BUS103: Introduction to Financial Accounting

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.