Khaled RagehAnalysis Ch 23 – Class 2Grade Four

Exercise (1)
The following information is taken from French Corporation's financial statements:
December 31
2011
2010
Cash $90,000 $27,000
Accounts receivable $92,000 $80,000
Allowance for doubtful accounts ($4,500) ($3,100)
Inventory $155,000 $175,000
Prepaid expenses $7,500 $6,800
Land $90,000 $60,000
Buildings $287,000 $244,000
Accumulated depreciation ($32,000) ($13,000)
Patents 20,000 35,000
$705,000 $611,700

Accounts payable $90,000 $84,000

Accrued liabilities $54,000 $63,000
Bonds payable $125,000 $60,000
Share capital-ordinary $100,000 $100,000
Retained earnings—appropriated $80,000 $10,000
Retained earnings—unappropriated $271,000 $302,700
Treasury shares, at cost ($15,000) ($8,000)
$705,000 $611,700

For 2011 Year

Net income $58,300
Depreciation expense 19,000
Amortization of patents 5,000
Cash dividends declared and paid 20,000
Gain or loss on sale of patents none
Required:
Prepare a statement of cash flows for the year 2011. (Use the indirect method.)

December 31
Increase or
2011 Change
2010 Decrease

Cash $90,000 $27,000 $63,000 Increase

Accounts receivable $92,000 $80,000 $12,000 Increase
Allowance for doubtful accounts ($4,500) ($3,100) ($1,400) increase
Inventory $155,000 $175,000 ($20,000) Decrease
Prepaid expenses $7,500 $6,800 $700 increase
Land $90,000 $60,000 $30,000 increase
Buildings $287,000 $244,000 $43,000 increase
Accumulated depreciation ($32,000) ($13,000) ($19,000) Increase
Patents 20,000 35,000 ($15,000) Decrease
$705,000 $611,700

Accounts payable $90,000 $84,000 $6,000 increase

Accrued liabilities $54,000 $63,000 ($9,000) Decrease
Bonds payable $125,000 $60,000 $65,000 increase
Share capital-ordinary $100,000 $100,000 $0
Retained earnings—appropriated $80,000 $10,000 $70,000 increase
Retained earnings—unappropriated $271,000 $302,700 ($31,700) Decrease

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four
Treasury shares, at cost ($15,000) ($8,000) ($7,000) increase
$705,000 $611,700

French Corporation
Statement of Cash Flows
For the Year Ended December 31, 2011
Increase (Decrease) in Cash
Cash flows from operating activities
Net income $58,300
Adjust. to reconcile net income to net cash provided by operating activities:
Depreciation expense $19,000
Patent amortization 5,000
Increase in accounts receivable (10,600)
Decrease in inventory 20,000
Increase in prepaid expenses (700)
Increase in accounts payable 6,000
Decrease in accrued liabilities (9,000)
29,700
Net cash provided by operating activities 88,000

Cash flows from investing activities

Purchase of land (30,000)
Purchase of buildings (43,000)
Sale of patents 10,000
Net cash used by investing activities (63,000)

Cash flows from financing activities

Sale of bonds 65,000
Purchase of treasury shares (7,000)
Payment of cash dividends (20,000)
Net cash provided by financing activities 38,000

Net increase in cash $63,000

Cash, January 1, 2011 27,000
Cash, December 31, 2011 $90,000

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

Exercise (2)

The statements of financial position for Kinder Company showed the following information. Additional information
concerning transactions and events during 2011 are presented below.
Kinder Company
Statements of Financial Position
December 31
2011 2010
Cash $30,900 $10,200
Accounts Receivable (net) 43,300 20,300
Inventory 35,000 42,000
Long-term investments 0 15,000
Property, plant & equipment 236,500 150,000
Accumulated depreciation (37,700) (25,000)
$308,000 $212,500

Accounts Payable $17,000 $26,500

Accrued liabilities 21,000 17,000
Long-term notes payable 70,000 50,000
Share capital-ordinary 130,000 90,000
Retained Earning 70,000 29,000
$308,000 $212,500

Additional data:
1. Net income for the year 2011, $76,000.
2. Depreciation on plant assets for the year, $12,700.
3. Sold the long-term investments for $28,000.
4. Paid dividends of $35,000.
5. Purchased machinery costing $26,500, paid cash.
6. Purchased machinery and gave a $60,000 long-term note payable.
7. Paid a $40,000 long-term note payable by issuing ordinary shares.

Required:
Using the format provided below, prepare a statement of cash flows (using the indirect method) for 2011 for Kinder
Company.

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

Kinder Company
Statements of Financial Position
December 31 Increase or
Change
2011 2010 Decrease
Cash $30,900 $10,200 $20,700 Increase
Accounts Receivable (net) 43,300 20,300 23,000 Increase
Inventory 35,000 42,000 (7,000) Decrease
Long-term investments 0 15,000 (15,000) Decrease
Property, plant & equipment 236,500 150,000 86,500 Increase
Accumulated depreciation (37,700) (25,000) (12,700) Increase
$308,000 $212,500
Accounts Payable $17,000 $26,500 ($9,500) Decrease
Accrued liabilities 21,000 17,000 4,000 Increase
Long-term notes payable 70,000 50,000 20,000 Increase
Share capital-ordinary 130,000 90,000 40,000 Increase
Retained Earning 70,000 29,000 41,000 Increase
$308,000 $212,500

Kinder Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Increase (Decrease) in Cash
Cash flows from operating activities
Net income $ 76,000
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation expense $12,700
Gain on sale of investments (13,000)
Increase in accounts receivable (23,000)
Decrease in inventory 7,000
Decrease in accounts payable (9,500)
Increase in accrued liabilities 4,000
(21,800)
Net cash provided by operating activities 54,200

Cash flows from investing activities

Sale of long-term investments 28,000
Purchase of machinery (26,500)
Net cash provided by investing activities 1,500

Cash flows from financing activities

Paid dividends (35,000)
Net cash used by financing activities (35,000)

Net increase (decrease) in cash $ 20,700

Cash, January 1, 2011 10,200
Cash, December 31, 2011 $ 30,900

Significant non-cash transactions:

Purchase of machinery by issuing a long-term note payable $ 60,000
Paid a long-term note payable by issuing ordinary shares $ 40,000

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four
Exercise (3)
Hartman, Inc. has prepared the following comparative statement of financial position for 2010 and 2011:

December 31
2011 2010
Plant assets $1,260,000 $1,050,000
Accumulated depreciation (450,000) (375,000)
Patent 153,000 174,000
Prepaid expenses 18,000 27,000
Inventory 150,000 180,000
Receivables 159,000 117,000
Cash 297,000 153,000
$1,587,000 $1,326,000

Share capital-Preference $525,000 —

Share premium-preference 120,000 —
Share capital-ordinary 600,000 $600,000
Retained Earnings 129,000 66,000
Mortgage Payable — 450,000
Accounts Payable 153,000 168,000
Accrued liabilities 60,000 42,000
$1,587,000 $1,326,000

1. The Accumulated Depreciation account has been credited only for the depreciation expense for the period.
2. The Retained Earnings account has been charged for dividends of $138,000 and credited for the net income for
the year.

The income statement for 2011 is as follows:

Sales $1,980,000
Cost of sales 1,089,000
Gross profit 891,000
Operating expenses 690,000
Net income $ 201,000

Required:

a) prepare a statement of cash flows (indirect method) for 2011.

b) prepare a schedule of cash provided by operating activities using the direct method.

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

December 31
Change Increase or
2011 2010 Decrease
Plant assets $1,260,000 $1,050,000 $210,000 Increase
Accumulated depreciation (450,000) (375,000) (75,000) Increase
Patent 153,000 174,000 (21,000) Decrease
Prepaid expenses 18,000 27,000 (9,000) Decrease
Inventory 150,000 180,000 (30,000) Decrease
Receivables 159,000 117,000 42,000 Increase
Cash 297,000 153,000 144,000 Increase
$1,587,000 $1,326,000

Share capital-Preference $525,000 — $525,000 Increase

Share premium-preference 120,000 — 120,000 Increase
Share capital-ordinary 600,000 $600,000 0
Retained Earnings 129,000 66,000 63,000 Increase
Mortgage Payable — 450,000 (450,000) Decrease
Accounts Payable 153,000 168,000 (15,000) Decrease
Accrued liabilities 60,000 42,000 18,000 Increase
$1,587,000 $1,326,000

(a)

Hartman, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2011
Increase (Decrease) in Cash
Cash flows from operating activities
Net income $201,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense $ 75,000
Patent amortization 21,000
Increase in receivables (42,000)
Decrease in inventory 30,000
Decrease in prepaid expenses 9,000
Decrease in accounts payable (15,000)
Increase in accrued liabilities 18,000
96,000
Net cash provided by operating activities 297,000

Cash used in investing activities

Purchase of plant assets (210,000)
Net cash used by investing activities (210,000)

Cash flows from financing activities

Payment of cash dividend (138,000)
Retirement of mortgage payable (450,000)
Sale of preference shares 645,000
Net cash provided by financing activities 57,000

Net increase in cash 144,000

Cash, January 1, 2011 153,000
Cash, December 31, 2011 $297,000

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four
(b)

Hartman, Inc.
Schedule of Cash Provided by Operating Activities
For Year Ended December 31, 2011
Cash flows from operating activities
Cash received from customers (1) $1,938,000
Cash paid to suppliers (2) $1,074,000
Operating expenses paid (3) 567,000 1,641,000
Net cash provided by operating activities $297,000

(1) $1,980,000 – $42,000

(2) $1,089,000 – $30,000 + $15,000
(3) $690,000 – $75,000 – $21,000 – $9,000 – $18,000

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

MCQ Ch 23 (Section)
31. An objective of the statement of cash flows is to
a. disclose changes during the period in all asset and all equity accounts.
b. disclose the change in working capital during the period.
c. provide information about a company’s operating, investing, and financing activities.
d. none of these.

32. The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of a company during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of a company during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external
financing.

33. Of the following questions, which one would not be answered by the statement of cash flows?
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during the period?
d. What was the change in the cash balance during the period?

34. The first step in the preparation of the statement of cash flows requires the use of information included in which
comparative financial statements?
a. Statements of cash flows
b. Statements of financial positions
c. Income statements
d. Statements of retained earnings

35. Cash equivalents are

a. treasury bills, commercial paper, and money market funds purchased with excess cash.
b. investments with original maturities of three months or less.
c. readily convertible to known amounts of cash.
d. all of these.

36. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows
(indirect method), this event would be reflected as a(n)
a. addition adjustment to net income in the cash flows from operating activities section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.

37. Which of the following under IFRS, but not U.S. GAAP is considered to be part of cash and cash equivalents?
a. Treasury bills
b. bank overdrafts
c. commercial paper
d. money market funds

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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

38. All of the following are required by IFRS for the statement of cash flows except:
a. The operating activities section.
b. The financing activities section.
c. The investing activities section.
d. Significant non-cash transactions.

39. Under IFRS where a company uses the indirect method, which of the following would not be reported in the
statement of cash flows?
a. Depreciation expense.
b. Retirement of bonds payable.
c. An increase in inventory.
d. Purchase of equipment using a note.

40. To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash
basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
b. estimating the percentage of income statement transactions that were originally reported on a cash basis
and projecting this amount to the entire array of income statement transactions.
c. eliminating the effects of income statement transactions that did not result in a corresponding increase or
decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net
income computation.

41. An increase in inventory balance would be reported in a statement of cash flows using the indirect method
(reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.

42. A statement of cash flows typically would not disclose the effects of
a. ordinary shares issued at an amount greater than par value.
b. share dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury shares.

43. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to
reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.

44. Declaration of a cash dividend on ordinary shares affects cash flows from operating activities under the direct and
indirect methods as follows:
Direct Method Indirect Method

a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
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Khaled RagehAnalysis Ch 23 – Class 2Grade Four

45. In a statement of cash flows, the cash flows from investing activities section should report
a. the issuance of ordinary shares in exchange for a factory building.
b. share dividends received.
c. a major repair to machinery charged to accumulated depreciation.
d. the factoring of accounts receivable.

46. Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.

2. Sale of delivery truck at book value.

3. Sale of Xanthe ordinary shares for cash.

4. Issuance of a note payable to a bank for cash.

5. Sale of an invesment held as an available-for-sale investment.

6. Collection of loan receivable.

How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for
the current year?
a. Five items
b. Four items
c. Three items
d. Two items

47. Which of the following would be classified as a financing activity on a statement of cash flows?
a. Declaration and distribution of a share dividend
b. Deposit to a bond sinking fund
c. Sale of a loan receivable
d. Payment of interest to a creditor

48. The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the
indirect method for operating activities) as a(n)
a. addition to net income.
b. deduction from net income.
c. investing activity.
d. financing activity.

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