Work sheet

Briefly explain
Q1. Describe the objectives of the statement of cash flows.
Q2. Explain the complementary nature of accrual earnings and cash flows.
Q3. Identify the three types of activities that generate and use cash.
Q4. Explain the difference between the direct and indirect methods of presenting a statement of cash flows.
Q5. Draw inferences about the financial performance of a firm from the statement of cash flows.
EXERCISES
Effects of Transactions: Cash versus Accrual
Q.6. Consider the following transactions or events:
1. Sold merchandise on account.
2. Sold a used computer for cash.
3. Paid a supplier’s overdue account.
4. Recorded depreciation expense on a building.
5. Signed a mortgage and received cash.
6. Purchased inventory on account.
7. Gave a refund after hearing a customer’s complaint.
8. Received payment from a customer.
9. Sold shares of IBM stock for cash and recorded a gain.
10. Recorded a loss after discarding obsolete inventory.
11. Received a personal cash gift from a friend.
12. Made an “even” swap of a used truck for another truck.
13. Paid quarterly unemployment taxes.
14. Received a tax refund after sending duplicate checks to the IRS.
Required
a. Show the effects on cash of each transaction or event, using the format below:
Effects on Cash

Increase Decrease No Change

b. Show the effects of each transaction or event on net income, using a similar format:

Effects on Net Income

Increase Decrease No Change

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Effects of Transactions on Cash Flows
Q.7. The following transactions were reported by Colorado Company in its statement of cash flows. Indicate
whether each transaction is an operating (O), a financing (F), an investing (I), or a transaction that has no effect
on cash flows (X) activity.
1. Office supplies were purchased and paid for.
2. Land was sold for cash.
3. Employees’ salaries and wages were paid.
4. The firm made a short-term loan to its president.
5. A short-term bank loan was obtained.
6. Interest on this loan was paid.
7. The maturity date on this loan was extended.
8. Depreciation for the year was recorded.
9. The firm’s tax return was filed with a request for a refund
10. The firm paid its unemployment taxes to the state.
Transaction Analysis
Q.8. Indicate where each of the following transactions would be reported on the statement of cash flows
(operating section, investing section, financing section, or not a cash flow item):
1. Purchased inventory on account.
2. Issued common stock for cash.
3. Paid loan principle.
4. Paid interest on the loan.
5. Lent money to a customer.
6. Received cash from sales.
7. Paid inventory suppliers.
8. Sold a building for cash.
9. Recorded a gain on the sale of the building in transaction
10. Received a dividend from short-term investments.
11. Recorded depreciation for the period.
Converting from Cash Flows to Revenues and Expenses
Q.9. Determine the amounts of revenue or expense associated with each of the following cash flows:
1. Cash received from customers was $8.5 million; accounts receivable increased by $1.6 million.
2. Paid salaries of $3 million; salaries payable decreased by $.6 million.
3. Paid cash of $4.5 million to suppliers; supplier accounts payable increased by $.5 million. Inventories
decreased by $1 million.

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Converting from Revenues and Expenses to Cash Flows
Q.10. Determine the amounts of cash flows associated with each of the following:
1. Sales revenue was $20 million; accounts receivable decreased by $2 million.
2. Salary expense was $7.5 million; salaries payable decreased by $1 million.
3. Cost of goods sold was $9 million; inventories decreased by $1.2 million. Supplier accounts payable
increased by $1.6 million.
Classifying Accounts
Q.11. Classify each account listed below into one of the following categories:
1. current assets,
2. noncurrent assets,
3. current liabilities,
4. noncurrent liabilities, and
5. Owners’ equity.
a. cash i. prepaid expenses
b. retained earnings j. wages payable
c. land k. unemployment taxes payable
d. invested capital l. accumulated depreciation
e. accounts payable m. inventory
f. accounts receivable n. prepaid insurance
g. mortgage payable o. patents (or copyrights)
h. marketable securities p. externally acquired goodwill

Arranging Accounts in Balance Sheet Order

Q.12. Rearrange the following accounts in the order in which you would expect to find them in a typical balance
sheet and explain why you put them in that order:
a. Mortgage payable f. Cash
b. Accounts payable g. Land
c. Taxes payable h. Building
d. Owner’s Equity i. Accrued expenses
e. Inventory j. Long-term notes payable

Sorting Balance Sheet Information

Q.12. The account balances given below are shown on the balance sheet of a corporation.
Marketable securities……………………………… $ 20,000
Invested capital……………………………………… 200,000
Buildings and equipment……………………………. 400,000
Accounts receivable………………………………….. 80,000
Prepaid rent………………………………………….. 17,000
Bonds payable……………………………………….. 230,000
Inventories ……………………………………………85,000
Taxes payable……………………………………….. 30,000
Accounts payable …………………………………….16, 000
Advance payments from customers…………………… 3,000

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Interest payable ………………………………………..9,000
Land …………………………………………………..19,000
Retained earnings …………………………………….133, 000
Required
Arrange three columns corresponding to the balance sheet equation:
ASSETS = LIABILITIES + OWNERS’ + EQUITY

Q13. The balance sheet data of Brown Company at the end of 2004 and 2003 follow.

2004 2003

Cash $ 30,000 $ 35,000

Accounts receivable (net) 55,000 45,000
Merchandise inventory 65,000 45,000
Prepaid expenses 15,000 25,000
Equipment 90,000 75,000
Accumulated depreciation—equipment (18,000) (8,000)
Land 70,000 40,000
Totals $307,000 $257,000

Accounts payable $ 65,000 $ 52,000

Accrued expenses 15,000 18,000
Notes payable—bank, long-term –0– 23,000
Bonds payable 30,000 –0–
Common stock, $10 par 189,000 159,000
Retained earnings 8,000 5,000
Totals $307,000 $257,000
Additional information
Land was acquired for $30,000 in exchange for common stock, par $30,000, during the year; all equipment
purchased was for cash. Equipment costing $10,000 was sold for $3,000; book value of the equipment was
$6,000. Cash dividends of $10,000 were declared and paid during the year.

Instructions
Compute net cash provided (used) by:
(a) operating activities.
(b) investing activities.
(c) financing activities.

Q14. The following data relates to Lilly Mercantile S.C. for the year ended December 31, 2007.
Lilly Mercantile Share Company
Comparative Balance Sheet
December 31, 2007 and 2006
Description December 31

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 2007 2006
Cash 4,400.00 3,200.00
Accounts Receivable 40,000.00 50,000.00
Inventory 25,000.00 19,000.00
Prepaid General Expenses 3,600.00 2,000.00
Plant Assets 203,800.0 200,000.00
0
Accumulated Depreciation-Plant Assets (105,400. (119,400.0
00) 0)
Total Assets 171,400.0 154,800.00
0
Liabilities and Stockholders’ Equity
Accounts Payable 15,000.00 10,000.00
Interest Payable 2,000.00 1,600.00
Income Taxes Payable 18,000.00 21,400.00
Bonds Payable 23,400.00 15,400.00
Common Stock 67,600.00 60,000.00
Retained Earnings 45,400.00 46,400.00
Total Liabilities and Stockholders’ 171,400.0 154,800.00
Equity 0
Lilly Mercantile Share Company
Income Statement
For the year ended December 31, 2007
Sales 260,000.0
0
Cost of Goods Sold (176,000.0
0)
Gross Profit 84,000.00
Prepaid General Expenses 48,000.0
0
Interest Expense 3,000.00
Depreciation Expense 12,000.0 (63,000.00
0 )
Operating Income 21,000.00
Gain from Sale of Equipment 1,000.00
Income before Income Taxes 22,000.00
Income Tax Expenses (7000.00)
Net Income 15,000.00
Additional Information:
1. Equipment with a book value of Birr 40,000.00 was sold for Birr 41, 000.00. The
equipment has an original cost of Birr 66,000.00 and an accumulated depreciation of Birr
26,000.00.
2. Retained Earnings account is affected only by Net Income and Cash Dividend
3. All Accounts payable changes relate to the purchase of Merchandise
4. All Purchase and sale of plant assets relates to cash transactions
5. All change in Bond and Common stock results from cash transactions
Required:
Prepare a statement of cash flows for the year ended December 31, 2007 under
1. The Direct FormaT
2. The Indirect Format

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