.)
$99,000 – $45,000 – $75,000 + $45,000 + $6,000 + $33,000 + $39,000 –
$18,000 = $84,000.

No. Answer Derivation
41. d $6,000 – ($270,000 + $15,000 – $225,000) = ($54,000).

42. c ($120,000) + $90,000 – $30,000 = ($60,000).

43. a $200,000 – $180,000 = $20,000.

44. d $400,000 + $1,200,000 – $160,000 – $60,000 – $120,000 + $100,000 =
$1,360,000.

45. c $3,500,000 + $30,000 + $1,100,000 – $45,000 + $55,000 + $20,000 =
$4,660,000.

46. b $600,000 + $300,000 + $170,000 + $60,000 + $50,000 = $1,180,000.

47. a $36,000 + $6,000 + ($40,000 + $8,000 – $38,000) – $18,000 + $12,000 +
$10,000 – $5,000 = $51,000.

48. c $30,000.

49. b $27,000 + $1,050,000 – $45,000 = $1,032,000.

50. d $49,000 + $12,000 – $44,000 = $17,000.

51. c ($24,000) – ($30,000) = ($54,000).

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