Question 1

Jamison Corporation issued preferred stock totaling $10,000,000 during Year 4.The statement of cash flows classifies the transaction as a(n)

Accepted Answer

Issuing preferred stock is a financing activity as it involves obtaining funds from investors in exchange for ownership in the company.

Question 2

The beginning and the ending balances in cash and cash equivalents are entered in the master T-account for preparing the statement of cash flows.Cash equivalents represent _____ in which a firm has temporarily placed excess cash.

Accepted Answer

Cash equivalents represent short-term, highly liquid investments in which a firm has temporarily placed excess cash. This includes items such as treasury bills, money market funds, and commercial paper.

Question 3

In preparing the statement of cash flows for Year 5, internal records indicate that depreciation on manufacturing facilities totaled $500 and on selling and administrative facilities totaled $300 during the year.The firm included these amounts in cost of goods sold and selling and administrative expenses, respectively, in the income statement for Year 5.None of this $800 of depreciation required an operating cash flow during Year 5.The firm reported cash expenditures for these assets as investing activities in the earlier periods when it acquired them.The T-account work sheet entry to explain the change in the Accumulated Depreciation account.

Accepted Answer

Depreciation is a non-cash expense that is added back to net income when calculating cash flow from operations because it reduces net income but does not involve an actual outflow of cash during the period.

Question 4

Glass Corporation retired $7,500,000 of long-term debt at maturity.The income statement shows no gain or loss on retirement of debt.The statement of cash flows classifies the transaction as a(n)

Accepted Answer

Retirement of long-term debt is classified as a financing activity in the statement of cash flows.

Question 5

Towson Corporation acquired 1,000,000 shares of its own common stock for $10,000,000 during Year 2.The statement of cash flows classifies the transaction as a(n)

Accepted Answer

The acquisition of its own shares by Towson Corporation is classified as a financing activity on the statement of cash flows because it relates to transactions with the company's owners and affects the equity structure of the company.

Question 6

In order to explain the change in the master cash account between the beginning and the end of the period, the accountant reconstructs the entries originally made in the accounts during the period and enters them in appropriate T-accounts on the T-account work sheet.By explaining the changes in balance sheet accounts other than cash, this process also explains the change in

Accepted Answer

The T-account work sheet is used to explain the changes in balance sheet accounts other than cash, which in turn explains the change in cash and cash equivalents.

Question 7

In determining cash flows from operations under the indirect method, the adjustments to convert net income to cash flow from operations generally involve ____ debit changes in operating working capital accounts.

Accepted Answer

The adjustments to convert net income to cash flow from operations under the indirect method generally involve subtracting increases in current assets, such as accounts receivable and inventory, and adding back decreases in current liabilities, such as accounts payable and accrued expenses. Therefore, the answer is subtracting (B).

Question 8

During Year 4, Adams Company had a net increase in accounts payable for purchases on account.Accounting classifies this source of cash in the _____ section of the statement of cash flows.

Accepted Answer

Accounts payable for purchases on account represents a source of cash from operations, as it indicates that the company received goods or services on credit and did not immediately pay for them. The statement of cash flows separates cash flows into three categories: operating activities, investing activities, and financing activities. Therefore, the correct answer is B, operations.

Question 9

During Year 9, Hart Motors Corp.had a net $100,000 decrease in Warranties Payable.The T-account work sheet for preparing the statement of cash flows

Accepted Answer

The decrease in Warranties Payable represents a decrease in liabilities, not a cash expense. Therefore, it needs to be subtracted from net income when calculating cash flow from operations so that it is not counted as an expense. This ensures that cash flow from operations only reports cash expenditures, which is the purpose of the statement of cash flows.

Question 10

In preparing a T-account work sheet, a master T-account for cash appears at the top of the work sheet.This master T-account has three sections, labeled

Accepted Answer

The three sections of a master T-account for cash typically reflect the three main categories of cash flows in a business: Operations, Investing, and Financing. These categories align with the statement of cash flows, helping in the analysis and understanding of cash movements within a business.

Question 11

The first step in theprocedure for preparing the statement of cash flows using a T-account work sheet is to

Accepted Answer

The first step in preparing the statement of cash flows using a T-account work sheet is to obtain balance sheets for the beginning and ending of the period spanned by the statement of cash flows. This is because the statement of cash flows involves analyzing the changes in the cash balance over a period of time, so both the beginning and ending cash balance must be known.

Question 12

Queen Corporation borrowed $750,000 during Year 3 from its bank under a long-term borrowing arrangement.The statement of cash flows classifies the transaction as a(n)

Accepted Answer

Long-term borrowing arrangements are generally classified as financing activities as they involve raising funds for the company's operations and are not directly related to the operating or investing activities of the business.

Question 13

The second step of completing the T-account work sheet for generating the statement of cash flows is to prepare a T-account for each balance sheet account other than _____ and enter the beginning and the ending balances.

Accepted Answer

Cash and cash equivalents are already accounted for in the statement of cash flows, therefore we do not need to prepare a T-account for it. Working capital and exchanges are not balance sheet accounts, so they also do not need to be considered. Marketable securities may be included in the T-account for cash, but they do not need a separate T-account.

Question 14

In determining cash flows from operations under the indirect method, the adjustments to convert net income to cash flow from operations generally involve ____ the amount by which a revenue exceeds the related cash receipt for the period (such as equity method earnings exceeding dividends).

Accepted Answer

The adjustments involved in converting net income to cash flow from operations under the indirect method generally require subtracting the amount by which a revenue exceeds the related cash receipt for the period. This is because revenues are recognized when earned, while cash may be received before or after the revenue is recognized. Thus, to convert net income to cash flow from operations, the excess revenue recognized in the income statement needs to be subtracted to arrive at the actual cash received.

Question 15

In theprocedure for preparing the statement of cash flows using a T-account work sheet, a master T-account for _____ appears at the top of the work sheet.

Accepted Answer

The master T-account for cash appears at the top of the work sheet because the statement of cash flows primarily focuses on the cash flows of the company. The other options, such as working capital, financing, operations, and net income, may be used as subsidiary T-accounts to assist in preparing the statement of cash flows, but they are not the primary focus of the statement.

Question 16

Exxon Corporation declared and paid $90,000 of dividends to its shareholders during Year 3.The statement of cash flows classifies the transaction as a(n)

Accepted Answer

Dividends paid to shareholders are classified as financing activities in the statement of cash flows, as they involve distribution of profits to the owners of the company.

Question 17

The statement of cash flows classifies cash used for interest expense as

Accepted Answer

Interest expense is classified as an operating activity because it is related to the core operations of a business, reflecting the cost of borrowing money which is considered part of the day-to-day operations.

Question 18

King Corporation borrowed $75,000 during Year 2 from its bank under a short-term borrowing arrangement.The statement of cash flows for King Corporation classifies the transaction as a(n)

Accepted Answer

Short-term borrowing from a bank falls under financing activities, as it relates to the borrowing and repayment of funds.

Question 19

In determining cash flows from operations under the indirect method, the adjustments to convert net income to cash flow from operations generally involve _____ the amount by which an expense exceeds the related cash expenditure for the period (for depreciation, the entire amount).

Accepted Answer

Depreciation expense does not involve an actual cash outflow, so when using the indirect method to calculate cash flows from operations, the amount of depreciation expense is added back to net income. This adjustment is necessary because net income includes non-cash expenses like depreciation, which need to be reversed to reflect the actual cash flow.

Question 20

In determining cash flows from operations under the indirect method, the adjustments to convert net income to cash flow from operations generally involve ____ credit changes in operating working capital accounts, such as accounts receivable, inventories, or accounts payable.

Accepted Answer

Under the indirect method, increases in operating working capital accounts like accounts receivable and inventories are subtracted from net income, while increases in accounts payable are added to net income to determine cash flows from operations.

Quiz 16: Statement of Cash Flows: Another Look