Module Nine Homework Notes: • Complete your solutions within this template. Copy and paste tables from Excel as needed. • Show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Problem 1 To compare statement of cash flow reporting under the direct and indirect methods, enter a check mark to indicate which items are used with each method. Cash Flows Statement of Cash Flows Method (and related changes) Direct Indirect 1. Salaries payable increase or decrease 2. Payments to employees 3. Cash collections from customers 4. Prepaid rent increase or decrease 5. Payments to suppliers 6. Inventory increase or decrease 7. Utilities payable, increase or decrease 8. Depreciation expense 9. Net income 10. Cash flows from operating activities 11. Cash flows from investing activities 12. Cash flows from financing activities 13. Net increase or decrease in cash during the period Problem 2 A company completed its income statement and balance sheet for the year and provided the following information: Income Statement Service Revenue $55,000 Expenses: Salaries 42,500 Rent 7,200 Depreciation 6,800 Amortization of copyrights 1,000 Total Expenses 57,500 Net loss $(2,500) Partial Balance Sheet Current Year Prior Year Accounts receivable $ 7,000 $16,000 Salaries Payable 14,000 7,200 Prepaid rent 2,200 8,400 In addition, the company bought a small piece of equipment costing $6,500. Required: 1. Prepare the operating activities section of the statement of cash flows using the indirect method. 2. Explain why the company was able to report positive operating cash flow despite having a net loss for the year. Problem 3 For the most recent accounting year, a company reported the following operating and cash activities: Investments in other companies (8,628) Increase in inventories (2,685) Depreciation and amortization 35,254 Long-term debt repayment (165,243) Net income 28,961 Proceeds from issuance of common stock 13,485 Proceeds from sale of property and equipment 3,590 Payment of dividends (6,255) Proceeds from long-term debt issuance 61,785 Purchases of property and equipment (25,400) Decrease in accounts receivable 5,291 Decrease in accounts payable (8,466) Requirements: 1. Prepare the operating, investing and financing sections of the cash flow statement. 2. Explain the major sources and uses of cash for the year. Problem 4 The balance sheet and income statement for a company are provided below, along with selected additional financial information. Current Year Prior Year Balance Sheet Cash 79,250 73,840 Accounts Receivable 18,820 24,185 Merchandise Inventory 15,354 6,976 Property and equipment 285,735 175,000 Accumulated Depreciation (89,000) (72,630) Total Assets 310,159 207,371 Accounts Payable 8,500 18,200 Wages Payable 3,208 2,194 Notes payable, long-term 72,840 86,100 Contributed capital 84,255 65,980 Retained earnings 141,356 34,897 Total Liabilities and Stockholders’ Equity 310,159 207,371 Income Statement Sales 284,955 Cost of goods sold 91,357 Wages 32,187 Depreciation expense 16,370 Other Expense 22,358 Net income 122,683 Additional data: a) Purchased equipment for cash $100,735 b) Paid $13,260 on a long-term loan c) Issued new shares of stock for $18,275 cash d) Dividends of $16,224 were declared and paid. Required: Prepare a statement of cash flows for the year using the indirect method. Problem 5 For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and A. It must be identified as a cash equivalent on the income statement. B. Must be sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes. C. The investment must have a known foreign exchange rate. D. It must mature within 4 months. Problem 6 Which of the following statements about the statement of cash flows is correct? A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities. Problem 7 Kela Corporation reported 2009 net income of $450,000 including the effects of depreciation expense, $60,000 and amortization expense on a patent, $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities for 2009 was: A. $440,000 B. $470,000 C. $520,000 D. $570,000 Problem 8 Which of the following statements about cash flows from operating activities, in a statement of cash flows prepared under the indirect method, is correct? A. An increase in accounts receivable would be subtracted from net income. B. An increase in salaries payable would be subtracted from net income. C. An increase in inventory would be added to net income. D. Depreciation expense would be subtracted from net income. Problem 9 Canadian Beer reported they sold equipment for $222 million and purchased $1,515 million of new equipment. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show: A. An inflow of $222 million and outflow of $1,515 million. B. An inflow of $150 million and outflow of $1,515 million. C. A net outflow of $1,293 million. D. A net outflow of $1,365 million. Problem 10 Lab Industries, Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold long-term investments for $12,000, received $5,000 of dividend revenue, purchased treasury stock for $15,000, and purchased new equipment for $19,000. The net cash flow from financing activities would be: A. $70,000 B. $27,000 C. $80,000 D. $20,000 Problem 11 A company acquired some land (independently appraised at $12,000) and paid for it by issuing 1,000 shares of its common stock (par $10 per share; no market price was quoted). How should this be reported on the statement of cash flows? A. Report $12,000 as inflow and outflow of cash. B. Report $12,000 as an inflow of cash. C. Should not be reported on the statement of cash flows. D. Report in the schedule of significant noncash transactions. Problem 12 8. Use the following information to prepare a statement of cash flows for Hanson Inc. for the year ended December 31, 2009 using the indirect method. Prepare a schedule for any non-cash items for disclosure, if appropriate. A. Net income $10,000 (depreciation expense, 5,000; inventory decrease, $1,000; no changes in accounts receivable or accounts payable) B. Issued capital stock for $4,000 of equipment. C. Sold equipment for $8,000, book value $8,000. D. Paid cash dividend, $3,000 (declared in prior year). E. Paid long-term debt principal, $8,000 and short-term debt principal, $2,000. F. Purchased equipment for $12,000 in exchange for a note payable due in two years. The cash balance on January 1, 2009 was $10,000.

Module Nine Homework

 

Notes:

• Complete your solutions within this template. Copy and paste tables from Excel as needed.
• Show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit.

 

Problem 1

To compare statement of cash flow reporting under the direct and indirect methods, enter a check mark to indicate which items are used with each method.

 

Cash Flows				Statement of Cash Flows Method
(and related changes)				Direct	Indirect
	1.		Salaries payable increase or decrease
	2.		Payments to employees
	3.		Cash collections from customers
	4.		Prepaid rent increase or decrease
	5.		Payments to suppliers
	6.		Inventory increase or decrease
	7.		Utilities payable, increase or decrease
	8.		Depreciation expense
	9.		Net income
	10.		Cash flows from operating activities
	11.		Cash flows from investing activities
	12.		Cash flows from financing activities
	13.		Net increase or decrease in cash during the period

 

 

Problem 2

A company completed its income statement and balance sheet for the year and provided the following information:

 

                                                            Income Statement

 

                              Service Revenue                                             $55,000

                              Expenses:

                                             Salaries                                                42,500

                                             Rent                                                        7,200

                                             Depreciation                                         6,800

                                             Amortization of copyrights              1,000

                              Total Expenses                                                  57,500

                              Net loss                                                                           $(2,500)

 

                                                            Partial Balance Sheet

                                                                                                         Current Year       Prior Year

                              Accounts receivable                                       $ 7,000                 $16,000

                              Salaries Payable                                              14,000                     7,200

                              Prepaid rent                                                        2,200                     8,400

 

In addition, the company bought a small piece of equipment costing $6,500.

 

Required:

1. Prepare the operating activities section of the statement of cash flows using the indirect method.
2. Explain why the company was able to report positive operating cash flow despite having a net loss for the year.

 

 

Problem 3

For the most recent accounting year, a company reported the following operating and cash activities:

 

Investments in other companies	(8,628)
Increase in inventories	(2,685)
Depreciation and amortization	35,254
Long-term debt repayment	(165,243)
Net income	28,961
Proceeds from issuance of common stock	13,485
Proceeds from sale of property and equipment	3,590
Payment of dividends	(6,255)
Proceeds from long-term debt issuance	61,785
Purchases of property and equipment	(25,400)
Decrease in accounts receivable	5,291
Decrease in accounts payable	(8,466)

 

Requirements:

1. Prepare the operating, investing and financing sections of the cash flow statement.
2. Explain the major sources and uses of cash for the year.

 

Problem 4

The balance sheet and income statement for a company are provided below, along with selected additional financial information.

 

	Current Year	Prior Year
Balance Sheet
Cash	79,250	73,840
Accounts Receivable	18,820	24,185
Merchandise Inventory	15,354	6,976
Property and equipment	285,735	175,000
Accumulated Depreciation	(89,000)	(72,630)
Total Assets	310,159	207,371
Accounts Payable	8,500	18,200
Wages Payable	3,208	2,194
Notes payable, long-term	72,840	86,100
Contributed capital	84,255	65,980
Retained earnings	141,356	34,897
Total Liabilities and Stockholders’ Equity	310,159	207,371
Income Statement
Sales	284,955
Cost of goods sold	91,357
Wages	32,187
Depreciation expense	16,370
Other Expense	22,358
Net income	122,683

 

Additional data:

a)      Purchased equipment for cash $100,735

b)      Paid $13,260 on a long-term loan

c)      Issued new shares of stock for $18,275 cash

d)      Dividends of $16,224 were declared and paid.

 

Required:

Prepare a statement of cash flows for the year using the indirect method.

 

 

 

 

 

 

 

 

Problem 5
	For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and
	A. It must be identified as a cash equivalent on the income statement. B. Must be sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes. C. The investment must have a known foreign exchange rate. D. It must mature within 4 months.

 

Problem  6
	Which of the following statements about the statement of cash flows is correct?
	A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities.

 

Problem  7
	Kela Corporation reported 2009 net income of $450,000 including the effects of depreciation expense, $60,000 and amortization expense on a patent, $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities for 2009 was:
	A. $440,000 B. $470,000 C. $520,000 D. $570,000

 

Problem  8
	Which of the following statements about cash flows from operating activities, in a statement of cash flows prepared under the indirect method, is correct?
	A. An increase in accounts receivable would be subtracted from net income. B. An increase in salaries payable would be subtracted from net income. C. An increase in inventory would be added to net income. D. Depreciation expense would be subtracted from net income.

 

Problem  9
	Canadian Beer reported they sold equipment for $222 million and purchased $1,515 million of new equipment. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show:
	A. An inflow of $222 million and outflow of $1,515 million. B. An inflow of $150 million and outflow of $1,515 million. C. A net outflow of $1,293 million. D. A net outflow of $1,365 million.

 

Problem  10
	Lab Industries, Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold long-term investments for $12,000, received $5,000 of dividend revenue, purchased treasury stock for $15,000, and purchased new equipment for $19,000. The net cash flow from financing activities would be:
	A. $70,000 B. $27,000 C. $80,000 D. $20,000

 

Problem  11
	A company acquired some land (independently appraised at $12,000) and paid for it by issuing 1,000 shares of its common stock (par $10 per share; no market price was quoted). How should this be reported on the statement of cash flows?
	A. Report $12,000 as inflow and outflow of cash. B. Report $12,000 as an inflow of cash. C. Should not be reported on the statement of cash flows. D. Report in the schedule of significant noncash transactions.

 

Problem  12
	8. Use the following information to prepare a statement of cash flows for Hanson Inc. for the year ended December 31, 2009 using the indirect method. Prepare a schedule for any non-cash items for disclosure, if appropriate. A. Net income $10,000 (depreciation expense, 5,000; inventory decrease, $1,000; no changes in accounts receivable or accounts payable) B. Issued capital stock for $4,000 of equipment. C. Sold equipment for $8,000, book value $8,000. D. Paid cash dividend, $3,000 (declared in prior year). E. Paid long-term debt principal, $8,000 and short-term debt principal, $2,000. F. Purchased equipment for $12,000 in exchange for a note payable due in two years. The cash balance on January 1, 2009 was $10,000.

 

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