ACCT 301 Lecture 12: Accounting Study Guide Ch 12

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31 Oct 2016

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Prepare a statement of cash flows using one of two approaches: (a) the indirect method or (b) the direct method. Use the statement of cash flows to evaluate a company. Study objective 1 - indicate the primary purpose of the statement of cash flows. Some cash flows relating to investing or financing activities are classified as operating activities because these items are reported in the income statement where results of operations are shown. For example, receipts of investment revenue (interest and dividends) and payments of interest to lenders are classified as operating activities because these items are reported in the income statement. As a general rule: (cid:131) operating activities involve income statement items. (cid:131) (cid:131) Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders" equity items. Not all of a company"s significant activities involve cash.

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PROBLEM 14-9 Understanding a Statement of Cash Flows (L014-1, L014-2] Brock Company is a merchandiser that prepared the statement of cash flows and income statement provided below: Brock Company Statement of Cash Flows-Indirect Method $ 275 Operating Activities Net income ... Adjustments to convert net income to a cash basis: Depreciation ........ Increase in accounts receivable.... Decrease in inventory ........ Decrease in accounts payable .......... Decrease in accrued liabilities ........ Increase in income taxes payable ................ Gain on sale of equipment... Net cash provided by operating activities ........... boa Investing Activities Additions to property, plant, and equipment ......... Proceeds from sale of equipment .... Net cash used in investing activities .............. long & nô Financing Activities Issuance of bonds payable ..... Issuance of common stock ............ Cash dividends paid ......... Net cash provided by financing activities ........... Net increase in cash and cash equivalents .......... Beginning cash and cash equivalents ............ Ending cash and cash equivalents ............ 34 Brock Company Income Statement Net sales .......... Cost of goods sold ............. .............. Gross margin ................ ............ Selling and administrative expenses ............. Net operating income ........... Nonoperating items: Gain on sale of equipment .... Income before taxes ... Income taxes . . . . . . . . $5,200 2,980 2,220 1,801 419 423 Net income .......................... $ 275 Required: Assume that you have been asked to teach a workshop to the employees within Brock Compa- ny's Marketing Department. The purpose of your workshop is to explain how the statement of cash flows differs from the income statement. Your audience is expecting you to explain the logic underlying each number included in the statement of cash flows. Prepare a memo that explains the format of the statement of cash flows and the rationale for each number included in Brock's state- ment of cash flows.

16. Mendes Charters reported the following information atDecember 31, 2015:

Preferred stock, $100 par, 500 shares authorized, andoutstanding;

cumulative; nonparticipating; callable at par value $50,000

Common stock, $12 par, 50,000shares authorized and outstanding 600,000

Additional paid-incapital--Common 25,000

Retained earnings825,000

Mendesâ total contributed capitalis

a. $ 650,000 b. $ 675,000 c. $1,500,000 d. $ 625,000

17. Which of the following should be considered when a companydecides to declare a cash dividend on common stock?

a. The retained earnings balance only

b. The amount of authorized shares of common stock

c. The book value of the company's stock

d. The cash available and the retained earnings balance

18. The primary reason for a stock split is to

a. distribute cash to the investor.

b. decrease the market value of the stock.

c. decrease the number of shares outstanding.

d. increase the contributed capital of the corporation.

19. Nordic Exports Inc. reported net income of $150,000 for2015, but its cash balance decreased $40,000. Which financialstatement should Nordic Exportsâ management refer to for anexplanation of this situation? a

. Balance Sheet

b. Income Statement

c. Statement of Retained Earnings

d. Statement of Cash Flows

20. The primary purpose of the statement of cash flows is toprovide information about

a. the financial position of the company.

b. the profitability of the company.

c. the investing and financing activities of the company.

d. the cash inflows and outflows of the company.

21. Cash flows from acquiring and disposing of long-term assetsare classified as

a. operating activities.

b. investing activities

. c. financing activities.

d. purchasing activities.

22. Cash flows from borrowing and paying off a 90-day bank loanare classified as

a. operating activities. b. investing activities. c. financingactivities. d. purchasing activities.

23. Cash flows from issuing and repurchasing stock or issuingand repaying (retiring) debt are classified as

a. operating activities. b. investing activities. c. financingactivities. d. borrowing activities.

24. Cash flows from acquiring and selling products areclassified as

a. operating activities. b. investing activities. c. financingactivities. d. distribution activities.

25. Presented below is the operating activities section of thestatement of cash flows for Golden Consulting for 2016:

Operating activities:

Net income $ 92,000

Add: Depreciation 20,000

Decrease in accounts receivable 8,000

__________

$120,000

Deduct: Decrease in accounts payable (6,000)

Net cash inflow from operating activities $114,000

Which method of preparing the operating activities section hasGolden Consulting used?

a. The direct method b. The indirect method c. Either method d.Cannot be determined without further information

redcaribou302

The balance sheet for Plasma Screens Corporation, along with additional information, are provided below:

PLASMA SCREENS CORPORATION Balance Sheets December 31, 2018 and 2017
	2018		2017
Assets:
Current assets:
Cash	$	142,950	$	154,000
Accounts receivable		76,800		90,500
Inventory		92,000		77,300
Prepaid rent		3,400		1,700
Long-term assets:
Land		465,000		465,000
Equipment		762,000		655,000
Accumulated depreciation		(421,000)		(262,000)

Total assets	$	1,121,150	$	1,181,500

Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable	$	96,000	$	82,300
Interest payable		6,750		13,500
Income tax payable		7,400		4,700
Long-term liabilities:
Notes payable		112,500		225,000
Stockholders' equity:
Common stock		685,000		685,000
Retained earnings		213,500		171,000

Total liabilities and stockholders' equity	$	1,121,150	$	1,181,500

Additional Information for 2018:

1. Net income is $66,000.

2. The company purchases $107,000 in equipment.

3. Depreciation expense is $159,000.

4. The company repays $112,500 in notes payable.

5 .The company declares and pays a cash dividend of $23,500.

Required:

Prepare the statement of cash flows using the indirect method.

PLASMA SCREENS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities

Adjustments to reconcile net income to net cash flows from operating activities









Net cash flows from operating activities
Cash Flows from Investing Activities




Net cash flows from investing activities
Cash Flows from Financing Activities




Net cash flows from financing activities

Cash at the beginning of the period
Cash at the end of the period

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ACCT 301 Lecture 12: Accounting Study Guide Ch 12

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