Test bank managerial accounting by garrison 13e chapter 15

Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
True/False Questions
1. An increase in inventory is classified as a “use” of cash for purposes of constructing
the statement of cash flows.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
2. In the statement of cash flows, dividend payments to the company's stockholders are
treated as a “use” rather than as a “source” of cash.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
3. Under the indirect method of determining the net cash flow from operating activities
on the statement of cash flows, a gain on the sale of equipment would be added to net
income.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Hard
4. Under the indirect method of determining the net cash provided by operating activities
on the statement of cash flows, increases in current liabilities such as accounts payable
are added to net income.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
5. Under the indirect method of determining the net cash provided by operating activities
on the statement of cash flows, dividends are added to net income.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
6. Interest paid on borrowed funds would be included as part of a company's financing
activities on the statement of cash flows.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-5


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
7. The net cash provided by operating activities on the statement of cash flows would
include interest paid to creditors and dividends paid to the company's own
shareholders.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
8. A change in deferred taxes is considered to be an operating activity on the statement of
cash flows.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
9. Lending money to another company would be classified as a financing activity on the
statement of cash flows.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
10. The direct method of preparing the statement of cash flows will usually show a greater
total increase in cash than the indirect method.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy
11. Under the direct method of determining the net cash provided by operations on the
statement of cash flows, the cost of goods sold is converted to a cash basis by
adjusting it for changes in inventories and changes in accounts payable during the
period.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 4 Level: Medium

12. Under the direct method of determining the net cash provided by operating activities
on the statement of cash flows, an increase in inventory would be added to cost of
goods sold to convert cost of goods sold to a cash basis.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 4 Level: Hard

15-6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
13. Under the direct method of determining the net cash provided by operating activities
on the statement of cash flows, an increase in prepaid expenses would be added to
selling and administrative expenses to convert selling and administrative expenses to a
cash basis.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 4 Level: Hard
14. Accounts receivable is not considered to be a cash equivalent for purposes of
preparing the statement of cash flows.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
15. The Financial Accounting Standards Board (FASB) recommends that companies use
the direct method rather than the indirect method in preparing their statement of cash
flows.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Multiple Choice Questions
16. Which of the following would be considered a “use” of cash for purposes of
constructing a statement of cash flows?

A) a decrease in accounts receivable.
B) an increase in accounts payable.
C) an increase in common stock.
D) a decrease in bonds payable.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
17. Which of the following would be considered a “source” of cash for purposes of
constructing a statement of cash flows?
A) an increase in accounts payable.
B) dividends paid to the company's own shareholders.
C) a decrease in accrued liabilities.
D) an increase in accounts receivable.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-7


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
18. Evita Corporation prepares its statement of cash flows using the indirect method.
Evita's statement showed “Net cash provided by operating activities” to be $46,000.
Under the direct method, this number would have been:
A) $0.
B) $46,000.
C) greater than $46,000.
D) less than $46,000 but greater than $0.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 2,3,4 Level: Easy

19. Under the indirect method, which item would be deducted from net income as part of
the process of arriving at cash provided by operating activities on the statement of
cash flows?
A) Patent amortization expense
B) Increase in accounts payable
C) Increase in prepaid expenses
D) Decrease in accounts receivable
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
20. A decrease in the prepaid expenses account of $1,000 over the course of a year would
be shown on the company's statement of cash flows prepared under the indirect
method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by
operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by
operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

15-8

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
21. An increase in the taxes payable account of $1,000 over the course of a year would be
shown on the company's statement of cash flows prepared under the indirect method
as:

A) an addition to net income of $1,000 in order to arrive at net cash provided by
operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by
operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
22. Luella Corporation prepares its statement of cash flows using the indirect method.
Which of the following would be added to net income in the operating activities
section of the statement?

A)
B)
C)
D)

Depreciation Loss on Sale
Expense
of Equipment
Yes
Yes
Yes
No
No
Yes
No
No

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3 Level: Medium
23. Gioja Corporation prepares its statement of cash flows using the indirect method.
Which of the following would be deducted from net income in the operating activities
section of the statement?
A)
B)
C)
D)

Increase in Taxes Payable Increase in Dividends Payable
Yes
Yes
Yes
No
No
Yes
No
No

Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-9


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
24. Olaf Corporation prepares its statement of cash flows using the direct method. The
following items were listed on Olaf's income statement. Which of these items would

also be listed in the operating activities section of Olaf's statement of cash flows?
A)
B)
C)
D)

Depreciation Expense Gain on Sale of Equipment
Yes
Yes
Yes
No
No
Yes
No
No

Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 2,4 Level: Medium
25. During the year the balance in the prepaid expenses account increased by $6,000. In
order to adjust the company's net income to a cash basis using the direct method on the
statement of cash flows, it would be necessary to:
A) deduct the $6,000 from the operating expenses reported on the income
statement.
B) add the $6,000 to the operating expenses reported on the income statement.
C) deduct the $6,000 from the cost of goods sold reported on the income statement.
D) add the $6,000 to the cost of goods sold reported on the income statement.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 2,4 Level: Hard
26. In a statement of cash flows, all of the following would be classified as operating
activities except:

A) interest paid to creditors.
B) dividends received on stock in another company held as an investment.
C) dividends paid to the company's own common stockholders.
D) interest received on a long-term note receivable.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium

15-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
27. In a statement of cash flows, a change in accounts payable account would be classified
as:
A) an operating activity.
B) a financing activity.
C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
28. A decrease in the plant and equipment account of $100,000 over the course of a year
would be shown on the company's statement of cash flows prepared under the indirect
method as:
A) an addition to net income of $100,000 in order to arrive at net cash provided by
operating activities.
B) a deduction from net income of $100,000 in order to arrive at net cash provided
by operating activities.
C) an addition of $100,000 under investing activities.
D) a deduction of $100,000 under investing activities.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
29. Which of the following should be classified as an investing activity on a statement of
cash flows?
A) cash received from the sale of office equipment that was sold at a loss.
B) cash used to purchase a long-term investment in bonds of another corporation.
C) cash received from the issuance of Iguato Corporation common stock.
D) both A and B above
E)
all of the above
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
30. Which of the following should be classified as an investing activity on a statement of
cash flows?
A) cash paid for income taxes.
B) cash paid for dividends to stockholders.
C) cash paid to employees for services rendered.
D) none of the above
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-11


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
31. A company declared and paid a cash dividend. The dividend would appear on the
company's statement of cash flows as:
A) an addition to net income in order to arrive at net cash provided by operating

activities under the indirect method.
B) a deduction from net income in order to arrive at net cash provided by operating
activities under the indirect method.
C) a deduction under investing activities.
D) a deduction under financing activities.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
32. Dividends paid to a company's own stockholders of $80,000 would be shown on the
company's statement of cash flows prepared under the indirect method as:
A) an addition of $80,000 under investing activities.
B) a deduction of $80,000 under investing activities.
C) an addition of $80,000 under financing activities.
D) a deduction of $80,000 under financing activities.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
33. Which of the following should be classified as a financing activity on a statement of
cash flows?
A) cash used to retire bonds payable.
B) an increase in deferred income taxes.
C) cash dividends received on an investment in stock.
D) both A and C above
E)
none of the above
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
34. Which of the following sections of the statement of cash flows will be prepared
differently if the direct method is used instead of the indirect method?
A) operating activities section
B) investing activities section
C) financing activities section

D) all of the above
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 15 LO: 3,4 Level: Easy

15-12

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
35. In the statement of cash flows, the sum total of the net cash provided by operating
activities, investing activities, and financing activities would be equal to:
A) zero.
B) the beginning balance of cash and cash equivalents.
C) the ending balance of cash and cash equivalents.
D) the increase or decrease in cash and cash equivalents.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
36. Excerpts from Neuwirth Corporation's comparative balance sheet appear below:
Cash and cash equivalents.............
Accounts receivable.......................
Inventory........................................

Ending Balance Beginning Balance
$37,000
$27,000
$24,000
$28,000
$65,000
$68,000

Which of the following classifications of changes in balance sheet accounts as sources
and uses is correct?
A) The change in Accounts Receivable is a source; The change in Inventory is a
source.
B) The change in Accounts Receivable is a use; The change in Inventory is a use.
C) The change in Accounts Receivable is a source; The change in Inventory is a
use.
D) The change in Accounts Receivable is a use; The change in Inventory is a
source.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-13


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
37. Excerpts from Deblois Corporation's comparative balance sheet appear below:
Cash and cash equivalents...................
Accounts payable.................................
Accrued wages and salaries payable....

Ending Balance Beginning Balance
$22,000
$28,000
$18,000
$17,000
$34,000

$37,000

Which of the following classifications of changes in balance sheet accounts as sources
and uses is correct?
A) The change in Accounts Payable is a source; The change in Accrued Wages and
Salaries payable is a source.
B) The change in Accounts Payable is a use; The change in Accrued Wages and
Salaries payable is a source.
C) The change in Accounts Payable is a source; The change in Accrued Wages and
Salaries payable is a use.
D) The change in Accounts Payable is a use; The change in Accrued Wages and
Salaries payable is a use.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
38. Excerpts from Aultman Corporation's comparative balance sheet appear below:
Cash and cash equivalents...................
Property, plant, and equipment............
Long-term debt.....................................

Ending Balance Beginning Balance
$62,000
$29,000
$371,000
$345,000
$75,000
$73,000

Which of the following classifications of changes in balance sheet accounts as sources
and uses is correct?
A) The change in Property, Plant, and Equipment is a use; The change in LongTerm Debt is a source.

B) The change in Property, Plant, and Equipment is a source; The change in LongTerm Debt is a use.
C) The change in Property, Plant, and Equipment is a use; The change in LongTerm Debt is a use.
D) The change in Property, Plant, and Equipment is a source; The change in LongTerm Debt is a source.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy

15-14

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
39. Swinger Corporation's comparative balance sheet appears below:
Ending
Balance
Assets:
Current assets:
Cash and cash equivalents.........................
Accounts receivable...................................
Inventory....................................................
Total current assets.......................................
Property, plant, and equipment.....................
Less accumulated depreciation..................
Net property, plant, and equipment...............
Total assets....................................................
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable.......................................
Accrued wages and salaries payable.........
Accrued income taxes payable..................

Notes payable............................................
Total current liabilities..................................
Long-term debt.............................................
Deferred income taxes..................................
Total liabilities..............................................
Stockholders’ equity:
Common stock...........................................
Retained earnings......................................
Total stockholders’ equity.............................
Total liabilities and stockholders’ equity......

Beginning
Balance

$ 47,000
23,000
66,000
136,000
356,000
184,000
172,000
$308,000

$ 31,000
22,000
64,000
117,000
338,000
161,000
177,000

$294,000

$ 17,000
32,000
25,000
11,000
85,000
83,000
38,000
206,000

$ 16,000
31,000
27,000
13,000
87,000
80,000
34,000
201,000

27,000
75,000
102,000
$308,000

24,000
69,000
93,000
$294,000

The company's net income (loss) for the year was $10,000 and its cash dividends were
$4,000. The total dollar amount of all of the items that would be classified as sources
when compiling a simplified statement of cash flows is:
A) $29,000
B) $16,000
C) $45,000
D) $25,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-15


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Sources
Net income.............................................................
Increases in liabilities (and contra asset accounts):
Increase in accumulated depreciation.................
Increase in accounts payable...............................
Increase in accrued wages and salaries payable..
Increase in long-term debt...................................
Increase in deferred income taxes.......................
Increases in capital stock accounts:
Increase in common stock...................................
Total sources..........................................................

15-16

$10,000
23,000
1,000
1,000
3,000
4,000
3,000
$45,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
40. Illies Corporation's comparative balance sheet appears below:
Ending
Balance
Assets:
Current assets:
Cash and cash equivalents.........................
Accounts receivable...................................
Inventory....................................................
Total current assets........................................
Property, plant, and equipment.....................
Less accumulated depreciation..................
Net property, plant, and equipment...............
Total assets....................................................
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable.......................................

Accrued wages and salaries payable..........
Accrued income taxes payable..................
Notes payable.............................................
Total current liabilities..................................
Long-term debt..............................................
Deferred income taxes..................................
Total liabilities...............................................
Stockholders’ equity:
Common stock...........................................
Retained earnings.......................................
Total stockholders’ equity.............................
Total liabilities and stockholders’ equity.......

Beginning
Balance

$ 40,000
19,000
67,000
126,000
358,000
156,000
202,000
$328,000

$ 33,000
21,000
69,000
123,000
339,000

132,000
207,000
$330,000

$ 18,000
35,000
23,000
19,000
95,000
82,000
25,000
202,000

$ 19,000
37,000
19,000
22,000
97,000
86,000
23,000
206,000

23,000
103,000
126,000
$328,000

22,000
102,000
124,000

$330,000

The company's net income (loss) for the year was $5,000 and its cash dividends were
$4,000. The total dollar amount of all of the items that would be classified as uses
when compiling a simplified statement of cash flows is:
A) $7,000
B) $40,000
C) $29,000
D) $33,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-17


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Uses
Increases in noncash assets:
Increase in property, plant, and equipment...........
Decreases in liabilities:
Decrease in accounts payable...............................
Decrease in accrued wages and salaries payable..
Decrease in notes payable....................................
Decrease in long-term debt...................................
Dividends paid.........................................................
Total uses.................................................................

15-18

$19,000
1,000
2,000
3,000
4,000
4,000
$33,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
41. The following information relates to Penha, Inc. for last year:
Net income.............................................................
Net increase in all current assets except cash........
Net increase in current liabilities...........................
Dividends paid on common stock..........................
Depreciation expense.............................................
Gain on sale of investments...................................

$117,000
$31,000
$45,000
$20,000
$8,000
$3,000

What is Penha's net cash provided by operating activities for last year on the statement

of cash flows? (Assume that current liabilities do not contain any notes payable.)
A) $108,000
B) $116,000
C) $136,000
D) $139,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Solution:
Net income............................................................................
Adjustments needed to convert net income to a cash basis:
Depreciation charges..........................................................
Add (deduct) changes in current asset accounts affecting
revenue or expense:
Increase in all current assets except cash...........................
Add (deduct) changes in current liability accounts affecting
revenue or expense:
Increase in current liabilities..............................................
Add (deduct) gains or losses on sale of assets:
Gain on sale of investments...............................................
Net cash provided by operating activities.............................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$117,000
8,000
(

31,000)
45,000

(

3,000)
$136,000

15-19


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
42. Morey Company's net income last year was $27,000 and cash dividends declared and
paid to the company's stockholders totaled $13,000. Changes in selected balance sheet
accounts for the year appear below:
Increases
(Decreases)
Debit balances:
Accounts receivable.................
Inventory..................................
Prepaid expenses......................
Credit balances:
Accumulated depreciation.......
Accounts payable.....................
Taxes payable...........................
Bonds payable..........................

$8,000
$(3,000)
$4,000
$18,000
$6,000
$(4,000)

$10,000

Based solely on this information, the net cash provided by operations under the
indirect method on the statement of cash flows would be:
A) $16,000
B) $45,000
C) $38,000
D) $25,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Hard
Solution:
Net income.........................................................................
Adjustments needed to convert net income to cash basis:
Depreciation charges.......................................................
Add (deduct) changes in current asset accounts
affecting revenue or expense:
Increase in accounts receivable...................................
Decrease in inventory..................................................
Increase in prepaid expenses.......................................
Add (deduct) changes in current liability accounts
affecting revenue or expense:
Increase in accounts payable.......................................
Decrease in taxes payable............................................
Net cash provided by operating activities..........................

15-20

$27,000
18,000
(

(

(

8,000)
3,000
4,000)
6,000
4,000)
$38,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
43. Norlund Company's net income last year was $21,000. Changes in selected balance
sheet accounts for the year appear below:
Increases
(Decreases)
Debit balances:
Accounts receivable.................
Inventory..................................
Prepaid expenses......................
Credit balances:
Accumulated depreciation.......
Accounts payable.....................
Accrued liabilities....................
Taxes payable...........................
Deferred taxes..........................

$8,000
$9,000
$(3,000)
$15,000
$(5,000)
$11,000
$7,000
$0

Based solely on this information, the net cash provided by operations under the
indirect method on the statement of cash flows would be:
A) $63,000
B) $36,000
C) $7,000
D) $35,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-21


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Net income.........................................................................
Adjustments needed to convert net income to cash basis:
Depreciation charges.......................................................
Add (deduct) changes in current asset accounts
affecting revenue or expense:

Increase in accounts receivable...................................
Increase in inventory....................................................
Decrease in prepaid expenses......................................
Add (deduct) changes in current liability accounts
affecting revenue or expense:
Decrease in accounts payable......................................
Increase in accrued liabilities.......................................
Increase in taxes payable.............................................
Net cash provided by operating activities..........................

$21,000
15,000
(
(

8,000)
9,000)
3,000

(

5,000)
11,000
7,000
$35,000

44. Alaric Corporation recently sold equipment for $16,000. The equipment was
purchased five years ago for $100,000. The accumulated depreciation on the
equipment on the date of sale was $75,000. Alaric uses the indirect method to prepare
its statement of cash flows. What net effect will this sale have on the investing

activities section of Alaric's statement of cash flows for the current year?
A) no effect
B) $7,000 increase
C) $9,000 decrease
D) $16,000 increase
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

15-22

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
45. Roble Corporation's balance sheet and income statement appear below:
Comparative Balance Sheet
Ending Beginning
Balance
Balance
Assets:
Cash and cash equivalents.........................
$ 28
$ 22
Accounts receivable...................................
65
61
Inventory....................................................
45
47
Plant and equipment...................................

658
520
Accumulated depreciation.........................
( 296)
( 288)
Total assets.................................................
$500
$362
Liabilities and stockholders’ equity:
Accounts payable.......................................
Wages payable............................................
Taxes payable.............................................
Bonds payable............................................
Deferred taxes............................................
Common stock...........................................
Retained earnings.......................................
Total liabilities and stockholders’ equity....
Income Statement
Sales...........................................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Gain on sale of plant and equipment..........
Income before taxes...................................
Income taxes..............................................
Net income.................................................

$ 28
22

28
151
16
55
200
$500

$ 29
20
24
200
17
50
22
$362

$1,485
989
496
172
324
19
343
103
$ 240

Cash dividends were $62. The company sold equipment for $19 that was originally
purchased for $5 and that had accumulated depreciation of $5. The net cash provided
by (used by) operations for the year was:
A) $255

B) $236
C) $324
D) $298
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-23


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Net income..................................................................................
Adjustments needed to convert net income to cash basis:
Depreciation charges................................................................
Add (deduct) changes in current asset accounts affecting
revenue or expense:
Increase in accounts receivable............................................
Decrease in inventory...........................................................
Add (deduct) changes in current liability accounts affecting
revenue or expense:
Decrease in accounts payable...............................................
Increase in wages payable....................................................
Increase in taxes payable......................................................
Add (deduct) gains or losses on sales of assets:
Gain on sale of plant and equipment....................................
Add (deduct) changes in the Deferred Income Taxes account:
Decreases in deferred taxes liability.....................................
Net cash provided by operating activities...................................

15-24

$240
13
(

4)
2

(

1)
2
4

(

19)

(

1)
$236

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
46. Ivory Corporation's balance sheet and income statement appear below:

Comparative Balance Sheet
Ending Beginning
Balance
Balance
Assets:
Cash and cash equivalents.........................
$ 37
$ 40
Accounts receivable...................................
44
42
Inventory....................................................
63
53
Plant and equipment...................................
443
440
Accumulated depreciation.........................
( 268)
( 230)
Total assets.................................................
$319
$345
Liabilities and stockholders’ equity:
Accounts payable.......................................
Wages payable............................................
Taxes payable.............................................
Bonds payable............................................
Deferred taxes............................................
Common stock...........................................

Retained earnings.......................................
Total liabilities and stockholders’ equity....
Income Statement
Sales...........................................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Gain on sale of plant and equipment..........
Income before taxes...................................
Income taxes..............................................
Net income.................................................

$ 41
26
16
127
18
63
28
$319

$ 45
25
17
120
19
60
59
$345

$386
239
147
185
( 38)
8
(30)
0
($ 30)

Cash dividends were $1. The company sold equipment for $19 that was originally
purchased for $15 and that had accumulated depreciation of $4. The net cash provided
by (used by) investing activities for the year was:
A) ($18)
B) ($1)
C) $1
D) $19
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15-25


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Additions to plant and equipment..............
Proceeds from sale of equipment...............

Net cash provided by investing activities. .

($18) *
19
$ 1

*$443 + $15 − $440 = $18
47. Daubenspeck Corporation's balance sheet and income statement appear below:
Comparative Balance Sheet
Ending
Balance
Assets:
Cash and cash equivalents.........................
Accounts receivable...................................
Inventory....................................................
Plant and equipment...................................
Accumulated depreciation.........................
Total assets.................................................

$ 42
65
65
666
( 258)
$580

$ 38
56
57
530

( 230)
$451

Liabilities and stockholders’ equity:
Accounts payable.......................................
Wages payable............................................
Taxes payable.............................................
Bonds payable............................................
Deferred taxes............................................
Common stock...........................................
Retained earnings.......................................
Total liabilities and stockholders’ equity....

$ 33
16
14
167
25
64
261
$580

$ 40
17
12
200
24
60
98
$451

Income Statement
Sales...........................................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Gain on sale of plant and equipment..........
Income before taxes...................................
Income taxes..............................................
Net income.................................................

15-26

Beginning
Balance

$1,093
671
422
145
277
20
297
89
$ 208

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Cash dividends were $45. The company sold equipment for $20 that was originally
purchased for $12 and that had accumulated depreciation of $12. The net cash
provided by (used by) financing activities for the year was:
A) ($74)
B) ($33)
C) ($45)
D) $4
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Solution:
Financing Activities
Decrease in bonds payable.........................
Increase in common stock..........................
Cash dividends paid...................................
Net cash used in financing activities..........

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

($33)
4
( 45)
($74)

15-27


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
48. The most recent balance sheet and income statement of Helle Corporation appear
below:

Comparative Balance Sheet
Ending Beginning
Balance
Balance
Assets:
Cash and cash equivalents.........................
$ 21
$ 22
Accounts receivable...................................
56
54
Inventory....................................................
66
58
Plant and equipment...................................
459
420
Accumulated depreciation.........................
( 225)
( 202)
Total assets.................................................
$377
$352
Liabilities and stockholders’ equity:
Accounts payable.......................................
Wages payable............................................
Taxes payable.............................................
Bonds payable............................................
Deferred taxes............................................
Common stock...........................................

Retained earnings.......................................
Total liabilities and stockholders’ equity....

$ 46
22
18
22
17
61
191
$377

Income Statement
Sales...........................................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Income taxes..............................................
Net income.................................................

$532
324
208
137
71
21
$ 50

$ 55

20
21
30
16
60
150
$352

Cash dividends were $9. The net cash provided by (used by) operations for the year
was:
A) $46
B) $71
C) $54
D) $4
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium

15-28

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 15 “How Well Am I Doing?”--Statement of Cash Flows
Solution:
Net income.............................................................
Adjustments to convert net income to cash basis:
Depreciation charges...........................................
Increase in accounts receivable...........................
Increase in inventory...........................................
Decrease in accounts payable.............................

Increase in wages payable...................................
Decrease in taxes payable...................................
Increase in deferred taxes liability......................
Net cash provided by operating activities..............

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$50
23
2)
8)
9)
2
( 3)
1
$54
(
(
(

15-29