QUESTIONS
1. What is the purpose of the statement of cash flows? What information does it provide?
2. Of what use is the statement of cash flows?
3. Differentiate between investing activities, financing activities, and operating activities.
4. What are the major sources of cash (inflows) in a statement of cash flows? What are the major uses (outflows) of cash?
5. Identify and explain the major steps involved in preparing the statement of cash flows.
6. Identify the following items as (1) operating, (2) investing, or (3) financing activities: purchase of land, payment of dividends, cash sales, and purchase of treasury stock.
7. Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance.
From what sources does the information to prepare this statement come, and what information does each source provide?
8. Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows?
9. Differentiate between the direct method and the indirect method by discussing each method.
10. Broussard Company reported net income of $3.5 million in 2017. Depreciation for the year was $520,000, accounts receivable increased $500,000, and accounts payable increased $300,000. Compute net cash flow from operating activities using the indirect method.
11. Collinsworth Co. reported sales on an accrual basis of $100,000. If accounts receivable increased $30,000 and the allowance for doubtful accounts increased $9,000 after a write-off of $2,000, compute cash sales.
12. Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of $675,000, yet its cash increased $321,000 during the same period of time. Explain to your roommate how this situation could occur.
13. The board of directors of Tirico Corp. declared cash dividends of $260,000 during the current year. If dividends payable was $85,000 at the beginning of the year and $90,000 at the end of the year, how much cash was paid in dividends during the year?
14. Explain how the amount of cash payments to suppliers is computed under the direct method.
15. The net income for Fallon Company for 2017 was $320,000.
During 2017, depreciation on plant assets was $124,000, amortization of patent was $40,000, and the company incurred a loss on sale of plant assets of $21,000. Compute net cash flow from operating activities.
16. Each of the following items must be considered in preparing a statement of cash flows for Blackwell Inc. for the year ended December 31, 2017. State where each item is to be shown in the statement, if at all.
(a) Plant assets that had cost $18,000 6½ years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $4,000.
(b) During the year, 10,000 shares of common stock with a stated value of $20 a share were issued for $41 a share.
(c) Uncollectible accounts receivable in the amount of $22,000 were written off against Allowance for Doubtful Accounts.
(d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of availablefor- sale securities for $38,000 cash.
17. Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.
(a) Cash payments to employees.
(b) Redemption of bonds payable.
(c) Sale of building at book value.
(d) Cash payments to suppliers.
(e) Exchange of equipment for furniture.
(f) Issuance of preferred stock.
(g) Cash received from customers.
(h) Purchase of treasury stock.
(i) Issuance of bonds for land.
(j) Payment of dividends.
(k) Purchase of equipment.
(l) Cash payments for operating expenses.
18. Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck’s statement of cash flows was a separate section entitled “Noncash investing and financing activities.” Give three examples of significant noncash transactions that would be reported in this section.
19. During 2017, Simms Company redeemed $2,000,000 of bonds payable for $1,880,000 cash. Indicate how this transaction would be reported on a statement of cash flows, if at all.
20. What are some of the arguments in favor of using the indirect (reconciliation) method as opposed to the direct method for reporting a statement of cash flows?
21. Why is it desirable to use a worksheet when preparing a statement of cash flows? Is a worksheet required to prepare a statement of cash flows?
