Chapter 16 Statement of Cash Flows Study Guide Solutions ...
Chapter 16 Statement of Cash Flows Study Guide Solutions
Fill-in-the-Blank Equations
1. Decrease in accounts receivable; Increase in accounts receivable 2. Decrease in inventories; Decrease in accounts payable; Increase in accounts payable 3. Operating expenses; Cash payments for operating expenses 4. Decrease in interest payable 5. Increase in income tax payable 6. Investments in fixed assets to maintain current production
Exercises
1. Determine if each activity would be shown as an operating, financing, or investing activity in the statement of cash flows. a. Purchase of 5%, $4,000,000 bonds Investing b. Sale of land for $650,000 Investing c. Payment of $4,500 for advertising Operating
2. Would each of the following activities be found in the operating, financing, or investing section of the statement of cash flows? a. Payment of $3,500 interest on bonds payable Financing b. Receipt of $5,200 dividends from equity securities Investing c. Issuance of a $5,000 note payable to bank for cash Financing
1
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2 Chapter 16
3. Determine if each transaction would be shown in the operating, financing, or investing section of the statement of cash flows. a. Payment for insurance for $15,000 for the upcoming year Operating b. Issuance of 5,000 shares of common stock Financing c. Sale of old equipment for $1,200 Investing
Strategy: Financing activities are activities associated with acquiring and repaying funds in order to maintain business. Investing activities provide gains and losses through the purchase and sale of assets, which may include land, buildings, equipment, and investments. Operating activities are the normal day-to-day cash inflows and outflows of the business.
4. Using the following beginning and ending operating account balances, determine if each change would be a positive or negative adjustment to net income to arrive at net cash flows from operating activities under the indirect method.
Accounts receivable Merchandise inventory Supplies Accounts payable Interest payable
Dec. 31 $6,210
9,900 3,200 10,100 1,600
Jan. 1 $4,450 10,880
3,000 7,800 3,200
Increase (Decrease)
$ 1,760 (980) 200 2,300
(1,600)
Positive or negative adjustment? Negative Positive Negative Positive Negative
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Statement of Cash Flows 3
5. Determine if each change in the operating accounts shown would be a positive or a negative adjustment to Net Income to arrive at net cash flows from operating activities using the indirect method.
Accounts receivable Merchandise inventory Supplies Accounts payable Dividends payable
Dec. 31 $7,500
7,750 490
4,850 1,000
Jan. 1 $7,900
7,500 570
5,000 7,800
Increase (Decrease)
$(400) 250 (80)
(150) (6,800)
Positive or negative adjustment? Positive Negative Positive Negative None
6. Use the beginning and ending account balances below to determine the dollar effect on net income when reconciling to arrive at net cash flows from operating activities under the indirect method.
Accounts receivable Merchandise inventory Prepaid insurance Accounts payable Wages payable
Dec. 31 $8,300
9,100 5,200 8,250 12,190
Jan. 1 $10,000
6,750 12,800
7,800 14,600
Increase (Decrease)
$(1,700) 2,350
(7,600) 450
(2,410)
Positive or negative adjustment? Positive Negative Positive Positive Negative
Strategy: If an item would be a source of cash, such as an increase in accounts payable (the company received the benefit of assets received without paying cash yet), add the change to net income. If a change demonstrates a use of cash, such as an increase in accounts receivable (the company has not yet received the cash but made the sale), subtract the change from net income.
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4 Chapter 16
7. Prepare the operating section of the statement of cash flows under the indirect method using the income statement below. During the year, the accounts payable also increased by $1,200 and accounts receivable decreased by $2,200.
ABC Corporation
Income Statement
For the Year Ended December 31, 2015
Sales revenue
Cost of merchandise sold
Gross profit
Operating expenses:
Salaries expense
$41,300
Advertising expense
1,500
Depreciation expense
6,250
Amortization expense
2,240
Total operating expenses
Income from operations
Other income and expenses:
Rent revenue
$15,300
Gain on sale of equipment
2,200
Net income
$182,100 90,400
$ 91,700
$ 51,290 $ 40,410
$ 17,500 $ 57,910
Cash flows from operating activities: Net income Adjustments: Increase in accounts payable Decrease in accounts receivable Gain on sale of equipment Depreciation expense Amortization expense Total adjustments
Net cash flow from operating activities
$ 1,200 2,200
(2,200) 6,250 2,240
$57,910
$ 9,690 $67,600
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Statement of Cash Flows 5
8. Use the income statement below to prepare the statement of cash flows using the indirect method. During the year, the company also had a $750 decrease in accounts payable, a $200 increase in supplies, and a $1,000 decrease in accounts receivable. The company issued $4,000,000 of 10% bonds at face value and paid $14,000 in dividends to shareholders. ABC Corporation received $10,000 in cash for the investments sold. The cash balance at the beginning of the year was $460,900.
ABC Corporation
Income Statement
For the Year Ended December 31, 2015
Sales revenue
$122,300
Cost of merchandise sold
25,700
Gross profit
$ 96,600
Operating expenses:
Salaries expense
$35,000
Insurance expense
4,800
Depreciation expense
7,700
Amortization expense
1,200
Total operating expenses
48,700
Income from operations
$ 47,900
Other income and expenses:
Rent revenue
$10,000
Loss on investments
2,200 $ 7,800
Net income
$ 55,700
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6 Chapter 16
ABC Corporation
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities
Net income
$ 55,700
Adjustments to reconcile net income to net cash flow from operating activities
Decrease in accounts receivable
$ 1,000
Decrease in accounts payable
(750)
Increase in supplies
(200)
Loss on investments
2,200
Depreciation expense
7,700
Amortization expense
2,200
Net cash flow from operating activities
Cash flows from investing activities
Sale of investments
$ 10,000
Net cash flow from investing activities
Cash flows from financing activities
Issuance of bonds
$4,000,000
Dividends paid
(14,000)
Net cash flow from financing activities
Increase (Decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
$ 67,850
10,000
3,986,000 $4,063,850
460,900 $4,524,750
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Statement of Cash Flows 7
9. Prepare the statement of cash flows using the income statement shown and the indirect method. The company also had a $1,500 increase in accounts receivable, a $2,200 decrease in accounts payable, and a $4,200 decrease in merchandise inventory. The corporation paid $50,000 in dividends and purchased land worth $40,000, half of which was paid for using cash and a note payable for the remainder. The cash balance at the beginning of the year was $22,000.
ABC Corporation
Income Statement
For the Year Ended December 31, 2015
Sales revenue
Cost of merchandise sold
Gross profit
Operating expenses:
Wages expense
$12,000
Insurance expense
6,600
Depreciation expense
5,100
Amortization expense
3,100
Total operating expenses
Income from operations
Other income and expenses:
Interest revenue
$ 1,350
Interest expense
(1,500)
Net income
$98,100 10,850
$87,250
26,800 $60,450
$ (150) $60,300
?2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part.
8 Chapter 16
ABC Corporation
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities
Net income
$ 60,300
Adjustments to reconcile net income to net cash flow from operating activities
Increase in Accounts Receivable
$ (1,500)
Decrease in Accounts Payable
(2,200)
Decrease in Merchandise Inventory Depreciation expense Amortization expense Net cash flow from operating activities Cash flows from investing activities Purchase of land Net cash flow from investing activities Cash flows from financing activities Dividends paid Net cash flow from financing activities Increase (Decrease) in cash Cash at the beginning of the period Cash at the end of the period
4,200 5,100 3,100
$(20,000)
$(50,000)
Schedule of noncash financings and investing activities: Issued note payable for land
$ 69,000
(20,000)
(50,000) $ (1,000)
22,000 $21,000
$20,000
Strategy: Under the indirect method, start with net income, and make any necessary adjustments to arrive at the net cash flow from operating activities. Adjustments include adding back any noncash expenses, such as depreciation and amortization, to net income. If an item shown on the income statement results in a gain or loss from the sale of an asset, make an adjustment to net income so that the cash flow from operating activities will not include these amounts, since it is also a noncash activity (the cash received will be shown in the financing or investing section). Also adjust net income for changes in operating assets and liabilities.
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