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74 Chapter 2 Basic Accounting Concepts
Sumner Insurance, Inc.
Statement of Cash Flows
For the Month Ending April 30, 2007Cash flows from operating activities:
Cash receipts from operating activities $ 11,500
Cash payments for operating activities 5,910
Net cash flows from operating activities $ 5,590Cash flows from investing activities:
Cash payments for land (20,000)Cash flows from financing activities:
Cash receipts from issuing capital stock $15,000
Cash receipts from note payable 8,000
Cash payments for dividends (1,000)
Net cash flows used in financing activities 22,000
Net increase in cash during April $ 7,590
Cash as of April 1, 2007 0
Cash as of April 30, 2007 $ 7,590SELF-STUDY QUESTIONS Answers at end of chapter
- The purchase of land for $50,000 cash was incorrectly
recorded as an increase in land and an increase in
notes payable. Which of the following statements is
correct?
A. The accounting equation will not balance because
cash is overstated by $50,000.
B. The accounting equation will not balance because
notes payable are overstated by $50,000.
C. The accounting equation will not balance because
assets will exceed liabilities by $50,000.
D. Even though a recording error has been made, the
accounting equation will balance. - The receipt of $8,000 of cash for fees earned was
recorded by Langley Consulting as an increase in cash
of $8,000 and a decrease in retained earnings (revenues)
of $8,000. What is the effect of this error on the
accounting equation?
A. Total assets will exceed total liabilities and
stockholders’ equity by $8,000.
B. Total assets will be less than total liabilities and
stockholders’ equity by $8,000.
C. Total assets will exceed total liabilities and
stockholders’ equity by $16,000.
D. The error will not affect the accounting equation.
3. If total assets increased $20,000 during a period and
total liabilities increased $12,000 during the same
period, the amount and direction (increase or decrease)
of the change in stockholders’ equity for that period is:
A. a $32,000 increase.
B. a $32,000 decrease.
C. an $8,000 increase.
D. an $8,000 decrease.
4. If revenue was $45,000, expenses were $37,500, and
dividends were $10,000, the amount of net income or
net loss would be:
A. $45,000 net income.
B. $7,500 net income.
C. $37,500 net loss.
D. $2,500 net loss.
5. Which of the following transactions changes only
the mix of assets and does not affect liabilities or
stockholders’ equity?
A. Borrowed $40,000 from First National Bank
B. Purchased land for cash
C. Received $3,800 for fees earned
D. Paid $4,000 for office salaries