Test bank managerial accounting by garrison 13e chapter 15

The net cash provided by operating activities on the statement of cash flows would include interest paid to creditors and dividends paid to the company's own Ans: False AACSB: Analytic A

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3 Under the indirect method of determining the net cash flow from operating activities

on the statement of cash flows, a gain on the sale of equipment would be added to net income

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3 Level: Hard

4 Under the indirect method of determining the net cash provided by operating activities

on the statement of cash flows, increases in current liabilities such as accounts payableare added to net income

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

5 Under the indirect method of determining the net cash provided by operating activities

on the statement of cash flows, dividends are added to net income

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

6 Interest paid on borrowed funds would be included as part of a company's financing activities on the statement of cash flows

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7 The net cash provided by operating activities on the statement of cash flows would include interest paid to creditors and dividends paid to the company's own

AICPA FN: Reporting LO: 3,4 Level: Easy

11 Under the direct method of determining the net cash provided by operations on the statement of cash flows, the cost of goods sold is converted to a cash basis by

adjusting it for changes in inventories and changes in accounts payable during the period

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 15 LO: 4 Level: Medium

12 Under the direct method of determining the net cash provided by operating activities

on the statement of cash flows, an increase in inventory would be added to cost of goods sold to convert cost of goods sold to a cash basis

AICPA FN: Reporting Appendix: 15 LO: 4 Level: Hard

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13 Under the direct method of determining the net cash provided by operating activities

on the statement of cash flows, an increase in prepaid expenses would be added to selling and administrative expenses to convert selling and administrative expenses to acash basis

AICPA FN: Reporting Appendix: 15 LO: 4 Level: Hard

14 Accounts receivable is not considered to be a cash equivalent for purposes of

preparing the statement of cash flows

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

15 The Financial Accounting Standards Board (FASB) recommends that companies use the direct method rather than the indirect method in preparing their statement of cash flows

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

Multiple Choice Questions

16 Which of the following would be considered a “use” of cash for purposes of

constructing a statement of cash flows?

A) a decrease in accounts receivable

B) an increase in accounts payable

C) an increase in common stock

D) a decrease in bonds payable

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

17 Which of the following would be considered a “source” of cash for purposes of

constructing a statement of cash flows?

A) an increase in accounts payable

B) dividends paid to the company's own shareholders

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18 Evita Corporation prepares its statement of cash flows using the indirect method Evita's statement showed “Net cash provided by operating activities” to be $46,000 Under the direct method, this number would have been:

A) $0

B) $46,000

C) greater than $46,000

D) less than $46,000 but greater than $0

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 15 LO: 2,3,4 Level: Easy

19 Under the indirect method, which item would be deducted from net income as part of the process of arriving at cash provided by operating activities on the statement of cash flows?

A) Patent amortization expense

B) Increase in accounts payable

C) Increase in prepaid expenses

D) Decrease in accounts receivable

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3 Level: Medium

20 A decrease in the prepaid expenses account of $1,000 over the course of a year would

be shown on the company's statement of cash flows prepared under the indirect

C) an addition of $1,000 under financing activities

D) a deduction of $1,000 under financing activities

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

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21 An increase in the taxes payable account of $1,000 over the course of a year would be shown on the company's statement of cash flows prepared under the indirect method as:

A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities

B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities

22 Luella Corporation prepares its statement of cash flows using the indirect method Which of the following would be added to net income in the operating activities section of the statement?

Depreciation Loss on Sale

23 Gioja Corporation prepares its statement of cash flows using the indirect method Which of the following would be deducted from net income in the operating activities section of the statement?

Increase in Taxes Payable Increase in Dividends Payable

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24 Olaf Corporation prepares its statement of cash flows using the direct method The following items were listed on Olaf's income statement Which of these items would also be listed in the operating activities section of Olaf's statement of cash flows?

Depreciation Expense Gain on Sale of Equipment

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 15 LO: 2,4 Level: Medium

25 During the year the balance in the prepaid expenses account increased by $6,000 In order to adjust the company's net income to a cash basis using the direct method on thestatement of cash flows, it would be necessary to:

A) deduct the $6,000 from the operating expenses reported on the income

statement

B) add the $6,000 to the operating expenses reported on the income statement.C) deduct the $6,000 from the cost of goods sold reported on the income statement.D) add the $6,000 to the cost of goods sold reported on the income statement.Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 15 LO: 2,4 Level: Hard

26 In a statement of cash flows, all of the following would be classified as operating activities except:

A) interest paid to creditors

B) dividends received on stock in another company held as an investment

C) dividends paid to the company's own common stockholders

D) interest received on a long-term note receivable

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27 In a statement of cash flows, a change in accounts payable account would be classifiedas:

A) an operating activity

B) a financing activity

C) an investing activity

D) a noncash item that need not appear on the statement of cash flows

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

28 A decrease in the plant and equipment account of $100,000 over the course of a year would be shown on the company's statement of cash flows prepared under the indirect method as:

A) an addition to net income of $100,000 in order to arrive at net cash provided by operating activities

B) a deduction from net income of $100,000 in order to arrive at net cash provided

by operating activities

C) an addition of $100,000 under investing activities

D) a deduction of $100,000 under investing activities

29 Which of the following should be classified as an investing activity on a statement of cash flows?

A) cash received from the sale of office equipment that was sold at a loss

B) cash used to purchase a long-term investment in bonds of another corporation.C) cash received from the issuance of Iguato Corporation common stock

D) both A and B above

E) all of the above

30 Which of the following should be classified as an investing activity on a statement of cash flows?

A) cash paid for income taxes

B) cash paid for dividends to stockholders

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31 A company declared and paid a cash dividend The dividend would appear on the company's statement of cash flows as:

A) an addition to net income in order to arrive at net cash provided by operating activities under the indirect method

B) a deduction from net income in order to arrive at net cash provided by operating activities under the indirect method

C) a deduction under investing activities

D) a deduction under financing activities

32 Dividends paid to a company's own stockholders of $80,000 would be shown on the company's statement of cash flows prepared under the indirect method as:

A) an addition of $80,000 under investing activities

B) a deduction of $80,000 under investing activities

33 Which of the following should be classified as a financing activity on a statement of cash flows?

A) cash used to retire bonds payable

B) an increase in deferred income taxes

C) cash dividends received on an investment in stock

D) both A and C above

E) none of the above

AICPA FN: Reporting LO: 2 Level: Hard

34 Which of the following sections of the statement of cash flows will be prepared differently if the direct method is used instead of the indirect method?

A) operating activities section

B) investing activities section

C) financing activities section

D) all of the above

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 15 LO: 3,4 Level: Easy

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35 In the statement of cash flows, the sum total of the net cash provided by operating activities, investing activities, and financing activities would be equal to:

A) zero

B) the beginning balance of cash and cash equivalents

C) the ending balance of cash and cash equivalents

D) the increase or decrease in cash and cash equivalents

36 Excerpts from Neuwirth Corporation's comparative balance sheet appear below:

Ending Balance Beginning BalanceCash and cash equivalents $37,000 $27,000

D) The change in Accounts Receivable is a use; The change in Inventory is a source

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37 Excerpts from Deblois Corporation's comparative balance sheet appear below:

Accounts payable $18,000 $17,000

Accrued wages and salaries payable $34,000 $37,000

Which of the following classifications of changes in balance sheet accounts as sources and uses is correct?

A) The change in Accounts Payable is a source; The change in Accrued Wages and Salaries payable is a source

B) The change in Accounts Payable is a use; The change in Accrued Wages and Salaries payable is a source

C) The change in Accounts Payable is a source; The change in Accrued Wages and Salaries payable is a use

D) The change in Accounts Payable is a use; The change in Accrued Wages and Salaries payable is a use

38 Excerpts from Aultman Corporation's comparative balance sheet appear below:

Property, plant, and equipment $371,000 $345,000

Long-Ans: A AACSB: Analytic AICPA BB: Critical Thinking

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39 Swinger Corporation's comparative balance sheet appears below:

EndingBalance

BeginningBalanceAssets:

Current assets:

Cash and cash equivalents $ 47,000 $ 31,000

Accounts receivable 23,000 22,000

Inventory 66,000 64,000

Total current assets 136,000 117,000

Property, plant, and equipment 356,000 338,000

Less accumulated depreciation 184,000 161,000

Net property, plant, and equipment 172,000 177,000

Total assets $308,000 $294,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 17,000 $ 16,000

Accrued wages and salaries payable 32,000 31,000

Accrued income taxes payable 25,000 27,000

Total stockholders’ equity 102,000 93,000

Total liabilities and stockholders’ equity $308,000 $294,000

The company's net income (loss) for the year was $10,000 and its cash dividends were

$4,000 The total dollar amount of all of the items that would be classified as sources when compiling a simplified statement of cash flows is:

A) $29,000

B) $16,000

C) $45,000

D) $25,000

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Sources

Net income $10,000

Increases in liabilities (and contra asset accounts):

Increase in accumulated depreciation 23,000

Increase in accounts payable 1,000

Increase in accrued wages and salaries payable 1,000

Increase in long-term debt 3,000

Increase in deferred income taxes 4,000

Increases in capital stock accounts:

Increase in common stock 3,000

Total sources $45,000

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40 Illies Corporation's comparative balance sheet appears below:

EndingBalance

Current assets:

Cash and cash equivalents $ 40,000 $ 33,000

Accounts receivable 19,000 21,000

Inventory 67,000 69,000

Total current assets 126,000 123,000

Property, plant, and equipment 358,000 339,000

Less accumulated depreciation 156,000 132,000

Net property, plant, and equipment 202,000 207,000

Total assets $328,000 $330,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 18,000 $ 19,000

Accrued wages and salaries payable 35,000 37,000

Accrued income taxes payable 23,000 19,000

Total stockholders’ equity 126,000 124,000

Total liabilities and stockholders’ equity $328,000 $330,000

The company's net income (loss) for the year was $5,000 and its cash dividends were

$4,000 The total dollar amount of all of the items that would be classified as uses when compiling a simplified statement of cash flows is:

A) $7,000

B) $40,000

C) $29,000

D) $33,000

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Uses

Increases in noncash assets:

Increase in property, plant, and equipment $19,000

Decreases in liabilities:

Decrease in accounts payable 1,000

Decrease in accrued wages and salaries payable 2,000

Decrease in notes payable 3,000

Decrease in long-term debt 4,000

Dividends paid 4,000

Total uses $33,000

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41 The following information relates to Penha, Inc for last year:

Net income $117,000

Net increase in all current assets except cash $31,000

Net increase in current liabilities $45,000

Dividends paid on common stock $20,000

Depreciation expense $8,000

Gain on sale of investments $3,000

What is Penha's net cash provided by operating activities for last year on the statement

of cash flows? (Assume that current liabilities do not contain any notes payable.)A) $108,000

B) $116,000

C) $136,000

D) $139,000

Increase in all current assets except cash ( 31,000)

Add (deduct) changes in current liability accounts affecting

revenue or expense:

Increase in current liabilities 45,000

Add (deduct) gains or losses on sale of assets:

Gain on sale of investments ( 3,000)

Net cash provided by operating activities $136,000

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42 Morey Company's net income last year was $27,000 and cash dividends declared and paid to the company's stockholders totaled $13,000 Changes in selected balance sheet accounts for the year appear below:

Increases(Decreases)Debit balances:

Based solely on this information, the net cash provided by operations under the

indirect method on the statement of cash flows would be:

A) $16,000

B) $45,000

C) $38,000

D) $25,000

AICPA FN: Reporting LO: 2,3 Level: Hard

Solution:

Net income $27,000

Adjustments needed to convert net income to cash basis:

Depreciation charges 18,000

Add (deduct) changes in current asset accounts

affecting revenue or expense:

Increase in accounts receivable ( 8,000)Decrease in inventory 3,000Increase in prepaid expenses ( 4,000)Add (deduct) changes in current liability accounts

Increase in accounts payable 6,000Decrease in taxes payable ( 4,000)Net cash provided by operating activities $38,000

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43 Norlund Company's net income last year was $21,000 Changes in selected balance sheet accounts for the year appear below:

Increases(Decreases)Debit balances:

Based solely on this information, the net cash provided by operations under the

indirect method on the statement of cash flows would be:

A) $63,000

B) $36,000

C) $7,000

D) $35,000

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Net income $21,000

Adjustments needed to convert net income to cash basis:

Depreciation charges 15,000

Add (deduct) changes in current asset accounts

Increase in accounts receivable ( 8,000)Increase in inventory ( 9,000)Decrease in prepaid expenses 3,000Add (deduct) changes in current liability accounts

Decrease in accounts payable ( 5,000)Increase in accrued liabilities 11,000Increase in taxes payable 7,000Net cash provided by operating activities $35,000

44 Alaric Corporation recently sold equipment for $16,000 The equipment was

purchased five years ago for $100,000 The accumulated depreciation on the

equipment on the date of sale was $75,000 Alaric uses the indirect method to prepare its statement of cash flows What net effect will this sale have on the investing

activities section of Alaric's statement of cash flows for the current year?

A) no effect

B) $7,000 increase

C) $9,000 decrease

D) $16,000 increase

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Comparative Balance Sheet

Ending Balance

Beginning Balance Assets:

Cash and cash equivalents $ 28 $ 22

Accounts receivable 65 61

Inventory 45 47

Plant and equipment 658 520

Accumulated depreciation ( 296) ( 288)

Total assets $500 $362

Liabilities and stockholders’ equity:

Accounts payable $ 28 $ 29

Wages payable 22 20

Taxes payable 28 24

Bonds payable 151 200

Deferred taxes 16 17

Common stock 55 50

Retained earnings 200 22

Total liabilities and stockholders’ equity $500 $362 Income Statement Sales $1,485 Cost of goods sold 989

Gross margin 496

Selling and administrative expense 172

Net operating income 324

Gain on sale of plant and equipment 19

Income before taxes 343

Income taxes 103

Net income $ 240

Cash dividends were $62 The company sold equipment for $19 that was originally purchased for $5 and that had accumulated depreciation of $5 The net cash provided

by (used by) operations for the year was:

A) $255

B) $236

C) $324

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revenue or expense:

Decrease in accounts payable ( 1)Increase in wages payable 2Increase in taxes payable 4Add (deduct) gains or losses on sales of assets:

Gain on sale of plant and equipment ( 19)Add (deduct) changes in the Deferred Income Taxes account:

Decreases in deferred taxes liability ( 1)Net cash provided by operating activities $236

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Ending Balance

Beginning Balance Assets:

Accounts receivable 44 42

Inventory 63 53

Plant and equipment 443 440

Accumulated depreciation ( 268) ( 230)

Total assets $319 $345

Liabilities and stockholders’ equity:

Accounts payable $ 41 $ 45

Wages payable 26 25

Taxes payable 16 17

Bonds payable 127 120

Deferred taxes 18 19

Common stock 63 60

Retained earnings 28 59

Total liabilities and stockholders’ equity $319 $345 Income Statement Sales $386

Cost of goods sold 239

Gross margin 147

Net operating income ( 38)

Income before taxes (30)

Income taxes 0

Net income ($ 30)

by (used by) investing activities for the year was:

A) ($18)

B) ($1)

C) $1

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Additions to plant and equipment ($18) *

Proceeds from sale of equipment 19

Net cash provided by investing activities $ 1

*$443 + $15 − $440 = $18

47 Daubenspeck Corporation's balance sheet and income statement appear below:

EndingBalance

Gross margin 422

Income taxes 89

Net income $ 208

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Cash dividends were $45 The company sold equipment for $20 that was originally purchased for $12 and that had accumulated depreciation of $12 The net cash

provided by (used by) financing activities for the year was:

A) ($74)

B) ($33)

C) ($45)

D) $4

Solution:

Financing Activities

Decrease in bonds payable ($33)

Increase in common stock 4

Cash dividends paid ( 45)

Net cash used in financing activities ($74)

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48 The most recent balance sheet and income statement of Helle Corporation appear below:

EndingBalance

Gross margin 208

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Decrease in accounts payable ( 9)

Increase in wages payable 2

Decrease in taxes payable ( 3)

Increase in deferred taxes liability 1

Net cash provided by operating activities $54

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49 Guzzi Corporation's most recent balance sheet appears below:

EndingBalance

Total liabilities and stockholders’ equity $511 $404

Net income for the year was $129 Cash dividends were $27 The net cash provided by(used by) operations for the year was:

A) $184

B) $147

C) $111

D) $18

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Increase in accounts payable 6

Decrease in wages payable ( 2)

Increase in taxes payable 1

Decrease in deferred taxes liability ( 5)

50 Isenberg Corporation's most recent balance sheet appears below:

EndingBalance

The net income for the year was $159 Cash dividends were $34 The net cash

provided by (used by) investing activities for the year was:

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Solution:

Investing Activities

Net cash used by investing activities ($159)

*$689 − $530

51 Minshall Corporation's most recent balance sheet appears below:

EndingBalance BeginningBalanceAssets:

The net income for the year was $26 Cash dividends were $6 The net cash provided

by (used by) financing activities for the year was:

A) $2

B) $8

C) $12

D) ($6)

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Increase in bonds payable $12

Net cash used in financing activities $ 8

52 Chain Corporation's most recent balance sheet appears below:

EndingBalance

The net income for the year was $121 Cash dividends were $30 The net cash

provided by (used by) operations for the year was:

A) $173

B) $138

C) $17

D) $104

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Increase in accounts payable 5

53 La Corporation's most recent balance sheet appears below:

EndingBalance

by (used by) investing activities for the year was:

A) $26

B) $62

C) ($26)

D) ($62)

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Net cash used by investing activities ($62)

*$552 − $490

54 Hanna Corporation's most recent balance sheet appears below:

EndingBalance

by (used by) financing activities for the year was:

A) ($9)

B) $1

C) ($21)

D) $11

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Increase in long-term debt $11

Net cash used by financing activities ($ 9)

55 Last year Cummins Company reported a cost of goods sold of $50,000 Inventories increased by $10,000 during the year, and accounts payable increased by $2,000 The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows The cost of goods sold adjusted to a cash basis would be:

A) $42,000

B) $58,000

C) $48,000

D) $60,000

Solution:

Cost of goods sold (as reported) $50,000

Adjustments to a cash basis:

Increase in inventory 10,000

Increase in accounts payable ( 2,000)

Cost of goods sold (adjusted) $58,000

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56 Last year Lawmond Company reported sales of $120,000 on its income statement During the year, accounts receivable increased by $20,000 and accounts payable decreased by $10,000 The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows The sales revenue adjusted to a cash basis for the year would be:

A) $100,000

B) $90,000

C) $130,000

D) $150,000

AICPA FN: Reporting Appendix: 15 LO: 2,4 Level: Hard

Solution:

Sales revenue (as reported) $120,000

Increase in accounts receivable ( 20,000)

Sales revenue (adjusted) $100,000

57 Cridge Company's selling and administrative expenses for last year totaled $170,000 During the year the company's prepaid expense account balance increased by $9,000 and accrued liabilities decreased by $13,000 Depreciation charges for the year were

$15,000 Based on this information, selling and administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:

A) $177,000

B) $207,000

C) $133,000

D) $163,000

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Selling and administrative expenses

(as reported) $170,000

Increase in prepaid expenses 9,000

Decrease in accrued liabilities 13,000

Period’s depreciation charges ( 15,000)

Selling and administration expenses

(adjusted) $177,000

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58 Pietras Corporation's balance sheet and income statement appear below:

EndingBalance

Gross margin 436

Income taxes 89

Net income $ 208

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by (used by) operations for the year was:

A) $213

B) $257

C) $284

D) $200

Solution:

Sales revenue (as reported) $1,264

Decrease in accounts receivable 1Total $1,265

Cost of goods sold (as reported) 828

Increase in inventory 6Increase in accounts payable ( 2)Total 832

Selling and administrative expenses (as reported) 152

Decrease in accrued wages payable 1Period’s depreciation charges ( 12)Total 141

Income tax expense 89

Decrease in accrued taxes payable 1Decrease in deferred income taxes 2Total 92

Net cash provided by operating activities $ 200

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59 The most recent balance sheet and income statement of Ganim Corporation appear below:

Gross margin 314

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Sales revenue (as reported) $920

Decrease in accounts receivable 2Total $922

Decrease in inventory ( 9)Decrease in accounts payable 2Total 599

Decrease in accrued wages payable 1Period’s depreciation charges ( 13)Total 145

Income tax expense 47

Decrease in accrued taxes payable 2Decrease in deferred income taxes 4Total 53

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60 Ostiguy Corporation's most recent comparative balance sheet and income statement appear below:

Gross margin 303

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Sales revenue (as reported) $883

Decrease in accounts receivable 4Total $887

Decrease in inventory ( 2)Increase in accounts payable ( 1)Total 577

Depreciation charges ( 49)Total 115

Income tax expense (as reported) 42

61 Last year Martson Company sold equipment with a net book value of $110,000 for

$130,000 in cash This equipment was originally purchased for $200,000 What will

be the net effect of this transaction on the net cash provided by investing activities on the statement of cash flows?

A) A net deduction of $70,000 from cash

B) A net addition of $70,000 to cash

C) A net deduction of $20,000 from cash

D) A net addition of $20,000 to cash

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Disposal of equipment ($200,000)

Proceeds from sale of equipment 130,000

Net cash used in investing activities ($ 70,000)

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