Practice Questions # 6 – Cash Flows

Q # 1. Cumberland Corporation had the following transactions.

1. Sold land (cost $12,000) for $15,000.
2. Issued common stock for $20,000.
3. Recorded depreciation of $17,000.
4. Paid salaries of $9,000.
5. Issued 1,000 shares of $1 par value common stock for equipment worth $8,000.
6. Sold equipment (cost $10,000, accumulated depreciation $7,000) for $1,200.

Indicate how it would affect the statement of cash flows.

1. Sold land (cost $12,000) for $15,000.

Cash 15,000
Land 12,000
Gain on Sale 3,000
Increase investing cash flows by 15,000. we should subtract the $3,000 gain from net income under operating activities on
the statement of cash flows.

2. Issued common stock for $20,000.

Cash 20,000
Common Stock 20,000
Increase financing cash flows by 20,000.

3. Recorded depreciation on buildings for $17,000.

Depreciation Expense 17,000
Accumulated Depreciation 17,000
This will not directly affect cash flow, but it would be added to net income under operating activities on the statement of
cash flows.

4. Paid salaries of $9,000.

Salaries Expense 9,000
Cash 9,000
Decrease operating activities cash flow by $9,000.

5. Issued 1,000 shares of $1 par value common stock for equipment worth $8,000.
Equipment 8,000
Additional Paid-In Capital, Common Stock 7,000
Common Stock 1,000
Since this does not involve cash but it does change the company's financial position, it would be reported in the schedule
of noncash investing and financing activities.

6. Sold equipment (cost $10,000, accumulated depreciation $7,000) for $1,200.

Instructions
Cash 1,200
Accumulated Depreciation 7,000
Loss on Disposal 1,800
Equipment 10,000
There would be an increased cash flow of $1,200 under investing activities. The $1,800 loss would also be added to net
income under operating activities on the statement of cash flows.
Q # 2. Wynne Company reported net income of $195,000 for 2018. Wynne also reported depreciation
expense of $45,000 and a loss of $5,000 on the sale of equipment. The comparative balance sheet shows a
decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a
$4,000 decrease in prepaid expenses.

Prepare the operating activities section of the statement of cash flows for 2018. Use the indirect method.

WYNNE COMPANY
Partial Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Net Income $195,000

Adjustments for non-cash effects:
Add: Depreciation Expense $45,000
Add: Loss on Sale of Equipment 5,000 50,000
$245,000

Changes in Current Assets & Current

Liabilities:
Add: Decrease in Accounts Receivable 15,000
Add: Increase in Accounts Payable 17,000
Add: Decrease in Prepaid Expenses (4,000) 36,000

Net Cash Flow from Operating Activities $281,000

Q # 3. The current sections of Carpenter Inc.’s balance sheets at December 31, 2017 and 2018, are
presented here. Carpenter’s net income for 2018 was $153,000. Depreciation expense was $24,000.

2018 2017
Current assets
Cash $105,000 $ 99,000
Accounts receivable 110,000 89,000
Inventory 158,000 172,000
Prepaid expenses 27,000 22,000
Total current assets $400,000 $382,000

Current liabilities
Accrued expenses payable $ 15,000 $ 5,000
Accounts payable 85,000 92,000
Total current liabilities $ 100,000 $ 97,000

Prepare the net cash provided by operating activities section of the company’s statement of cash flows for
the year ended December 31, 2018, using the indirect method.

CARPENTER INC.
Partial Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Net Income $153,000

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation Expense $24,000
Decrease in Inventory 14,000
Decrease in Accounts Payable (7,000)
Increase in Accounts Receivable (21,000)
Increase in Accrued Expenses Payable 10,000
Increase in Prepaid Expenses (5,000) 15,000

Net Cash Flow from Operating Activities $168,000

Q # 4. The 2004 income statement for McDonald’s Corporation shows cost of goods sold $4,852.7 million
and operating expenses (including depreciation expense of $1,201 million) $10,671.5 million. The
comparative balance sheet for the year shows that inventory increased $18.1 million, prepaid expenses
increased $56.3 million, accounts payable (merchandise suppliers) increased $136.9 million, and accrued
expenses payable increased $160.9 million.

Using the direct method, compute,

(a) cash payments to suppliers

Costs of Goods Sold $4,852.7 m

Add: Increase in Inventory 18.1
Cost of Purchases $4,870.8 m
Less: Increase in Accounts Payable (136.9)
Cash Payment to Suppliers $4,733.9 m

(b) cash payments for operating expenses.

Operating Expenses (exclusive of depreciation) $9,470.5 m

Add: Increase in Prepaid Expenses 56.3
Less: Increase in Accrued Expenses Payable (160.9) (104.6)
Cash Payment for Operating Expenses $9,365.9 m
Q # 5. The 2018 accounting records of Wilkinsen Transport reveal these transactions and events.

Payment of interest $ 10,000 Collection of accounts receivable $182,000

Cash sales 48,000 Payment of salaries and wages 53,000
Receipt of dividend revenue 18,000 Depreciation expense 16,000
Payment of income taxes 12,000 Proceeds from sale of vehicles 12,000
Net income 38,000 Purchase of equipment for cash 22,000
Payment of accounts payable for
115,000 Loss on sale of vehicles 3,000
merchandise
Payment for land 74,000 Payment of dividends 14,000
Payment of operating expenses 28,000

Prepare the cash flows from operating activities section using the direct method.

WILKINSEN TRANSPORT
Partial Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Cash Receipts from:

Customers $230,000
Dividend Revenue 18,000
$248,000

Less Cash Payments:

To Suppliers by Merchandise 115,000
For Operating Expenses 28,000
For Salaries and Wages 53,000
For Interest 10,000
For Income Taxes 12,000 218,000

Net Cash Provided By Operating Activities $30,000

Q # 6. The following information is taken from the 2018 general ledger of Roberson Company.

Rent Rent expense $ 40,000

Prepaid rent, January 1 5,900
Prepaid rent, December 31 9,000
Salaries Salaries expense $ 54,000
Salaries payable, January 1 10,000
Salaries payable, December 31 8,000
Sales Revenue from sales $170,000
Accounts receivable, January 1 16,000
Accounts receivable, December 31 7,000

In each case, compute the amount that should be reported in the operating activities section of the
statement of cash flows under the direct method.

Cash Payments for Rentals

Rent Expense $40,000
Add: Increase in Prepaid Rent 3,100
Cash Payments for Rent $43,100

Cash Payments for Salaries

Salaries Expense $54,000
Add: Decrease in Salaries Payable 2,000
Cash Payments for Salaries $56,000

Cash Receipts from Customers

Revenues from Sales $170,000
Add: Decrease in Accounts Receivable 9,000
Cash Payments from Customers $179,000
Q # 7. The following selected account balances relate to the plant asset accounts of Wegent Inc. at year-
end.

2018 2017
Accumulated depreciation—buildings $337,500 $300,000
Accumulated depreciation—equipment 144,000 96,000
Buildings 750,000 750,000
Depreciation expense 101,500 85,500
Equipment 300,000 240,000
Land 100,000 70,000
Loss on sale of equipment 3,000 0

Additional information:
1. Wegent purchased $85,000 of equipment and $30,000 of land for cash in 2018.
2. Wegent also sold equipment in 2018.
3. Depreciation expense in 2018 was $37,500 on building and $64,000 on equipment.
(a) Determine the amounts of any cash inflows or outflows related to the plant asset accounts in 2018.
Cash inflows (outflows) related to plant assets:
Equipment Purchase ($85,000)
Land Purchase (30,000)
Proceeds from Equipment Sales 6,000

Cost of Equipment Sold: $240,000 + $85,000 - $300,000 = $25,000 (accumulated depreciation has been
removed from accounts for sale of equipment)

Cash Proceeds: $25,000 (cost) - $16,000 (accumulated depreciation) - $3,000 (loss) = $6,000

(b) Indicate where each of the cash inflows or outflows identified in (a) would be classified on the
statement of cash flows.
Equipment Purchase Investing Activity (Outflow)
Land Purchase Investing Activity (Outflow)
Proceeds from Equipment Sale Investing Activity (Inflow)
Q # 8. The income statement of Rosenthal Company is presented below.
Additional information:
1. Accounts receivable decreased $520,000 during the year, and inventory increased $140,000.
2. Prepaid expenses increased $175,000 during the year.
3. Accounts payable to merchandise suppliers increased $50,000 during the year.
4. Accrued expenses payable increased $165,000 during the year.

ROSENTHAL COMPANY
Income Statement
For the Year Ended December 31, 2018

Sales $5,400,000
Cost of goods sold
Beginning inventory $1,780,000
Purchases 3,430,000
Goods available for sale 5,210,000
Ending inventory 1,920,000
Total cost of goods sold 3,290,000
Gross profit 2,110,000

Operating expenses
Selling expenses 420,000
Administrative expense 525,000
Depreciation expense 105,000
Amortization expense 20,000 1,070,000

Net income $1,040,000

a. Prepare the operating activities section of the statement of cash flows for the year ended December 31,
2018, for Rosenthal Company, using the indirect method.

ROSENTHAL COMPANY
Partial Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Net Income $1,040,000

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation Expense $105,000
Amortization Expense 20,000
Increase in Inventory (140,000)
Increase in Accounts Payable 50,000
Decrease in Accounts Receivable 520,000
Increase in Accrued Expenses Payable 165,000
Increase in Prepaid Expenses (175,000) 545,000

Net Cash Flow from Operating Activities $1,585,000

b. Prepare the operating activities section of the statement of cash flows using the direct method.

ROSENTHAL COMPANY
Partial Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Cash Receipts from Customers $5,920,000

Less Cash Payments:

To Suppliers $3,380,000
For Operating Expenses 955,000 4,335,000

Net Cash Provided by Operating Activities $1,585,000

Calculations:
Cash Receipts from Customer
Sales $5,400,000
Add: Decrease in Accounts Receivable 5,200
Cash Receipts from Customers $5,920,000

Cash Payments to Suppliers

Cost of Goods Sold $3,290,000
Add: Increase in Inventories 140,000
Cost of Purchases 3,430,000
Less: Increase in Accounts Payable (50,000)
Cash Payments to Suppliers $3,380,000

Cash Payments for Operating Expenses

Operating Expenses
$945,000
($420,000 + $525,000)
Add: Increase in Prepaid Expenses 175,000
Less: Increase in Accrued Expenses Payable (165,000)
Cash Payments for Operating Expenses $955,000
Q # 9. Presented below are the financial statements of Ortega Company.

ORTEGA COMPANY
Comparative Balance Sheets
December 31

2018 2017
Assets
Cash $ 28,000 $ 33,000
Accounts receivable 23,000 14,000
Merchandise inventory 41,000 25,000
Property, plant, and equipment $ 70,000 $ 78,000
Less: Accumulated depreciation (27,000) 43,000 (24,000) 54,000
Total $135,000 $126,000

Liabilities and Stockholders’ Equity

Accounts payable $ 31,000 $ 43,000
Income taxes payable 26,000 20,000
Bonds payable 20,000 10,000
Common stock 25,000 25,000
Retained earnings 33,000 28,000
Total $135,000 $126,000

ORTEGA COMPANY
Income Statement
For the Year Ended December 31, 2018

Sales $286,000
Cost of goods sold 194,000
Gross profit 92,000

Operating expenses
Selling expenses $28,000
Administrative expense 9,000 37,000

Income from operations 55,000

Interest expense 7,000

Income before income taxes 48,000

Income tax expense 10,000

Net income $ 38,000

Additional data:
1. Dividends of $33,000 were declared and paid.
2. During the year equipment was sold for $10,000 cash. This equipment cost $13,000 originally and had
a book value of $10,000 at the time of sale.
3. All depreciation expense, $6,000, is in the selling expense category.
4. All sales and purchases are on account.
5. Additional equipment was purchased for $5,000 cash.

(a) Prepare a statement of cash flows using the indirect method.

ORTEGA COMPANY
Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Net Income $38,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation Expense $6,000
Increase in Inventory (16,000)
Decrease in Accounts Payable (12,000)
Increase in Accounts Receivable (9,000)
Increase in Income Taxes Payable 6,000
Net Cash Provided by Operating Activities $1,585,000

Cash Flow from Investing Activities

Sale of Equipment 10,000
Purchase of Equipment (5,000)
Net Cash Provided by Investing Activities 5,000

Cash Flow from Financing Activities

Issuance of Bonds 10,000
Payment of Cash Dividends (33,000)
Net Cash Provided by Financing Activities 23,000

Net Decrease in Cash (5,000)

Cash at the Beginning of the Period 33,000
Cash at the End of the Period $28,000

(b) Further analysis reveals the following.

1. Accounts payable pertains to merchandise creditors.
2. All operating expenses except for depreciation are paid in cash;
Prepare a statement of cash flows using the direct method.
Q # 10. Presented below are the comparative balance sheets for Marin Company at December 31.

MARIN COMPANY
Comparative Balance Sheets
December 31

2018 2017
Assets
Cash $ 31,000 $ 57,000
Accounts receivable 77,000 64,000
Inventory 192,000 140,000
Prepaid Expenses 12,140 16,540
Land 100,000 150,000
Equipment 215,000 175,000
Less: Accumulated depreciation (70,000) 145,000 (42,000) 133,000
Building 250,000 250,000
Less: Accumulated depreciation (70,000) 180,000 (50,000) 200,000
Total $737,140 $760,540

Liabilities and Stockholders’ Equity

Accounts payable $ 58,000 $ 45,000
Bonds payable 235,000 265,000
Common stock, $1 par 280,000 250,000
Retained earnings 164,140 200,540
Total $737,140 $760,540

Additional information:
1. Operating expenses include depreciation expense $65,000 and charges from prepaid expenses of
$4,400.
2. Land was sold for cash at cost.
3. Cash dividends of $69,290 were paid.
4. Net income for 2018 was $32,890.
5. Equipment was purchased for $80,000 cash. In addition, equipment costing $40,000 with a book value
of $23,000 was sold for $25,000 cash.
6. Bonds were converted at face value by issuing 30,000 shares of $1 par value common stock.

Prepare a statement of cash flows for 2018 using the indirect method.
 MARIN COMPANY
Statement of Cash Flows
For the year ended December 31, 2018

Cash Flow from Operating Activities

Net Income $32,890
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation Expense $65,000
Gain on Sale of Equipment (2,000)
Increase in Inventory (52,000)
Increase in Accounts Payable 13,000
Increase in Accounts Receivable (13,000)
Decrease in Prepaid Expenses 4,400 15,400
Net Cash Provided by Operating Activities $48,290

Cash Flow from Investing Activities

Sale of Land 50,000
Sale of Equipment 25,000
Purchase of Equipment (80,000)
Net Cash Provided by Investing Activities (5,000)

Cash Flow from Financing Activities

Payment of Cash Dividends (69,290)

Net Decrease in Cash (26,000)

Cash at the Beginning of the Period 57,000
Cash at the End of the Period $31,000

Non-Cash Investing and Financing Activities

Conversion of Bonds by Issuance of Stock $30,000