Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 13 Statement of Cash Flows 603

DISCUSSION QUESTIONS

EXERCISES

End Beginning

Cash $ 65,000 $ 70,000
Accounts receivable 100,000 90,000
Inventories 145,000 150,000
Prepaid expenses 7,500 8,000
Accounts payable
(merchandise creditors) 51,000 58,000

The total amount reported for cash flows from operating ac-
tivities in the statement of cash flows, using the indirect
method, is:

1. What is the principal disadvantage of the direct method
   of reporting cash flows from operating activities?


2. What are the major advantages of the indirect method of
   reporting cash flows from operating activities?


3. A corporation issued $200,000 of common stock in ex-
   change for $200,000 of fixed assets. Where would this
   transaction be reported on the statement of cash flows?


4. a.What is the effect on cash flows of declaring and issu-
   ing a stock dividend?
   b.Is the stock dividend reported on the statement of
   cash flows?


5. A retail business, using the accrual method of accounting,
   owed merchandise creditors (accounts payable) $290,000
   at the beginning of the year and $315,000 at the end of the
   year. How would the $25,000 increase be used to adjust
   net income in determining the amount of cash flows from
   operating activities by the indirect method? Explain.


6. If salaries payable was $75,000 at the beginning of the
   year and $65,000 at the end of the year, should $10,000 be
   added to or deducted from income to determine the
   amount of cash flows from operating activities by the in-
   direct method? Explain.


7. A long-term investment in bonds with a cost of $75,000
   was sold for $80,000 cash. (a) What was the gain or loss
   on the sale? (b) What was the effect of the transaction on
   cash flows? (c) How should the transaction be reported

in the statement of cash flows if cash flows from operat-

ing activities are reported by the indirect method?

8. A corporation issued $5,000,000 of 20-year bonds for cash
   at 105. How would the transaction be reported on the
   statement of cash flows?


9. Fully depreciated equipment costing $55,000 was dis-
   carded. What was the effect of the transaction on cash
   flows if (a) $5,000 cash is received, (b) no cash is received?


10. For the current year, Accord Company decided to switch
    from the indirect method to the direct method for re-
    porting cash flows from operating activities on the state-
    ment of cash flows. Will the change cause the amount of
    net cash flow from operating activities to be (a) larger,
    (b) smaller, or (c) the same as if the indirect method had
    been used? Explain.


11. Name five common major classes of operating cash re-
    ceipts or operating cash payments presented on the state-
    ment of cash flows when the cash flows from operating
    activities are reported by the direct method.


12. In a recent annual report, PepsiCo, Inc., reported that
    during the year it issued stock of $438 million for acqui-
    sitions. How would this be reported on the statement of
    cash flows?


13. Maytag Corporationhas 49 days in accounts receivable,
    46 days in inventory, and 49 days in accounts payable.
    What is Maytag’s cash conversion cycle?

A. $33,000. C. $65,500.

B. $55,000. D. $77,000.

5. An analysis of the balance sheet of Getty Company re-
   vealed the number of days’ sales in accounts receivable
   and inventory of 30 and 45 days, respectively. The
   number of days’ sales in accounts payable was 25 days.
   What is Getty’s cash conversion cycle?
   A. 100 days C. 50 days
   B. 40 days D. 75 days

On its income statement for a recent year, Time Warnerreported a net lossof $4.9 billion from

operations. On its statement of cash flows, it reported $5.3 billion of cash flows from operating

activities.

Explain this apparent contradiction between the loss and the positive cash flows.

Exercise 13-1

Cash flows from operating
activities—net loss

Goal 1