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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 16 Understanding Corporate Annual Reports: Basic Financial Statements

16.1 Questions

1) Which of the following assets is NOT classified as a short-term investment?


A) corporate stocks
B) corporate bonds
C) debt securities issued by governments
D) checking account balance
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

2) The net amount a company expects to collects on Accounts Receivable is equal to ________.
A) gross Accounts Receivable
B) Allowance for Doubtful Accounts
C) gross Accounts Receivable minus Allowance for Doubtful Accounts
D) gross Accounts Receivable plus Allowance for Doubtful Accounts
Answer: C
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

3) Manufacturers have several inventory accounts that do NOT include ________.


A) Finished Goods Inventory
B) Raw Materials Inventory
C) Work in Process Inventory
D) Construction in Process Inventory
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

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4) A unit of ending inventory has a cost of $100 per unit. The selling price per unit is $200. The
replacement cost per unit is $90. What value is reported for this inventory on the balance sheet?
A) $90
B) $100
C) $110
D) $200
Answer: A
Diff: 2
LO: 16-1
AACSB: Analytic skills
Learning Outcome: None

5) Details about Property, Plant and Equipment, such as the age of plant assets and the types of plant
assets, are typically reported ________.
A) on the balance sheet
B) on the income statement
C) on the statement of cash flows
D) in a footnote
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

6) Leasehold Improvements do NOT include ________.


A) painting and decorating of leased property
B) security systems added to leased property
C) bookcases built into walls of leased property
D) furniture used at leased property
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

7) Companies do not amortize indefinite-life intangible assets. What do companies do each year for these
assets?
A) only report them on the balance sheet
B) only apply an impairment test annually
C) only report them on the statement of stockholders' equity
D) A and B
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

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8) Current assets are expected to be converted to cash or sold or consumed within ________.
A) one year or operating cycle if longer than one month
B) one year or operating cycle if longer than one year
C) one year or operating cycle if shorter than one year
D) one fiscal year
Answer: B
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

9) Which of the following is NOT a current asset?


A) Inventories
B) Prepaid Insurance
C) Supplies
D) Land
Answer: D
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

10) On a classified balance sheet, the Equipment account is reduced by ________.


A) Allowance for Bad Debts
B) Allowance for Doubtful Accounts
C) Accumulated Depreciation
D) Depreciation Expense
Answer: C
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

11) The purpose of depreciation is to ________.


A) establish the current replacement cost of a fixed asset
B) accumulate funds to replace a fixed asset
C) set aside cash to replace a fixed asset
D) allocate the original cost of a fixed asset to the periods that benefit from the use of the fixed asset
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

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12) Which of the following is NOT a tangible asset?
A) inventories
B) land
C) equipment
D) goodwill
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

13) Intangible assets are ________.


A) assets with a physical presence
B) assets that can be seen and touched
C) rights to expected future benefits
D) assets with definite lives only
Answer: C
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

14) The amortization of intangible assets applies to ________.


A) Research and Development Costs
B) Goodwill
C) intangible assets with definite lives
D) intangible assets with indefinite lives
Answer: C
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

15) Goodwill remains on a company's books until ________.


A) accountants amortize it
B) accountants depreciate it
C) management sells it
D) management determines its value is impaired
Answer: D
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

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16) Accounts receivable is a current asset.
Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

17) A company's operating cycle can be longer than one year.


Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

18) The Allowance for Bad Debts account is added to the Accounts Receivable account on the balance
sheet.
Answer: FALSE
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

19) Land is not depreciated.


Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

20) Freight and installation costs are added to the cost of equipment.
Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

21) Leasehold improvements are amortized annually.


Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

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22) Some intangible assets are depreciated.
Answer: FALSE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

23) Research and development costs are expensed when incurred for financial statement purposes.
Answer: TRUE
Diff: 1
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

24) Goodwill is amortized for financial statement purposes.


Answer: FALSE
Diff: 2
LO: 16-1
AACSB: Reflective thinking skills
Learning Outcome: None

16.2 Questions

1) Deferred tax liabilities are ________.


A) expected increases in future income taxes due to past transactions
B) expected decreases in future income taxes due to past transactions
C) expected increases in future income taxes due to future transactions
D) expected decreases in future income taxes due to future transactions
Answer: A
Diff: 2
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

2) How should Unearned Rent Revenue be classified on a balance sheet at December 31, 2013? The rental
contract covers the period, January 1, 2013 through December 31, 2015.
A) current liability only
B) long-term liability only
C) current and long-term liability
D) current asset only
Answer: C
Diff: 2
LO: 16-2
AACSB: Analytic skills
Learning Outcome: None

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3) An example of secured bonds is ________.
A) debentures
B) zero coupon bonds
C) mortgage bonds
D) serial bonds
Answer: C
Diff: 2
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

4) It is December 31, 2014. A Note Payable is due in five annual installments beginning on December 31,
2015. On the balance sheet dated December 31, 2014, the Note Payable is classified as ________.
A) current liability only
B) long-term liability only
C) current and long-term liability
D) owners' equity
Answer: C
Diff: 3
LO: 16-2
AACSB: Analytic skills
Learning Outcome: None

5) Current liabilities are debts due within the ________ year or within the normal operating cycle if
________.
A) past; longer than a year
B) next; longer than a year
C) past; shorter than a year
D) next; shorter than a year
Answer: B
Diff: 2
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

6) Unsecured debt holders are creditors who have ________.


A) a specific claim against particular assets
B) a specific claim against fixed assets only
C) a general claim against fixed assets only
D) a general claim against total assets
Answer: D
Diff: 2
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

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7) Assume you are preparing a balance sheet dated December 31, 2014. Which of the following is NOT a
long-term liability?
A) bonds payable due June 30, 2016
B) bonds payable due June 30, 2015
C) bonds payable due December 31, 2016
D) bonds payable due December 31, 2020
Answer: B
Diff: 2
LO: 16-2
AACSB: Analytic skills
Learning Outcome: None

8) Convertible bonds allow a bondholder to exchange ________.


A) unsecured bonds for secured bonds
B) unsubordinated bonds for subordinated bonds
C) common stock for bonds
D) bonds for mortgage bonds
Answer: C
Diff: 2
LO: 16-2
AACSB: Analytic skills
Learning Outcome: None

9) The account Unearned Revenue is a revenue account.


Answer: FALSE
Diff: 1
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

10) Accounts payable, wages payable and income taxes payable are all considered to be current liabilities.
Answer: TRUE
Diff: 1
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

11) Accrued interest payable is a long-term liability because it relates to a long-term bond payable.
Answer: FALSE
Diff: 1
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

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12) Working capital is equal to current assets plus current liabilities.
Answer: FALSE
Diff: 1
LO: 16-2
AACSB: Reflective thinking skills
Learning Outcome: None

16.3 Questions

1) Which of the following items is NOT a component of stockholders' equity?


A) paid-in capital
B) retained earnings
C) accumulated other comprehensive income
D) deferred income tax liabilities
Answer: D
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

2) Damon Company sold 10,000 shares of $1 par value common stock. The selling price was $9.00 per
share. After the sale, what is the capital in excess of par value?
A) $80,000
B) $90,000
C) $100,000
D) $110,000
Answer: A
Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

3) What is Other Comprehensive Income?


A) unrealized gains and loss that are reported on the Statement of Retained Earnings
B) unrealized gains and losses that are reported on the traditional Income Statement
C) unrealized gains and losses that are reported on the Balance Sheet
D) unrealized gains and losses that are not reported on the financial statements
Answer: C
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

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4) Preferred stock has priority over common stock in ________.
A) voting rights
B) distribution of assets in liquidation
C) payment of dividends
D) B and C
Answer: D
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

5) Treasury stock is shown on the balance sheets as a deduction from ________.


A) total assets
B) total liabilities
C) total current assets
D) total stockholders' equity
Answer: D
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

6) Johnson Company's capital stock is currently trading for $22 per share. The following accounts appear
on the balance sheet:

Common stock, $6.00 par value per share, 10,000 shares issued $60,000
Paid in capital in excess of par value $200,000

The only transaction affecting the accounts was one issue of the company's common stock. What was the
original selling price of the common stock?
A) $6.00 per share
B) $20.00 per share
C) $22.00 per share
D) $26.00 per share
Answer: D
Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

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7) Joe Anthony Company recently issued 20,000 shares of $1.00 par value common stock for $40,000. This
transaction will increase the ________.
A) Common stock account by $20,000
B) Common stock account by $40,000
C) Paid in capital in excess of par account by $40,000
D) Retained earnings account by $40,000
Answer: A
Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

8) Treasury stock is ________.


A) unissued shares of stock
B) the number of shares of stock that cannot be sold in the future
C) shares of stock held in other companies for investment purposes
D) shares of stock already issued that are later repurchased by the corporation that originally issued them
Answer: D
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

9) The limited liability of stockholders in a corporation means that ________.


A) the company's creditors cannot seek payment from the stockholders as individuals if the corporation
cannot pay its debt
B) the company's creditors cannot receive more than the face value of their debt
C) the short-term creditors have to be paid before the long-term creditors
D) the long-term creditors have to be paid before the short-term creditors
Answer: A
Diff: 2
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

10) Treasury stock is a deduction from total stockholders' equity.


Answer: TRUE
Diff: 1
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

11) Par value is the value that is printed on the face of the stock certificate.
Answer: TRUE
Diff: 1
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

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12) Preferred stockholders receive cash dividends before common stockholders.
Answer: TRUE
Diff: 1
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

13) A company's treasury stock is outstanding but not issued.


Answer: FALSE
Diff: 1
LO: 16-3
AACSB: Reflective thinking skills
Learning Outcome: None

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14) The following balances are available for Thompson Company on December 31, 2015:

Accumulated depreciation $21,800


Accounts payable 11,200
Accounts receivable 9,800
Additional paid-in capital 24,000
Common stock 6,000
Cash 7,400
Fixed assets 89,400
Interest payable 2,400
Inventory 13,600
Long-term notes payable 28,000
Prepaid rent 2,500
Retained earnings ?
Wages payable 6,400

Required:
Prepare a classified balance sheet at December 31, 2015.

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Answer: Thompson Company
Balance Sheet
December 31, 2015
Current Assets:
Cash $7,400
Accounts Receivable 9,800
Inventory 13,600
Prepaid rent 2,500
Total current assets $33,300
Noncurrent Assets:
Fixed assets $89,400
Less: Accumulated Depreciation (21,800)
Total long-term assets 67,600
Total assets $100,900

Current Liabilities:
Accounts payable $11,200
Interest payable 2,400
Wages payable 6,400
Total current liabilities $20,000
Noncurrent Liabilities:
Long-term notes payable 28,000
Total liabilities $48,000
Stockholders' Equity:
Common stock $6,000
Additional paid-in capital 24,000
Retained earnings 22,900
Total stockholders' equity 52,900
Total liabilities and stockholders' equity $100,900
Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

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15) The balances on December 31, 2015 are available for Jennifer Company:

Accounts payable $2,550


Accounts receivable 3,550
Accumulated depreciation 6,250
Retained earnings, December 31, 2014 ?
Cash 2,300
Cost of goods sold 52,300
Depreciation expense 2,500
Dividends declared 8,800
Equipment 29,000
Income tax expense 10,700
Interest expense 1,150
Inventory 6,250
Long-term notes payable 11,500
Paid-in capital 4,450
Prepaid rent 350
Rent expense 4,000
Sales 118,600
Wage expense 31,900
Wages payable 3,000

Required:
Prepare a classified balance sheet at December 31, 2015.

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Answer: Jennifer Company
Balance Sheet
December 31, 2015
Current Assets:
Cash $2,300
Accounts Receivable 3,550
Inventory 6,250
Prepaid rent 350
Total current assets $12,450
Noncurrent Assets:
Equipment $29,000
Less: Accumulated Depreciation (6,250)
Total long-term assets 22,750
Total assets $35,200

Current Liabilities:
Accounts payable $2,550
Wages payable 3,000
Total current liabilities $5,550
Noncurrent Liabilities:
Long-term notes payable 11,500
Total liabilities $17,050
Stockholders' Equity:
Paid-in capital 4,450
Retained earnings 13,700
Total stockholders' equity 18,150
Total liabilities and stockholders' equity $35,200

Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

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16) The following information is available for Anderson Company at December 31, 2016:

Additional paid-in capital, common $490,000


Common stock, $5 par value, 40,000 shares issued 200,000
Dividends payable 415,000
Long-term investment in Jacobs Company 1,400,000
Marketable securities 610,000
Retained earnings 242,000
Treasury stock, common, 8,000 shares 176,000

Required:
Prepare the stockholders' equity section of a classified balance sheet at December 31, 2016. Assume
400,000 shares of common stock are authorized to be issued.
Answer: Common stock, $5 par value, 400,000 shares authorized,
40,000 shares issued, 32,000 shares outstanding $200,000
Additional paid-in capital, common 490,000
Retained earnings 242,000
Total stockholders' equity 932,000
Less: Treasury stock, common, 8,000 shares (176,000)
Total stockholders' equity $756,000
Diff: 2
LO: 16-3
AACSB: Analytic skills
Learning Outcome: None

16.4 Questions

1) What is gross margin?


A) sales minus operating expenses
B) sales minus other expenses
C) sales minus cost of goods sold
D) sales plus other income
Answer: C
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

2) What is earnings per share?


A) net income divided by weighted average number of preferred shares outstanding
B) net income divided by weighted average number of common shares outstanding
C) net income plus the weighted average number of common and preferred shares outstanding
D) net income plus the weighted average number of bonds outstanding
Answer: B
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

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3) When calculating diluted earnings per share, which of the following items is NOT considered?
A) number of common shares outstanding
B) additional common shares from conversion of convertible securities
C) additional common shares from exercise of stock options
D) number of common shares authorized to be issued
Answer: D
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

4) A multiple step income statement has several measures of profit that do NOT include ________.
A) operating income
B) gross margin
C) income before taxes
D) cost of sales
Answer: D
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

5) ________ summarizes the results of the basic operating activities of a company.


A) Gross margin
B) Gross profit
C) Net profit
D) Operating income
Answer: D
Diff: 1
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

6) A nonoperating item on a multiple-step income statement that reflects financial decisions is ________.
A) gain from sale of inventory
B) interest expense
C) income tax expense
D) operating profit
Answer: B
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

18
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7) Nonoperating items on a multiple-step income statement do NOT include ________.
A) interest income
B) interest expense
C) gain from disposal of a fixed asset
D) selling expenses
Answer: D
Diff: 2
LO: 16-4
AACSB: Analytic skills
Learning Outcome: None

8) Sanders Company had the following data for the year ending December 31, 2014:

Cash $6,000
Depreciation expense 40,000
Prepaid rent 1,400
Cost of goods sold 69,000
Sales 200,000
Dividends paid 3,000
Rent expense 3,600
Wage expense 81,000

What is the net income for the year ending December 31, 2014?
A) $400
B) $3,400
C) $6,000
D) $6,400
Answer: D
Diff: 2
LO: 16-4
AACSB: Analytic skills
Learning Outcome: None

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9) Selected items from the financial statements for Lorna Company are listed below:

Paid in capital, December 31, 2014 $100,000


Retained earnings, December 31, 2014 $75,000
Common stock dividends declared in 2014 $75,000
Net income for the year ended December 31, 2014 $100,000

Lorna Company has 5,000 common shares outstanding during the year. What are the earnings per share
for the year ended December 31, 2014?
A) $12.00
B) $15.00
C) $20.00
D) $25.00
Answer: C
Diff: 2
LO: 16-4
AACSB: Analytic skills
Learning Outcome: None

10) Gross profit equals sales minus cost of goods sold.


Answer: TRUE
Diff: 1
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

11) Nonoperating items on a multiple-step income statement include interest expense and interest
income.
Answer: TRUE
Diff: 2
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

12) The inventory method a company uses does not affect its income statement.
Answer: FALSE
Diff: 1
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

13) Operating income summarizes the results of basic operating activities of a company.
Answer: TRUE
Diff: 1
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

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14) The last line item on an income statement is earnings per share.
Answer: TRUE
Diff: 1
LO: 16-4
AACSB: Reflective thinking skills
Learning Outcome: None

21
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15) The balances on December 31, 2015 are available for Matthew Company:

Accounts payable $2,550


Accounts receivable 3,550
Accumulated depreciation 6,250
Retained earnings, December 31, 2014 6,450
Cash 2,300
Cost of goods sold 52,300
Depreciation expense 2,500
Dividends declared 8,800
Equipment 29,000
Income tax expense 10,700
Interest expense 1,150
Inventory 6,250
Long-term notes payable 11,500
Paid-in capital 4,450
Prepaid rent 350
Rent expense 4,000
Sales 120,000
Wage expense 41,900
Wages payable 3,000

Required:
Prepare a multiple-step income statement for the year ended December 31, 2015.

Answer: Matthew Company


Income Statement
For the year ended December 31, 2015

Sales $120,000
Less: Cost of goods sold 52,300
Gross profit 67,700
Operating expenses:
Wage expense $41,900
Depreciation expense 2,500
Rent expense 4,000
Total operating expenses 48,400
Operating income 19,300
Other expense: Interest expense (1,150)
Income before taxes 18,150
Income tax expense 10,700
Net income $7,450
Diff: 2
LO: 16-4
AACSB: Analytic skills
Learning Outcome: None

22
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16) Wheel Company has the following balances at December 31, 2015:

Retained earnings, December 31, 2014 $30,000


Cost of goods sold 56,000
Depreciation expense 1,450
Dividends 8,000
Income tax expense 2,000
Interest expense 1,050
Rent expense 1,700
Sales 68,000
Wage expense 6,800

Required:
Prepare a multiple-step income statement for the year ended December 31, 2015.
Answer: Wheel Company
Income Statement
For the year ended December 31, 2015

Sales $68,000
Less: Cost of goods sold 56,000
Gross profit 12,000
Operating expenses:
Wage expense $6,800
Depreciation expense 1,450
Rent expense 1,700
Total operating expenses 9,950
Operating income 2,050
Other expense: Interest expense (1,050)
Income before taxes 1,000
Income tax expense 2,000
Net loss $(1,000)
Diff: 2
LO: 16-4
AACSB: Analytic skills
Learning Outcome: None

16.5 Questions

1) The statement of changes in stockholders' equity shows the changes in ________.


A) retained earnings only
B) dividends only
C) each of the stockholders' equity accounts
D) fixed assets only
Answer: C
Diff: 2
LO: 16-5
AACSB: Reflective thinking skills
Learning Outcome: None

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2) Mary Company had the following data available:

Paid-in capital, December 31, 2014 $43,000


Retained earnings, December 31, 2014 $27,000
Net income for the year ended December 31, 2015 $35,400
Dividends declared in 2015 $20,000

What is the balance in Retained Earnings on December 31, 2015?


A) $23,400
B) $42,400
C) $52,400
D) $66,400
Answer: B
Diff: 2
LO: 16-5
AACSB: Analytic skills
Learning Outcome: None

3) Michael Company had the following data:

Retained earnings, January 1, 2015 $45,000


Depreciation expense for 2015 $7,000
Cost of goods sold for 2015 $102,000
Paid-in capital, January 1, 2015 $26,000
Rent expense for 2015 $12,000
Sales for 2015 $194,000
Dividends declared in 2015 $15,000
Wage expense for 2015 $40,000
Prepaid rent, January 1, 2015 $2,000

What is the balance in Retained Earnings on December 31, 2015?


A) $61,000
B) $63,000
C) $65,000
D) $74,000
Answer: B
Diff: 2
LO: 16-5
AACSB: Analytic skills
Learning Outcome: None

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4) The ending retained earnings balance of Brothers Company is $700,000. During the current year, net
income is $370,000 and dividends declared are $150,000. What is the beginning balance in retained
earnings?
A) $480,000
B) $580,000
C) $800,000
D) $1,060,000
Answer: A
Diff: 2
LO: 16-5
AACSB: Analytic skills
Learning Outcome: None

5) Dividends paid are reported on the Retained Earnings Statement.


Answer: FALSE
Diff: 1
LO: 16-5
AACSB: Reflective thinking skills
Learning Outcome: None

6) Cash dividends declared are an addition to Retained Earnings on the Retained Earnings Statement.
Answer: FALSE
Diff: 1
LO: 16-5
AACSB: Reflective thinking skills
Learning Outcome: None

7) Cash dividends are reported as an expense on the Income Statement.


Answer: FALSE
Diff: 1
LO: 16-5
AACSB: Reflective thinking skills
Learning Outcome: None

16.6 Questions

1) Cash receipts of interest income are reported in the ________ section of the statement of cash flows. The
direct method is used.
A) operating activities
B) investing activities
C) financing activities
D) noncash investing and financing activities
Answer: A
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
2) Cash payments for interest expense are reported in the ________ section of the statement of cash flows.
The direct method is used.
A) operating activities
B) investing activities
C) financing activities
D) noncash investing and financing activities
Answer: A
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

3) A payment on bonds payable will be reported in the ________ section of the statement of cash flows.
A) operating activities only
B) investing activities
C) financing activities
D) noncash investing and financing activities
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

4) Which of the following events do NOT affect cash flows from operating activities? Assume the direct
method is used.
A) cash sale of merchandise inventory
B) cash purchase of equipment
C) cash purchase of inventory
D) cash paid for employees' wages
Answer: B
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

5) The cash paid to settle a long-term note payable is included in the ________ section of the statement of
cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

26
Copyright © 2014 Pearson Education
6) The cash paid for taxes is included in the ________ section of the statement of cash flows. Assume the
direct method is used.
A) operating
B) investing
C) financing
D) noncash
Answer: A
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

7) The cash paid for employees' wages is included in the ________ section of the statement of cash flows.
Assume the direct method is used.
A) operating
B) financing
C) investing
D) noncash
Answer: A
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

8) The cash paid to purchase equipment is included in the ________ section of the statement of cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: B
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

9) Cash collections from customers are included in the ________ section of the statement of cash flows.
Assume the direct method is used.
A) operating
B) investing
C) financing
D) noncash
Answer: A
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
10) The cash paid for dividends is included in the ________ section of the statement of cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

11) The cash received from the sale of common stock is included in the ________ section of the statement
of cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

12) The cash received from the sale of land is included in the ________ section of the statement of cash
flows.
A) operating
B) investing
C) financing
D) noncash
Answer: B
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

13) The cash received from the sale of bonds payable is included in the ________ section of the statement
of cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
14) The cash payment for the maturity value of bonds payable is included in the ________ section of the
statement of cash flows.
A) operating
B) investing
C) financing
D) noncash
Answer: C
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

15) An example of an operating activity on the statement of cash flows is federal taxes paid. Assume the
direct method is used.
Answer: TRUE
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

16) An example of an operating activity on the statement of cash flows is cash dividends received on
investments. Assume the direct method is used.
Answer: TRUE
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

17) An example of a financing activity on the statement of cash flows is the payment of cash dividends.
Answer: TRUE
Diff: 1
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

18) An example of a noncash transaction on the statement of cash flows is the purchase of equipment with
a long-term note payable.
Answer: TRUE
Diff: 2
LO: 16-6
AACSB: Reflective thinking skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
19) The sections of the statement of cash flows are listed below:

Sections of Statement of Cash Flows


O = Operating activities
I = Investing activities
F = Financing activities
Required:
For each of the following items, identify the section of the statement of cash flows you would find the
item. Assume the direct method is used.

_____ 1. Paid taxes of $15,000.


_____ 2. Borrowed $35,000 from the bank on a long-term note payable.
_____ 3. Collected $690,000 from customers.
_____ 4. Received $40,000 in dividend income.
_____ 5. Paid $12,000 to suppliers for inventory.
_____ 6. Issued common stock for $170,000 cash.
_____ 7. Purchased $120,000 in long-term securities for cash.
_____ 8. Paid $18,000 dividend on common stock.
_____ 9. Purchased land for $345,000 cash.
_____ 10. Sold long-term securities for cash. No gain or loss on sale.
_____ 11. Paid $210,000 on long-term debt.
_____ 12. Received $31,000 cash on sale of equipment. No gain or loss on sale.
Answer:
1. O
2. F
3. O
4. O
5. O
6. F
7. I
8. F
9. I
10. I
11. F
12. I
Diff: 2
LO: 16-6
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
16.7 Questions

1) Georgia Company has the following data available:

December December
31, 2011 31, 2012
Fixed Assets $125 $125
Accumulated Depreciation $110 $117
Long-term debt $125 $5
Common stock $300 $400
Retained earnings $100 $120

No dividends were declared or paid for the year ending December 31, 2012. What is the net cash flow
from financing activities for the year ended December 31, 2012?
A) $20 cash inflow
B) $20 cash outflow
C) $100 cash inflow
D) $120 cash outflow
Answer: B
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

2) Michigan Company has the following data available:

December December
31, 2011 31, 2012
Fixed Assets $125 $125
Accumulated Depreciation $110 $117
Long-term debt $125 $5
Common stock $300 $400
Retained earnings $100 $120

Dividends of $20 were declared on December 1, 2012. What is the net income for the year ended
December 31, 2012?
A) $10
B) $20
C) $30
D) $40
Answer: D
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

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3) Wisconsin Company reported selected accounts as follows:

December 31, 2014 December 31, 2015


Accounts payable $20,000 $30,000
Bonds payable $40,000 $28,000
Common stock $20,000 $24,000

Dividends of $8,800 were declared and paid by December 31, 2015. What was the net cash flow from
financing activities for the year ended December 31, 2015?
A) $6,800 cash outflow
B) $16,800 cash outflow
C) $6,800 cash inflow
D) $16,800 cash inflow
Answer: B
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

4) Old equipment having a book value of $12,000 was sold for $20,000 cash. New equipment was
purchased for $25,000 cash. Additional equipment was acquired in exchange for a $17,000 long-term note
payable. The net cash flow from investing activities was ________.
A) $5,000 cash outflow
B) $22,000 cash outflow
C) $25,000 cash outflow
D) $42,000 cash outflow
Answer: A
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
5) California Company reports the following information:

12/31/14 12/31/15
Fixed Assets $330 $581
Less: Accumulated Depreciation (110) (127)
Net Fixed Assets $220 $454

Depreciation expense for the year ending December 31, 2015 is $17. No fixed assets were sold during
2015. What is the net cash flow from investing activities for the year ending December 31, 2015?
A) $17 cash inflow
B) $251 cash inflow
C) $251 cash outflow
D) $268 cash outflow
Answer: C
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

6) Utah Corporation reports the following data:

12/31/14 12/31/15
Fixed Assets $330 $581
Less: Accumulated Depreciation (110) (127)
Net Fixed Assets $220 $454

Depreciation expense for the year ending December 31, 2015 is $27. The company sold a fixed asset for
$10 cash on December 1, 2015. The cost of the fixed asset sold was $20 and the accumulated depreciation
on the fixed asset sold was $10. What is the net cash flow from investing activities for the year ending
December 31, 2015?
A) $241 cash outflow
B) $251 cash outflow
C) $261 cash outflow
D) $271 cash outflow
Answer: C
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
7) Nebraska Company gave a long-term note payable in the amount of $285,000 to acquire a new piece of
land. This transaction will be reported on the statement of cash flows as a ________.
A) investing activity
B) financing activity
C) investing and financing activity
D) noncash investing and financing transaction
Answer: D
Diff: 2
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

8) An example of a financing activity on the statement of cash flows is the conversion of debt to common
stock.
Answer: FALSE
Diff: 2
LO: 16-7
AACSB: Reflective thinking skills
Learning Outcome: None

9) An example of an investing activity on the statement of cash flows is the purchase of equipment for
cash.
Answer: TRUE
Diff: 2
LO: 16-7
AACSB: Reflective thinking skills
Learning Outcome: None

10) Wyoming Company had the following information for the year ended December 31, 2015 and
December 31, 2016.

December 31, 2016 December 31, 2015


Equipment $186,000 $156,000
Accumulated depreciation 62,000 54,000

Depreciation expense for the year ended December 31, 2016 was $18,000. Equipment that cost $20,000 was
sold at a $3,000 loss. The equipment had accumulated depreciation of $10,000.

Required:
Prepare the investing section of the statement of cash flows for the year ended December 31, 2016.
Answer: Cash flows from investing activities:
Purchase of fixed assets $(50,000)
Proceeds from sale of fixed asset 7,000
Net cash used for investing activities $(43,000)
Diff: 3
LO: 16-7
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
16.8 Questions

1) For the year ending December 31, 2014, Martha Company reports net income of $23,000 and
depreciation expense of $7,000. The income tax expense for the year ending December 31, 2014 is $20,000.
The following data is available:

December 31, 2013 December 31, 2014


Cash $25,000 $16,000
Accounts Receivable $25,000 $45,000
Inventories $60,000 $100,000
Fixed Assets $330,000 $581,000
Accumulated Depreciation $110,000 $101,000
Accounts Payable $6,000 $74,000
Wages Payable $4,000 $25,000

What is the net cash provided (used) by operating activities for the year ended December 31, 2014?
Assume the indirect method is used.
A) $(20,000)
B) $23,000
C) $59,000
D) $69,000
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
2) For the year ending December 31, 2014, Harkins Company reports net income of $35,000 and
depreciation expense of $12,000. The income tax expense for the year ending December 31, 2014 is
$20,000. The following data is available:

December 31, 2013 December 31, 2014


Cash $35,000 $16,000
Accounts Receivable $35,000 $45,000
Inventories $70,000 $100,000
Fixed Assets $440,000 $581,000
Accumulated Depreciation $120,000 $101,000
Accounts Payable $6,000 $74,000
Wages Payable $4,000 $25,000

What is the net cash provided by operating activities for the year ended December 31, 2014? Assume the
indirect method is used.
A) $5,000
B) $26,000
C) $73,000
D) $96,000
Answer: D
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

3) Listed below are selected accounts for Dentice Corporation:

December 31, 2013 December 31, 2014


Accounts Receivable $20,000 $40,000
Inventory $70,000 $30,000
Accounts Payable $20,000 $88,000
Wages payable $22,000 $1,000

For the year ended December 31, 2014, net income was $50,000 and depreciation expense was $0. The net
cash provided by operating activities for the year ending December 31, 2014 was ________. Assume the
indirect method is used.
A) $70,000
B) $90,000
C) $108,000
D) $117,000
Answer: D
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

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Copyright © 2014 Pearson Education
4) When calculating the net cash provided by operating activities, which procedure should NOT be
carried out? Assume the indirect method is used.
A) add depreciation expense
B) subtract a decrease in accounts payable
C) subtract a decrease in prepaid expenses
D) add a decrease in inventories
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

5) A gain on the sale of a fixed asset is reported on the statement of cash flows ________.
A) as a deduction to net income under operating activities for the indirect method
B) as a deduction to the cash proceeds received from the sale of fixed assets under investing activities
C) as a noncash transaction
D) as a cash inflow under financing activities
Answer: A
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

6) Lantern Company reported sales of $200,000, an increase in accounts receivable of $5,000, and a
decrease in cash of $20,000. How much cash was collected from customers?
A) $185,000
B) $195,000
C) $200,000
D) $220,000
Answer: B
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

7) Beth Company reported sales on account of $250,000, an increase in inventory of $70,000, and a
decrease in accounts receivable of $20,000. How much cash was collected from customers?
A) $180,000
B) $230,000
C) $270,000
D) $320,000
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

37
Copyright © 2014 Pearson Education
8) John Company reported cost of goods sold of $910,000, an increase in inventory of $100,000, and an
increase in accounts payable of $40,000. How much cash was paid to suppliers?
A) $770,000
B) $810,000
C) $970,000
D) $1,050,000
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

9) Jerome Company reported cost of goods sold of $700,000, a decrease in inventory of $60,000, and an
increase in accounts payable of $30,000. How much cash was paid to suppliers?
A) $605,000
B) $610,000
C) $725,000
D) $795,000
Answer: B
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

10) The wages expense of Florida Corporation was $45,000 as per its income statement. Beginning wages
payable was $6,000. Ending wages payable was $3,000. The cash paid to employees was ________.
A) $42,000
B) $45,000
C) $48,000
D) $50,000
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

11) Baldwin Company's income statement reported income tax expense of $18,000. Income tax payable at
the beginning of the year was $5,000. Income tax payable at the end of the year was $4,000. The cash paid
for taxes was ________.
A) $15,000
B) $17,000
C) $19,000
D) $22,000
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

38
Copyright © 2014 Pearson Education
12) Benson Company's income statement showed rent expense of $16,000. The beginning balance in
Prepaid Rent was $5,000. The ending balance in Prepaid Rent was $3,000. The cash paid for rent was
________.
A) $14,000
B) $16,000
C) $19,000
D) $24,000
Answer: A
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

13) When reconciling net income to net cash provided by operating activities, a(n) ________ is a
deduction from net income.
A) decrease in inventories
B) increase in unearned revenues
C) decrease in prepaid rent
D) decrease in accounts payable
Answer: D
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

14) When reconciling net income to net cash provided by operating activities, a(n) ________ is an addition
to net income.
A) increase in inventories
B) increase in accounts receivable
C) increase in wages payable
D) decrease in taxes payable
Answer: C
Diff: 2
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

15) The indirect and direct methods of preparing the statement of cash flows show the same amount of
net cash provided by operating activities.
Answer: TRUE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

39
Copyright © 2014 Pearson Education
16) The indirect method of preparing the statement of cash flows is the most popular method in the
United States.
Answer: TRUE
Diff: 1
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

17) The direct method of preparing the operating activities section of the statement of cash flows begins
with net income.
Answer: FALSE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

18) Under the direct method of preparing the statement of cash flows, the cash collected from customers
is determined for the operating activities section.
Answer: TRUE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

19) When using the direct method of preparing the statement of cash flows, depreciation expense is
added to net income.
Answer: FALSE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

20) Analysts focus on free cash flow from the statement of cash flows.
Answer: TRUE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

21) Free cash flow equals net cash from operating activities minus capital expenditures.
Answer: TRUE
Diff: 2
LO: 16-8
AACSB: Reflective thinking skills
Learning Outcome: None

40
Copyright © 2014 Pearson Education
22) For the year ended December 31, 2015, the following information is available for the Kansas
Company:

Sales $891,000
Cost of goods sold 662,000
Depreciation expense 16,000
Amortization expense 3,000
Wage expense 91,000
Rent expense 4,000
Loss on sale of fixed assets 2,000
Interest expense 13,000
Income tax expense 38,000
Total expenses 829,000
Net income $62,000

December 31, 2014 December 31, 2015


Cash $10,000 $12,800
Accounts receivable $10,000 $19,200
Inventory $20,000 $14,100
Prepaid rent $2,000 $1,700
Accounts payable $22,000 $24,400
Wages payable $12,000 $11,300
Taxes payable $2,000 $3,100

Required:
Prepare the operating activities section of the statement of cash flows for the year ending December 31,
2015. Use the indirect method.

Answer: Net income $62,000


Add: depreciation expense 16,000
Add: amortization expense 3,000
Add: loss on sale of fixed assets 2,000
Less: Increase in accounts receivable (9,200)
Add: Decrease in inventory 5,900
Add: Decrease in prepaid rent 300
Add: Increase in accounts payable 2,400
Add: Increase in taxes payable 1,100
Less: Decrease in wages payable (700)
Net cash provided by operating activities $82,800
Diff: 3
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

41
Copyright © 2014 Pearson Education
23) Maryland Company had net income of $21,850 for the year ended December 31, 2015. Additional
information from the income statement follows:

Depreciation expense $8,400


Interest expense 3,900
Income tax expense 5,700

The company also reported the following balances:


December December
31, 2014 31, 2015
Accounts receivable $10,000 $11,800
Accounts payable $20,000 $23,200
Income taxes payable $22,000 $21,300
Inventory $30,000 $25,000

Required:
Prepare the operating activities section of the statement of cash flows for the year ended December 31,
2015. Use the indirect method.
Answer: Net income $21,850
Add: Depreciation expense 8,400
Add: Decrease in inventory 5,000
Add: Increase in accounts payable 3,200
Less: Increase in accounts receivable (1,800)
Less: Decrease in income tax payable (700)
Net cash provided by operating activities $35,950
Diff: 3
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

42
Copyright © 2014 Pearson Education
24) The income statement and comparative balance sheets for Sterling Company are presented below:
Sterling Company
Income Statement
For the Year Ended December 31, 2015

Sales $586,000
Cost of goods sold 311,000
Depreciation expense 14,000
Amortization expense 3,000
Wage expense 88,000
Rent expense 24,000
Loss on sale of fixed assets 2,600
Interest expense 4,900
Income tax expense 56,000
Total expenses 503,500
Net income $82,500

December 31, 2014 December 31, 2015


Cash $16,300 $19,900
Accounts receivable 27,900 36,300
Inventory 53,900 48,200
Prepaid rent 1,800 2,000
Land 22,000 32,000
Fixed assets 118,000 130,000
Accumulated depreciation (39,000) (46,000)
Patent 11,000 12,000
Total assets $211,900 $234,400
Accounts payable 21,100 27,700
Wages payable 5,700 6,200
Interest payable 400 1,600
Taxes payable 7,900 6,800
Bonds payable, due 2020 36,000 44,000
Common stock 32,000 35,000
Retained earnings 108,800 113,100
Total liabilities and
Stockholders' equity $211,900 $234,400

Required:
Prepare a statement of cash flows using the indirect method for the year ended December 31, 2015. No
land was sold in 2015. Land was purchased using bonds payable for $8,000 and cash for $2,000. A fixed
asset was sold in 2015 for $4,100. Purchases of fixed assets and patents were for cash.

43
Copyright © 2014 Pearson Education
Answer: Sterling Company
Statement of Cash Flows
For the year ended December 31, 2015
Cash flows from operating activities:
Net income $82,500
Add: depreciation expense 14,000
Add: amortization expense 3,000
Add: loss on sale of fixed assets 2,600
Less: Increase in accounts receivable (8,400)
Add: Decrease in inventory 5,700
Less: Increase in prepaid rent (200)
Add: Increase in accounts payable 6,600
Less: Decrease in taxes payable (1,100)
Add: Increase in wages payable 500
Add: Increase in interest payable 1,200
Net cash provided by operating activities $106,400

Cash flows from investing activities:


Proceeds from sale of fixed asset $4,100
Purchase of fixed asset (25,700)
Purchase land for cash (2,000)
Purchase of patent (4,000)
Net cash used by investing activities (27,600)

Cash flows from financing activities:


Issued common stock 3,000
Paid dividends (78,200)
Net cash used by financing activities (75,200)
Increase in cash $3,600

Schedule of noncash transactions:


Issued long-term bonds payable to acquire land $8,000
Diff: 3
LO: 16-8
AACSB: Analytic skills
Learning Outcome: None

44
Copyright © 2014 Pearson Education
16.9 Questions

1) Why do accountants add Depreciation Expense to net income when determining net cash provided by
operating activities? Assume the indirect method is used.
A) because depreciation expense is a source of cash
B) because depreciation expense requires the outflow of cash
C) because depreciation expense is an investing activity that should be reported in the investing section of
the cash flow statement
D) because it cancels the earlier deduction when calculating net income
Answer: D
Diff: 2
LO: 16-9
AACSB: Analytic skills
Learning Outcome: None

2) Which of the following statements about depreciation is FALSE?


A) Depreciation does not generate cash.
B) Depreciation is an allocation of the original cost of an asset to the periods in which the asset is used.
C) Depreciation does not entail an outflow of cash.
D) Depreciation is a means of setting aside cash for the replacement of an asset.
Answer: D
Diff: 2
LO: 16-9
AACSB: Reflective thinking skills
Learning Outcome: None

16.10 Questions

1) On January 1, 2014, a company had 100 units of inventory. A company acquired 100 units of inventory
on January 31, 2014 and 100 units on December 1, 2014. The company sold 100 units on December 31,
2014, which was the company's only sale. Under FIFO, the cost of goods sold would come from ________.
A) the purchase cost of beginning inventory
B) the purchase cost on January 31, 2014
C) the purchase cost on December 1, 2014
D) an average of the cost over the two purchase dates
Answer: A
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

45
Copyright © 2014 Pearson Education
2) LIFO uses the ________ costs to measure the ending inventory.
A) latest
B) earliest
C) average
D) weighted-average
Answer: B
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

3) LIFO uses the ________ costs to measure the cost of goods sold.
A) latest
B) earliest
C) average
D) weighted-average
Answer: A
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

4) FIFO provides inventory valuations that approximate the actual ________ of inventory at the balance
sheet date.
A) cost
B) market value
C) average cost
D) sales value
Answer: B
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

5) In periods of inflation, FIFO leads to ________ gross profit than LIFO.


A) lower
B) the same
C) higher
D) not enough information
Answer: C
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

46
Copyright © 2014 Pearson Education
6) In periods of inflation, the ________ method of inventory valuation provides a more realistic net
income.
A) LIFO
B) FIFO
C) average cost
D) weighted-average cost
Answer: A
Diff: 2
LO: 16-10
AACSB: Analytic skills
Learning Outcome: None

7) During a period of inflation, the LIFO method reports a larger cost of goods sold amount than FIFO.
Answer: TRUE
Diff: 2
LO: 16-10
AACSB: Reflective thinking skills
Learning Outcome: None

8) During a period of inflation, the LIFO method reports a lower ending inventory amount than FIFO.
Answer: TRUE
Diff: 2
LO: 16-10
AACSB: Reflective thinking skills
Learning Outcome: None

9) The LIFO method reports the latest costs for ending inventory.
Answer: FALSE
Diff: 2
LO: 16-10
AACSB: Reflective thinking skills
Learning Outcome: None

10) In a period of inflation, LIFO results in a higher net income than FIFO.
Answer: FALSE
Diff: 2
LO: 16-10
AACSB: Reflective thinking skills
Learning Outcome: None

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