Practice Problems: Statement of Cash Flows

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Course: BUS103: Introduction to Financial Accounting
Book: Practice Problems: Statement of Cash Flows
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Date: Tuesday, February 20, 2024, 6:12 PM

Description

Complete the practice problems. Check your answers after you finish.

Demonstration problem

The following comparative balance sheets are for Dells Corporation as of 2010 June 30, and 2009 June 30. Also provided is the statement of income and retained earnings for the year ended 2010 June 30, with additional data.

Dells Company

Comparative balance sheet

2010 June 30 and 2009

Assets

2010

2009

Increase (Decrease)

 

Current assets:

 

 Cash

$ 30,000

$ 80,000

$ (50,000)

 

 Accounts receivable, net

160,000

100,000

60,000

 

 Merchandise inventory

100,000

70,000

30,000

 

 Prepaid rent

20,000

10,000

10,000

 

 Total current assets

$310,000

$260,000

$ 50,000

 

Property, plant, and equipment:

 

 Equipment

$400,000

$200,000

$200,000

 

 Accumulated depreciation – equipment

(60,000)

(50,000)

(10,000)

 

 Total property, plant, and equipment

$340,000

$150,000

$190,000

 

Liabilities and stockholders' equity

 

Current liabilities:

 

 Accounts payable

$ 50,000

$ 40,000

$ 10,000

 

 Notes payable – bank

-0-

50,000

(50,000)

 

 Salaries payable

10,000

20,000

(10,000)

 

 Federal income taxes payable

30,000

20,000

10,000

 

 Total current liabilities Stockholders' equity:

$ 90,000

$130,000

$ (40,000)

 

 Common stock, $10 par

$300,000

$100,000

$200,000

 

 Paid-in capital in excess of par

50,000

-0-

50,000

 

 Retained earnings

210,000

180,000

30,000

 

 Total stockholders' equity

$560,000

$280,000

$280,000

 

Total liabilities and stockholders' equity

$650,000

$410,000

$240,000

 

 

Dells Corporation

Statement of income and retained earnings

For the year ended 2010 June 30

Sales

$1,000,000

 

Cost of goods sold

$600,000

 

Salaries and wages expense

200,000

 

Rent expense

40,000

 

Depreciation expense

20,000

 

Interest expense

3,000

 

Loss on sale of equipment

7,000

870,000

 

Income before federal income taxes

$ 130,000

 

 Deduct: Federal income taxes

60,000

 

Net income

$ 70,000

 

Retained earnings, 2009 July 1

180,000

 

$ 250,000

 

Deduct: Dividends

40,000

 

Retained earnings, 2010 June 30

$210,000

 

 

Equipment with a cost of USD 20,000, on which USD 10,000 of depreciation had been recorded, was sold for USD 3,000 cash. Additional equipment was purchased for USD 220,000.

Stock was issued for USD 250,000 cash.

The USD 50,000 bank note was paid. Using the data given for Dells Corporation:

a. Prepare a statement of cash flows - indirect method.

b. Prepare a working paper to convert net income from an accrual basis to a cash basis. Then prepare a partial statement of cash flows - direct method, showing only the cash flows from operating activities section.

Solution to demonstration problem

a.

Dells Company

Statement of cash flows

 For the year ended 2010 June 30

Cash flows from operating activities:

   

 Net income

 

$ 70,000

 Adjustments to reconcile net income to net cash provided by operating activities:

   

 Increase in accounts receivable

(60,000)

 

 Increase in merchandise inventory

(30,000)

 

 Increase in prepaid rent

(10,000)

 

 Increase in accounts payable

10,000

 

 Decrease in salaries payable

(10,000)

 

 Increase in federal income taxes payable

10,000

 

 Loss on sale of equipment

7,000

 

 Depreciation expense

20,000

 

 Net cash provided by operating activities

 

$7,000

Cash flows from investing activities:

   

 Proceeds from sale of equipment

$ 3,000

 

 Purchase of equipment

(220,000)

 

 Net cash used by investing activities

 

(217,000)

 Cash flows from financing activities:

   

 Proceeds from issuing common stock

$250,000

 

 Repayment of bank note

(50,000)

 

 Dividends paid

(40,000)

 

 Net cash provided by financing activities

 

160,000

Net increase (decrease) in cash

 

$(50,000)

 

 b.

Dells Corporation

Working paper to convert income statement from accrual basis to cash basis

For the year ended 2010 June 30

 

Accrual basis

 

Add

Deduct

Cash basis

(Cash flows From operating activities)

Sales

 

$1,000,000

 

$60,000a

 

$940,000

Cost of goods sold

$600,000

 

$30,000b

10,000c

$620,000

 

Salaries and wages expense

200,000

 

10,000d

 

210,000

 

Rent expense

40,000

 

10,000e

 

50,000

 

Depreciation expense

20,000

   

20,000

-0-

 

Interest expense

3,000

     

3,000

 

Loss on sale of equipment

7,000

   

7,000

-0-

 

Federal income taxes

60,000

   

10,000f

50,000

 
   

930,000

     

933,000

 Net income

 

$70,000

     

$ 7,000

a Increase in accounts receivable.

B  Increase in merchandise inventory.

C Increase in accounts payable.

D Decrease in salaries payable.

E  Increase in prepaid rent.

F  Increase in Federal Income Taxes Payable.

 

Dells Corporation

Partial Statement of cash flows- Direct Method

 For the Year Ended  2010 June 30

Cash flows from operating activities:

   

 Cash received from customers

$ 940,000

 

 Cash paid for merchandise

(620,000)

 

 Salaries and wages paid

(210,000)

 

 Rent paid

(50,000)

 

 Interest paid

(3,000)

 

 Federal income taxes paid

(50,000)

 

Net cash provided by operating activities

 

$ 7,000


Self-test

True-false

Indicate whether each of the following statements is true or false.

1. The requirement for a statement of cash flows was preceded by the requirement for the statement of changes in financial position.

2. The statement of cash flows is one of the major financial statements.

3. Investing activities are transactions with creditors and owners.

4. The direct method of calculating cash flows from operations is encouraged by the FASB and is the predominant method used.

5. Issuance of capital stock and the subsequent reacquisition of some of those shares would both be financing activities.


Multiple-choice

Select the best answer for each of the following questions.

1. Which of the following statements is true?

a. The direct method of calculating cash flows from operations starts with net income and adjusts for noncash revenues and expenses and changes in current assets and current liabilities.

b. The indirect method of calculating cash flows from operations adjusts each item in the income statement to a cash basis.

c. The descriptions in (a) and (b) should be reversed.

d. The direct method is easier to use than the indirect method.

2. Investing activities include all of the following except:

a. Payment of debt.

b. Collection of loans.

c.  Making of loans.

d.  Sale of available-for-sale and held-to-maturity securities.

3. If sales on an accrual basis are USD 500,000 and accounts receivable increased by USD 30,000, the cash received from customers would be:

a. USD 500,000.

b.  USD 470,000.

c.  USD 530,000.

d.  Cannot be determined.

4. Assume cost of goods sold on an accrual basis is USD 300,000, accounts payable increased by USD 20,000, and inventory increased by USD 50,000. Cash paid for merchandise is:

a. USD 370,000.

b.  USD 230,000.

c.  USD 270,000.

d. USD 330,000.

5. Assume net income was USD 200,000, depreciation expense was USD 10,000, accounts receivable increased by USD 15,000, and accounts payable increased by USD 5,000. The amount of cash flows from operating activities is:

a.  USD 200,000.

b.  USD 180,000.

c. USD 210,000.

d. USD 190,000.


Check your answers on the next page. 


Self-Test Answers

True-false


1. True. Before July 1988, the statement of changes in financial position was required. This statement emphasized changes in working capital rather than changes in cash.

2. True. The statement of cash flows must be published every time an income statement is published.

3. False. Investing activities are transactions involving the acquisition or disposal of noncurrent assets. Transactions with creditors and owners are financing activities.

4. False. While the direct method is the method encouraged by the FASB, it is not the predominant method in use. In a recent study, only about 3 percent of the companies surveyed used the direct method.

5. True. Both of these transactions are with owners and, therefore, would be financing activities.


Multiple-choice

1. c. The descriptions in (a) and (b) would be correct if they were reversed. The indirect method is easier to use, and this characteristic is probably the main reason why it is used by most companies.

2. a. Payment of debt is a financing activity because it is a transaction with creditors. All of the others are investing activities because they are transactions involving the acquisition or disposal of noncurrent assets.

3. b. Sales of USD 500,000 minus the increase in accounts receivable of USD 30,000 = USD 470,000.

4. d. Cost of goods sold of USD 300,000, less the increase in accounts payable of USD 20,000, plus the increase in inventory of USD 50,000 = USD 330,000.

5. a. Net income of USD 200,000, plus depreciation of USD 10,000, less the increase in accounts receivable of USD 15,000, plus the increase in accounts payable of USD 5,000 = USD 200,000.