Which of the following would not be found within the investing section of the statement of cash flows?

Multiple Choice

1.

LO 16.1Which of the following statements is false?

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

2.

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?

1. credit purchase of inventory
2. sales of product, for cash
3. cash paid for purchase of equipment
4. salary payments to employees

3.

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

1. financing, investing, operating
2. operating, investing, financing
3. investing, operating, financing
4. operating, financing, investing

4.

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

1. inventory purchased for cash
2. sales of product, for cash
3. cash paid for purchase of equipment
4. dividend payments to shareholders, paid in cash

5.

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

1. land purchased, with note payable
2. sales of product, for cash
3. cash paid for purchase of equipment
4. dividend payments to shareholders, paid in cash

6.

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

1. land purchased, with note payable
2. sales of product, for cash
3. cash paid for purchase of equipment
4. dividend payments to shareholders, paid in cash

7.

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

1. Cash increases by the same amount.
2. Cash decreases by the same amount.
3. Cash decreases by twice as much.
4. Cash does not change.

8.

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

1. Cash increases by the same amount.
2. Cash decreases by the same amount.
3. Cash decreases by twice as much.
4. Cash does not change.

9.

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

1. Cash increases by the same amount.
2. Cash decreases by the same amount.
3. Cash decreases by twice as much.
4. Cash does not change.

10.

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

1. Cash increases by the same amount.
2. Cash decreases by the same amount.
3. Cash decreases by twice as much.
4. Cash does not change.

11.

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

1. gain on sale of investments
2. depreciation expense
3. decrease in accounts receivable
4. decrease in bonds payable

12.

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

1. sale of investments
2. depreciation expense
3. decrease in accounts receivable
4. decrease in bonds payable

13.

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

1. loss on sale of investments
2. depreciation expense
3. increase in notes receivable
4. decrease in notes payable

14.

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

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

15.

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

1. cash flow from operating activities
2. cash flow to sales ratio
3. free cash flow
4. all three indicate comparable degrees of flexibility

Questions

2.

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.

3.

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

4.

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

5.

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

6.

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

7.

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?

8.

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

9.

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).

1. Declared and paid to shareholders, a dividend of $24,000.
2. Issued common stock at par value for $12,000 cash.
3. Sold a tract of land that had cost $10,000, for $16,000.
4. Purchased a company truck, with a note payable of $38,000.
5. 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.)

1. paid advertising expense
2. paid dividends to shareholders
3. purchased business equipment
4. sold merchandise to customers
5. purchased plant assets

EA3.

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.)

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

EA4.

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

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?

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.

EA7.

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

EA8.

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

EA9.

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

EA10.

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

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.

EA12.

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

EA13.

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

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.

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.

EA16.

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

Compute the following for the company:

1. free cash flow
2. cash flows to sales ratio
3. 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.

EA18.

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

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).

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

EB2.

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.)

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

EB3.

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.)

1. purchased stock in Xerox Corporation
2. purchased office supplies
3. issued common stock
4. sold plant assets for cash
5. 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).

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?

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.

EB7.

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

EB8.

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

EB9.

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

EB10.

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

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.

EB12.

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

EB13.

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

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.

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.

EB16.

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

Compute the following for the company:

1. free cash flow
2. cash flows to sales ratio
3. 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.

EB18.

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

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).

1. paid $12,000 of accounts payable
2. collected $6,000 from a customer
3. issued common stock at par for $24,000 cash
4. paid $6,000 cash dividend to shareholders
5. sold products to customers for $15,000
6. 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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

PA12.

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

Compute the following for both companies. Compare your results.

1. free cash flow
2. cash flows to sales ratio
3. 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.

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.

PA15.

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

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).

1. reacquired $30,000 treasury stock
2. purchased inventory for $20,000
3. issued common stock of $40,000 at par
4. purchased land for $25,000
5. collected $22,000 from customers for accounts receivable
6. 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.

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.

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.

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.

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.

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.

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.

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.

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.

PB12.

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

Compute the following for both companies. Compare your results.

1. free cash flow
2. cash flows to sales ratio
3. 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.

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.

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.