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Multiple-Choice Questions (1-39)

A. Objectives of the Statement of Cash Flows

1. At December 31, year 1, Kale Co. had the following balances in the accounts it
maintains at First State Bank:
Checking account #101 P175,000 Checking account #201 (10,000) Money market account
25,000 90-day certificate of deposit, due 2/28/Y2 50,000 180-day certificate of deposit, due
3/15/Y2 80,000 Kale classifies investments with original maturities of three months or less as
cash equivalents. In its December 31, year 1 balance sheet, what
amount should Kale report as cash and cash equivalents?
a. P190,000
b. P200,000
c. P240,000
d. P320,000
2. The primary purpose of a statement of cash flows is to provide relevant
information about
a. Differences between net income and associated cash receipts and
disbursements.
b. An enterprise’s ability to generate future positive net cash flows.
c. The cash receipts and cash disbursements of an enterprise during a period. d. An
enterprise’s ability to meet cash operating needs.
3. Mend Co. purchased a three-month US Treasury bill. Mend’s policy is to treat as cash
equivalents all highly liquid investments with an original maturity of three months or less when
purchased. How should this purchase be reported in Mend’s statement of cash flows?
a. As an outflow from operating activities. b.
As an outflow from investing activities. c. As
an outflow from financing activities. d. Not
reported.
B. Statement of Cash Flows Classification

4. Alp, Inc. had the following activities during year 1:


Acquired 2,000 shares of stock in Maybel, Inc. for P26,000. Alp intends to hold the
stock as a long-term investment.
Sold an investment in Rate Motors for P35,000 when the carrying value was
P33,000.
Acquired a P50,000, four-year certificate of deposit from a bank. (During the year,
interest of P3,750 was paid to Alp.)
Collected dividends of P1,200 on stock investments.
In Alp’s year 1 statement of cash flows, net cash used in investing activities should
be
a. P37,250
b. P38,050
c. P39,800
d. P41,000
5. In year 1, a tornado completely destroyed a building belonging to Holland Corp. The
building cost P100,000 and had accumulated depreciation of P48,000 at the time of the loss.
Holland received a cash settlement from the insurance company and reported an extraordinary
loss of P21,000. In Holland’s year 1 cash flow statement, the net change reported in the cash
flows from investing activities section should be a
a. P10,000 increase. b.
P21,000 decrease. c.
P31,000 increase. d.
P52,000 decrease.
6. In a statement of cash flows, if used equipment is sold at a gain, the amount shown
as a cash inflow from investing activities equals the carrying amount of the equipment
a. Plus the gain.
b. Plus the gain and less the amount of tax attributable to the gain. c. Plus
both the gain and the amount of tax attributable to the gain. d. With no
addition or subtraction.
7. On September 1, year 1, Canary Co. sold used equipment for a cash amount equaling
its carrying amount for both book and tax purposes. On September 15, year 1, Canary replaced
the equipment by paying cash and signing a note payable for new equipment. The cash paid for
the new equipment exceeded the cash received for the old equipment. How should these
equipment transactions be reported in Canary’s year 1 statement of cash flows?
a. Cash outflow equal to the cash paid less the cash received.
b. Cash outflow equal to the cash paid and note payable less the cash received. c.
Cash inflow equal to the cash received and a cash outflow equal to the cash
paid and note payable.
d. Cash inflow equal to the cash received and a cash outflow equal to the cash
paid.
Items 8 and 9 are based on the following:
A company acquired a building, paying a portion of the purchase price in cash
and issuing a mortgage note payable to the seller for the balance.
8. In a statement of cash flows, what amount is included in investing activities for the
above transaction?
a. Cash payment.
b. Acquisition price.
c. Zero.
d. Mortgage amount.
9. In a statement of cash flows, what amount is included in financing activities for the
above transaction?
a. Cash payment.
b. Acquisition price.
c. Zero.
d. Mortgage amount.
10. Fara Co. reported bonds payable of P47,000 at December 31, year 1, and
P50,000 at December 31, year 2. During year 2, Fara issued P20,000 of bonds payable in
exchange for equipment. There was no amortization of bond premium or discount during the
year. What amount should Fara report in its year 2 statement of cash flows for redemption of
bonds payable?
a. P 3,000
b. P17,000
c. P20,000
d. P23,000
Items 11 and 12 are based on the following:
In preparing its cash flow statement for the year ended December 31, year 1, Reve
Co. collected the following data:
Gain on sale of equipment P (6,000) Proceeds from sale of equipment 10,000 Purchase of A.S.,
Inc. bonds (par value P200,000) (180,000) Amortization of bond discount 2,000
Dividends declared (45,000) Dividends paid (38,000) Proceeds from sale of treasury
stock (carrying amount P65,000) 75,000 In its December 31, year 1 statement of cash flows,
11. What amount should Reve report as net cash used in investing activities?
a. P170,000
b. P176,000
c. P188,000
d. P194,000
12. What amount should Reve report as net cash provided by financing activities?
a. P20,000
b. P27,000
c. P30,000
d. P37,000
13. On July 1, year 1, Dewey Co. signed a twenty-year building lease that it reported as a
capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the
effect of the lease payments in the financing activities section of its year 1 statement of cash
flows?
a. An inflow equal to the present value of future lease payments at July 1, year 1, less
year 1 principal and interest payments.
b. An outflow equal to the year 1 principal and interest payments on the lease. c. An
outflow equal to the year 1 principal payments only.
d. The lease payments should not be reported in the financing activities section.
14. Which of the following should be reported when preparing a statement of cash
flows?
Conversion of long-term debt to common stock Conversion of preferred stock a. No No b.
No Yes c. Yes Yes d. Yes No
15. Which of the following information should be disclosed as supplemental information
in the statement of cash flows?
Cash flow per share Conversion of debt to equity a. Yes Yes b. Yes No c. No Yes d. No No C.
Direct or Indirect Presentation in Reporting Operating Activities
16. Which of the following is not disclosed on the statement of cash flows when
prepared under the direct method, either on the face of the statement or in a separate
schedule?
a. The major classes of gross cash receipts and gross cash payments. b.
The amount of income taxes paid.
c. A reconciliation of net income to net cash flow from operations.
d. A reconciliation of ending retained earnings to net cash flow from operations.
Items 17 through 21 are based on the following:
Flax Corp. uses the direct method to prepare its statement of cash flows. Flax’s trial
balances at December 31, year 2 and year 1 are as follows:
December 31 Year 2 Year 1 Debits Cash P 35,000 P 32,000 Accounts receivable
33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000
Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses
141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300
2,600 Income tax expense 20,400 61,200 P756,700 $976,100 Credits Allowance for
uncollectible accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500
15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100
Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock
50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700
64,600 Sales 538,800 778,700 P756,700 P976,100 Flax purchased P5,000 in
equipment during year 2.
Flax allocated one third of its depreciation expense to selling expenses and the
remainder to general and administrative expenses. There were no write-offs of accounts
receivable during year 2.
What amounts should Flax report in its statement of cash flows for the year ended
December 31, year 2, for the following:
17. Cash collected from customers?
a. P541,800
b. P541,600
c. P536,000
d. P535,800
18. Cash paid for goods to be sold?
a. P258,500
b. P257,500
c. P242,500
d. P226,500
19. Cash paid for interest?
a. P4,800
b. P4,300
c. P3,800
d. P1,700
20. Cash paid for income taxes?
a. P25,800
b. P20,400
c. P19,700
d. P15,000
21. Cash paid for selling expenses?
a. P142,000
b. P141,500
c. P141,000
d. P140,000
22. In a statement of cash flows, which of the following would increase reported cash
flows from operating activities using the direct method? (Ignore income tax considerations.)
a. Dividends received from investments. b.
Gain on sale of equipment.
c. Gain on early retirement of bonds.
d. Change from straight-line to accelerated depreciation.
23. A company’s wages payable increased from the beginning to the end of the year. In
the company’s statement of cash flows in which the operating activities section is prepared under
the direct method, the cash paid for wages would be
a. Salary expense plus wages payable at the beginning of the year.
b. Salary expense plus the increase in wages payable from the beginning to the end of
the year.
c. Salary expense less the increase in wages payable from the beginning to the end of the
year.
d. The same as salary expense.
24. Metro, Inc. reported net income of P150,000 for year 1. Changes occurred in several
balance sheet accounts during year 1 as follows:
Investment in Videogold, Inc. stock, carried on the equity basis P5,500 increase
Accumulated depreciation, caused by major repair to projection equipment 2,100 decrease
Premium on bonds payable 1,400 decrease Deferred income tax liability
(long-term) 1,800 increase In Metro’s year 1 cash flow statement, the reported net cash
provided by operating activities should be
a. P150,400
b. P148,300
c. P144,900
d. P142,800
25. Lino Co.’s worksheet for the preparation of its year 1 statement of cash flows
included the following:
December 31 January 1 Accounts receivable P29,000 P23,000 Allowance for uncollectible
accounts 1,000 800 Prepaid rent expense 8,200 12,400 Accounts payable
22,400 19,400 Lino’s year 1 net income is P150,000. What amount should Lino
include as net cash provided by operating activities in the statement of cash flows?
a. P151,400
b. P151,000
c. P148,600
d. P145,400
26. In a statement of cash flows (using indirect approach for operating activities)
an increase in inventories should be presented as a(n)
a. Outflow of cash.
b. Inflow and outflow of cash. c.
Addition to net income.
d. Deduction from net income.
27. How should a gain from the sale of used equipment for cash be reported in a
statement of cash flows using the indirect method?
a. In investment activities as a reduction of the cash inflow from the sale. b. In
investment activities as a cash outflow.
c. In operating activities as a deduction from income. d. In
operating activities as an addition to income.
28. Would the following be added back to net income when reporting operating
activities’ cash flows by the indirect method?
Excess of treasury stock acquisition cost over sales proceeds (cost method) Bond discount
amortization a. Yes Yes b. No No c. No Yes d. Yes No
29. Which of the following should not be disclosed in an enterprise’s statement of cash
flows prepared using the indirect method?
a. Interest paid, net of amounts capitalized. b.
Income taxes paid.
c. Cash flow per share.
d. Dividends paid on preferred stock.
D. Example of Statement of Cash Flows

Items 30 through 32 are based on the following:


The differences in Beal Inc.’s balance sheet accounts at December 31, year 2 and year 1,
are presented below.
Increase (Decrease) Assets Cash and cash equivalents P 120,000 Available-for-sale
securities 300,000 Accounts receivable, net -- Inventory 80,000 Long-term investments
(100,000) Plant assets 700,000 Accumulated depreciation -- P1,100,000 Liabilities and
Stockholders’ Equity Accounts payable and accrued liabilities P (5,000) Dividends payable
160,000 Short-term bank debt 325,000 Long-term debt 110,000 Common stock,
P10 par 100,000 Additional paid-in capital 120,000 Retained earnings 290,000
P1,100,000 The following additional information relates to year 2: Net
income was P790,000.
Cash dividends of P500,000 were declared.
Building costing P600,000 and having a carrying amount of P350,000 was sold for
P350,000.
Equipment costing P110,000 was acquired through issuance of long-term debt.
A long-term investment was sold for P135,000. There were no other transactions
affecting long-term investments.
10,000 shares of common stock were issued for P22 a share. In
Beal’s year 2 statement of cash flows,
30. Net cash provided by operating activities was a.
P1,160,000
b. P1,040,000
c. P920,000 d.
P 705,000
31. Net cash used in investing activities was a.
P1,005,000
b. P1,190,000
c. P1,275,000
d. P1,600,000
32. Net cash provided by financing activities was a. P
20,000
b. P 45,000 c.
P150,000 d.
P205,000
Items 33 through 36 relate to data to be reported in the statement of cash flows of
Debbie Dress Shops, Inc. based on the following information:
Debbie Dress Shops, Inc.
BALANCE SHEETS

December 31 Year 2 Year 1 Assets Current assets: Cash P 300,000


P 200,000 Accounts receivable—net 840,000 580,000 Merchandise inventory
660,000 420,000 Prepaid expenses 100,000 50,000 Total current assets 1,900,000
1,250,000 Long-term investments 80,000 -- Land, buildings, and fixtures 1,130,000
600,000 Less accumulated depreciation 110,000 50,000 1,020,000 550,000 Total assets
$3,000,000 $1,800,000 Equities Current liabilities: Accounts payable
$ 530,000 $ 440,000 Accrued expenses 140,000 130,000 Dividends payable 70,000
-- Total current liabilities 740,000 570,000 Note payable—due year 4 500,000 --
Stockholders’ equity: Common stock 1,200,000 900,000 Retained earnings
560,000 330,000 1,760,000 1,230,000 Total liabilities and stockholders’ equity
P3,000,000 $1,800,000 Debbie Dress Shops, Inc.
INCOME STATEMENTS

Year ended December 31 Year 2 Year 1 Net credit sales P6,400,000 P4,000,000
Cost of goods sold 5,000,000 3,200,000 Gross profit 1,400,000 800,000 Expenses
(including income taxes) 1,000,000 520,000 Net income $400,000 P280,000
Additional information available included the following:
All accounts receivable and accounts payable are related to trade merchandise. Accounts
payable are recorded net and always are paid to take all of the discount allowed. The allowance
for doubtful accounts at the end of year 2 was the same as at the end of
year 1; no receivables were charged against the allowance during year 2.
The proceeds from the note payable were used to finance a new store building.
Capital stock was sold to provide additional working capital.
33. Cash collected during year 2 from accounts receivable amounted to a.
P5,560,000
b. P5,840,000
c. P6,140,000
d. P6,400,000
34. Cash payments during year 2 on accounts payable to suppliers amounted to a.
P4,670,000
b. P4,910,000
c. P5,000,000
d. P5,150,000
35. Net cash provided by financing activities for year 2 totaled a.
P140,000
b. P300,000
c. P500,000
d. P700,000
36. Net cash used in investing activities during year 2 was a. P
80,000
b. P530,000
c. P610,000
d. P660,000
37. Bee Co. uses the direct write-off method to account for uncollectible accounts
receivable. During an accounting period, Bee’s cash collections from customers equal sales
adjusted for the addition or deduction of the following amounts:
Accounts written off Increase in accounts receivable balance a. Deduction Deduction b.
Addition Deduction c. Deduction Addition d. Addition Addition G. International Financial
Reporting Standards (IFRS)

38. Rice Corporation prepares its financial statements in accordance with IFRS. Rice
must report amounts paid for interest on a note payable on the statement of cash flows
a. In operating activities. b.
In financing activities.
c. Either in operating activities or financing activities. d.
Either in investing activities or financing activities.
39. Filigree Corporation prepares its financial statements in accordance with IFRS.
Filigree acquired equipment by issuing 5,000 shares of its common stock. How should
this transaction be reported on the statement of cash flows?
a. As an outflow of cash from investing activities and an inflow of cash from
financing activities.
b. As an inflow of cash from financing activities and an outflow of cash from
operating activities.
c. At the bottom of the statement of cash flows as a significant noncash
transaction.
d. In the notes to the financial statements as a significant noncash transaction.