ACCT 1A Chapter Notes - Chapter 6: Retained Earnings, Operating Cash Flow, Cash Flow

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rosebuffalo981

18 Aug 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1A

Professor

seilo

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Document Summary

Conversion of selling, general and administrative expenses to a cash outflow: The computation of cash paid for operating expenses is, therefore, a two stage process. 1) analyze the change in the prepaid expenses account to determine the amount of cash paid during the period. 2) analyze the change in accrued liabilities account to compute the amount of cash that was paid during the period for various expenses. Prepaid expenses (known) + cash payments for future (deferred) expenses (unknown) prepaid expenses used during. Accrued liabilities (known) + expenses accrued during period (unknown) cash payments for accrued expenses (unknown) = end. The beginning and ending balances of prepaid expenses and accrued liabilities are reported on the statement of financial position. However, prepaid expenses that were used up during the period are not reported separately on the statement of earnings, which means we cannot compute the amount of cash paid for future expenses.

Related Questions

1. Which of the following identifies the proper order of theaccounting cycle?

A. Analyze, Journalize, Unadjusted Trial Balance

B. Analyze, Post, Unadjusted Trial Balance

C. Journalize, Post, Adjusted Trial Balance

D. Unadjusted Trial Balance, Adjusted Trial Balance, Close

E. Adjusted Trial Balance, Adjustments, Financial Statements

2. Interim financial statements refer to financial reports:

A. That cover less than one year, usually spanning one, three orsix-month periods

B. That are prepared before any adjustments have beenrecorded

C. That show the assets above the liabilities and theliabilities above the equity

D. Where revenues are reported on the income statement when cashis received and expenses are reported when cash is paid

E. Where the adjustment process is used to assign revenues tothe periods in which they are earned and to match expenses withrevenues

3. The accounting principle that requires revenue to be reportedwhen earned is the:

A. Matching principle

B. Revenue recognition principle

C. Time period principle

D. Accrual reporting principle

E. Going-concern principle

4. Adjusting entries:

A. Affect only income statement accounts

B. Affect only balance sheet accounts

C. Affect both income statement and balance sheet accounts

D. Affect only cash flow statement accounts

E. Affect only equity accounts

5. The system of preparing financial statements based onrecognizing revenues when the cash is received and reportingexpenses when the cash is paid is called:

A. Accrual basis accounting

B. Operating cycle accounting

C. Cash basis accounting

D. Revenue recognition accounting

E. Current basis accounting

6. If throughout an accounting period the fees for legalservices paid in advance by clients are recorded in an accountcalled Unearned Legal Fees, the end-of-period adjusting entry torecord the portion of those fees that has been earned is:

A. Debit Cash and credit Legal Fees Earned

B. Debit Cash and credit Unearned Legal Fees

C. Debit Unearned Legal Fees and credit Legal Fees Earned

D. Debit Legal Fees Earned and credit Unearned Legal Fees

E. Debit Unearned Legal Fees and credit Accounts Receivable

7. A company had no office supplies available at the beginningof the year. During the year, the company purchased $250 worth ofoffice supplies. On December 31, $75 worth of office suppliesremained. How much should the company report as office suppliesexpense for the year? A. $75 B. $125 C. $175 D. $250 E. $325 8. OnJanuary 1 a company purchased a five-year insurance policy for$1,800 with coverage starting immediately. If the purchase wasrecorded in the Prepaid Insurance account and the company recordsadjustments only at year-end, the adjusting entry at the end of thefirst year is:

A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800

B. Debit Prepaid Insurance, $1,440; credit Insurance Expense,$1,440

C. Debit Prepaid Insurance, $360; credit Insurance Expense,$360

D. Debit Insurance Expense, $360; credit Prepaid Insurance,$360

E. Debit Insurance Expense, $360; credit Prepaid Insurance,$1,440

9. Unearned revenue is reported on the financial statementsas:

A. A revenue on the balance sheet

B. A liability on the balance sheet

C. An unearned revenue on the income statement

D. An asset on the balance sheet

E. An operating activity on the statement of cash flows

10. Which of the following assets is not depreciated?

A. Store fixtures

B. Computers

C. Land

D. Buildings

E. Vehicles

11. On April 30, 2011, a three-year insurance policy waspurchased for $18,000 with coverage to begin immediately. What isthe amount of insurance expense that would appear on the company'sincome statement for the year ended December 31, 2011? A. $500 B.$4,000 C. $6,000 D. $14,000 E. $18,000 12. Expenses incurred butunpaid that are recorded during the adjusting process with a debitto an expense and a credit to a liability are:

A. Intangible expenses

B. Prepaid expenses

C. Unearned expenses

D. Net expenses

E. Accrued expenses

13 The difference between the cost of an asset and theaccumulated depreciation for that asset is called

A. Depreciation Expense

B. Unearned Depreciation

C. Prepaid Depreciation

D. Depreciation Value

E. Book Value

14. A company purchased a new truck at a cost of $42,000 on July1, 2011. The truck is estimated to have a useful life of 6 yearsand a salvage value of $3,000. How much depreciation expense willbe recorded for the truck for the year ended December 31, 2011?

A. $3,250

B. $3,500

C. $4,000

D. $6,500

E. $7,000

15. A company's Office Supplies account shows a beginningbalance of $600 and an ending balance of $400. If office suppliesexpense for the year is $3,100, what amount of office supplies waspurchased during the period?

A. $2,700

B. $2,900

C. $3,300

D. $3,500

E. $3,700

chocolatereindeer731

Comparative financial statement data for Carmono Company follow:

	This Year		Last Year
Assets
Cash	$	7.50	$	14.00
Accounts receivable		50.00		43.00
Inventory		92.50		79.20

Total current assets		150.00		136.20

Property, plant, and equipment		231.00		194.00
Less accumulated depreciation		45.60		34.20

Net property, plant, and equipment		185.40		159.80

Total assets	$	335.40	$	296.00

Liabilities and Stockholdersâ Equity
Accounts payable	$	55.50	$	46.00
Common stock		118.00		91.00
Retained earnings		161.90		159.00

Total liabilities and stockholdersâ equity	$	335.40	$	296.00

For this year, the company reported net income as follows:


Sales	$	850.00
Cost of goods sold		510.00

Gross margin		340.00
Selling and administrative expenses		320.00

Net income	$	20.00

This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year.

Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50

2.	Compute Carmonoâs free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.)

Free cash flow$

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below:

Item		Amount
Accounts receivable	$	79,000	decrease
Inventory	$	120,000	increase
Prepaid expenses	$	3,500	decrease
Accounts payable	$	41,000	decrease
Accrued liabilities	$	9,600	increase
Income taxes payable	$	15,700	increase
Sale of equipment	$	8,100	gain
Sale of long-term investments	$	12,200	loss

Required:

For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.

Item	Amount	Effect
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Accrued liabilities
Income taxes payable
Sale of equipment
Sale of long-term investments

Apex Company prepared the statement of cash flows for the current year that is shown below:

Apex Company Statement of Cash FlowsâIndirect Method
Operating activities:
Net income			$	41,500
Adjustments to convert net income to cash basis:
Depreciation	$	20,100
Increase in accounts receivable		(61,500)
Increase in inventory		(25,100)
Decrease in prepaid expenses		9,400
Increase in accounts payable		54,300
Decrease in accrued liabilities		(10,100)
Increase in income taxes payable		3,300		(9,600)

Net cash provided by operating activities				31,900
Investing activities:
Proceeds from the sale of equipment		15,200
Loan to Thomas Company		(41,900)
Additions to plant and equipment		(121,800)

Net cash used for investing activities				(148,500)
Financing activities:
Increase in bonds payable		88,800
Increase in common stock		38,700
Cash dividends		(28,400)

Net cash provided by financing activities				99,100

Net decrease in cash				(17,500)
Beginning cash balance				27,200

Ending cash balance			$	9,700

Required:

Compute Apex Companyâs free cash flow for the current year. (Negative amount should be indicated by a minus sign.)

Free Cash Flow

For the just completed year, Hanna Company had net income of $95,000. Balances in the companyâs current asset and current liability accounts at the beginning and end of the year were as follows:

	December 31
	End of Year		Beginning of Year
Current assets:
Cash	$	59,000	$	80,000
Accounts receivable	$	164,000	$	184,000
Inventory	$	448,000	$	346,000
Prepaid expenses	$	11,500	$	15,000
Current liabilities:
Accounts payable	$	366,000	$	392,000
Accrued liabilities	$	8,000	$	13,000
Income taxes payable	$	32,000	$	25,000

The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year.

Required:

Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.)

redgrasshopper904

Statement of Cash Flows (Indirect Method) The Towne Companyâs income statement and comparative balance sheets as of December 31 of 2016 and 2015 follow:

TOWNE COMPANY Income Statement For the Year Ended December 31, 2016
Service Fees Earned		$317,000
Dividend and Interest Income		14,000
		$331,000
Wages and Other Operating Expenses	$285,000
Depreciation Expense	55,000
Franchise Amortization Expense	10,000
Loss on Sale of Equipment	7,000
Gain on Sale of Investments	(17,000)	340,000
Net Loss		$(9,000)

TOWNE COMPANY Balance Sheets
	Dec. 31, 2016	Dec. 31, 2015
Assets
Cash	$43,000	$33,000
Accounts Receivable	13,000	18,000
Interest Receivable	-	4,000
Prepaid Expenses	16,000	10,000
Long-term InvestmentsâAvailable for Sale	-	70,000
Fair Value Adjustment to Investments	-	10,000
Plant Assets	696,000	655,000
Accumulated Depreciation	(237,000)	(185,000)
Franchise	91,000	29,000
Total Assets	$622,000	$644,000

Liabilities and Stockholdersâ Equity
Accrued Liabilities	$12,000	$14,000
Notes Payable	-	26,000
Common Stock ($10 par value)	595,000	535,000
Retained Earnings	35,000	59,000
Unrealized Gain on Investments	-	10,000
Treasury Stock	(20,000)	-
Total Liabilities and Stockholdersâ Equity	$622,000	$644,000

During the year, the following transactions occurred:
1. Sold equipment for $9,000 cash that originally cost $19,000 and had $3,000 accumulated depreciation.
2. Sold longâterm investments that had cost $70,000 for $87,000 cash. Unrealized gains totaling $10,000 related to these investments had been recorded in earlier years. At yearâend, the fair value adjustment and unrealized gain account balances were eliminated.
3. Paid cash to extend the companyâs exclusive franchise for another three years.
4. Paid off a note payable at the bank on January 1.
5. Declared and paid a $15,000 dividend.
6. Purchased treasury stock for cash.
7. Acquired land valued at $60,000 by issuing 6,000 shares of common stock.

Required
a. Compute the change in cash that occurred in 2016.
b. Prepare a statement of cash flows using the indirect method.

a. Change in Cash during 2016 $Answer AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

TOWNE COMPANY Statement of Cash Flows For Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Loss		$Answer
Add (deduct) items to convert net income to cash basis
Depreciation		Answer
Franchise Amortization		Answer
Loss on Sale of Equipment		Answer
Gain on Sale of Investments		Answer
Accounts Receivable	AnswerIncreaseDecrease	Answer
Interest Receivable	AnswerIncreaseDecrease	Answer
Prepaid Expenses	AnswerIncreaseDecrease	Answer
Accrued Liabilities	AnswerIncreaseDecrease	Answer
Cash Provided by Operating Activities		Answer

Cash Flow from Investing Activities
Sale of Equipment		Answer
Sale of Investments		Answer
Extension of Franchise		Answer
Cash Provided by Investing Activities		Answer

Cash Flow from Financing Activities
Payment of Notes Payable		Answer
Payment of Dividends		Answer
Purchase of Treasury Stock		Answer
Cash Used by Financing Activities		Answer
Net in Cash AnswerIncreaseDecrease		Answer
Cash at Beginning of Year		Answer
Cash at End of Year		$Answer

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ACCT 1A Chapter Notes - Chapter 6: Retained Earnings, Operating Cash Flow, Cash Flow

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