Accounting questions

Eye Openers

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 $500,000 of common stock in exchange for $500,000 of fixed assets. Where would this transaction be reported on the statement of cash flows?

4. A retail business, using the accrual method of accounting, owed merchandise creditors (accounts payable) $300,000 at the beginning of the year and $340,000 at the end of the year. How would the $40,000 increase be used to adjust net income in determining the amount of cash flows from operating activities by the indirect method? Explain.

5. If salaries payable was $90,000 at the beginning of the year and $70,000 at the end of the year, should $20,000 be added to or deducted from income to determine the amount of cash flows from operating activities by the indirect method? Explain.

6. A long-term investment in bonds with a cost of $60,000 was sold for $72,000 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 operating activities are reported by the indirect method?

7. A corporation issued $6,000,000 of 20-year bonds for cash at 104. How would the transaction be reported on the statement of cash flows?

8. Fully depreciated equipment costing $100,000was discarded. What was the effect of the transaction on cash flows if (a) $24,000 cash is received, (b) no cash is received?

9. For the current year, Bearings Company decided to switch from the indirect method

to the direct method for reporting cash flows from operating activities on the statement 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.

10. Name five common major classes of operating cash receipts or operating cash payments presented on the statement of cash flows when the cash flows from operating activities are reported by the direct method.

11. In a recent annual report, eBay Inc. reported that during the year it issued stock of $128 million for acquisitions. How would this be reported on the statement of cash flows?

Exercise 14-2

Effect of transactions on cash flows

State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows:

a. Sold a new issue of $200,000 of bonds at 99.

b. Purchased 4,000 shares of $35 par common stock as treasury stock at $70 per share.

c. Sold 10,000 shares of $20 par common stock for $50 per share.

d. Purchased a building by paying $60,000 cash and issuing a $100,000 mortgage note payable.

e. Retired $250,000 of bonds, on which there was $2,500 of unamortized discount, for$260,000.

f. Purchased land for $320,000 cash.

g. Paid dividends of $2.00 per share. There were 25,000 shares issued and 4,000 shares of treasury stock.

h. Sold equipment with a book value of $50,000 for $72,000.