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Exam 13: Statement of Cash Flows

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Question 91

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Which of the following is not classified among the operating activities in a statement of cash flows?

A) Payment of interest on a bank loan.
B) Payment of the principal amount owed on a bank loan.
C) Payment of an account payable to a supplier.
D) Payment of income taxes.

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Question 92

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The financial statements of New World Company provide the following information for the current year: $\begin{array}{|l|c|c|}\hline & \text { Dec.31 } & \text { Jan.1 } \\\hline \text { Accounts receivable } & \$ 273,000 & \$ 241,500 \\\hline \text { Inventory } & \$ 262,500 & \$ 252,000 \\\hline \text { Prepaid expenses } & \$ 67,200 & \$ 63,000 \\\hline \text { Accounts payable (for merchandise) } & \$ 237,300 & \$ 221,550 \\\hline \text { Accrued expenses payable } & \$ 66,150 & \$ 72,450 \\\hline \text { Net sales } & \$ 3,097,500 \\\hline \text { Cost of goods sold } & \$ 1,627,500 \\\hline \text { Operating expenses (including depreciation of } \$ 94,500) & \$ 367,500 \\\hline\end{array}$ -Compute the amount of New World's cash payments for operating expenses.

A) $277,200.
B) $283,500.
C) $378,000.
D) $349,650.

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Question 93

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An analysis of Korman Corporation's Investment in Equity Securities account during 2014 disclosed the following: $\begin{array} { | l | r | } \hline \text { Debit entries } & \$ 160,000 \\\hline \text { Credit entries } & 240,000 \\\hline\end{array}$ Korman 's 2014 income statement included a $40,000 gain on sale of equity securities and $30,000 dividend income from equity securities. All payments and proceeds relating to equity securities transactions were in cash. -The amount of cash paid by Korman Corporation in 2014 for the purchase of equity securities was:

Computation of cash flows An analysis of changes in selected statement of financial position accounts of Gable Corporation shows the following for the current year: $\begin{array}{|l|l|}\hline\text { Equity Securities accourt }\\\hline \text { Debit entries } & \$ 250,000 \\\hline \text { Credit entries } & \$ 400,000 \\\hline \text { Property, Plart, ardd Equiprnent accourts: } & \\\hline \text { Debit entries to asset accourits } & \$ 700,000 \\\hline \text { Credit entries to asset accounts } & \$ 900,000 \\\hline \begin{array} { c } \text { Debit entries to accurmulated depreciation accournts } \\\text { (resulting from sale of PPE assets) }\end{array} & \$ 300 , 000 \\\hline \begin{array} { c } \text { Credit entries to accurmulated depreciation accourts } \\\text { (representing depreciation for the curent year) }\end{array} & \$ 125,000 \\\hline\end{array}$ The income statement for the current year included the following items relating to the transactions summarized above: $\begin{array}{|l|r|}\hline \text { Loss on sale of equity securities } & \$ 85,000 \\\hline \text { Gain on sale of property, plant, and equipment } & \$ 150,000 \\\hline\end{array}$ All payments and proceeds relating to these transactions were in cash. Using this information, compute the following cash flows for the current year: $\begin{array}{|l|l|}\hline \text { (a) Purchases of equity securities } & \$\_\_\_ \\\hline \text { (b) Proceeds from sale of equity securities } & \$\_\_\_ \\\hline \text { (c) Purchases of property, plant, and equipment } & \$ \_\_\_\\\hline \text { (d) Proceeds from sale of property, plant, and equipment } & \$\_\_\_\\\hline\end{array}$

The "bottom line" in a statement of cash flows shows:

Whether one uses the direct or the indirect method of presentation of the statement of cash flows, the totals from each of the three sections (activities) will be the same regardless of the method used.

The Stock exchange of Hong Kong requires listed companies in Hong Kong to use the indirect method for the statement of cash flows.

Classification of cash flows Indicate how each of the following events should be classified in a statement of cash flows for the current calendar year. Use the following code: O = operating activities, I = investing activities, and F = financing activities. Assume use of the direct method. If the event does not involve a cash flow that should be included in the statement of cash flows, use an X. ____ (a) Paid an account payable for inventory purchased in a prior accounting period. ____ (b) On 28 December made a large credit sale; terms, 2/10, n/30. ____ (c) Received a dividend from an investment in IBM ordinary shares. ____ (d) Paid a dividend to shareholders. ____ (e) Paid the interest on a note payable to First Bank. ____ (f) Paid the principal amount due on the note payable to First Bank. ____ (g) Transferred cash from a checking account into a money market fund. ____ (h) Made an adjusting entry to record accrued wages payable at the end of the period. ____ (i) Recorded depreciation expense for the current year. ____ (j) Purchased property, plant, and equipment for cash.

Hamilton Company reported an increase of $370,000 in its accounts receivable during the year 2014. The company's statement of cash flows for 2014 reported $1 million of Cash receipts from customers. What amount of net sales must Hamilton have recorded in 2014?

The financial statements of Oriental Company provide the following information for the current year: $\begin{array}{|l|r|r|}\hline & \text { Dec.31 } &{\text { Jan.1 }} \\\hline \text { Accounts receivable } & \$ 35,000 & \$ 40,000 \\\hline \text { Inventory } & \$ 55,000 & \$ 51,000 \\\hline \text { Prepaid expenses } & \$ 12,000 & \$ 14,000 \\\hline \text { Accounts payable (for merchandise) } & \$ 33,000 & \$ 32,000 \\\hline \text { Accrued expenses payable } & \$ 15,000 & \$ 20,000 \\\hline \text { Net sales } & \$ 260,000 & \\\hline \text { Cost of goods sold } & \$ 130,000 \\\hline \text { Operating expenses (including depreciation of } \$ 18,000) & \$ 80,000 \\\hline\end{array}$ -Compute the amount of Oriental Company's cash payments for purchases of merchandise during the current year.

In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories?

Depreciation expense reduces profit for the year but does not reduce the net cash from operating activities.

When net cash from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling:

Significance of cash flows In the long run, is it more important for a business to have a positive cash flow from its operating activities, investing activities, or financing activities? Why?