CMA-Financial Statements Types, Presentation, Limitations, Users

Fielding Manufacturing reported net income of $296,000 including depreciation expense of $90,000. The company sold investments for $12,000 that hada cost of $36,000. Accounts receivable decreased $50,000 and accounts payable increased $46,000. What amount did Fielding report as net cash providedby operating activities?

• $326,000

• $266,000

• $506,000

• $314,000

Answer explanation

The starting point for calculating cash flow from operating activities is net income. The next step is to add back the non-cash depreciation expense of $90,000. It has to be added back since it was subtracted when net income was calculated, but it does not involve a cash outflow. The next step isto add back the loss on the investment sale of $24,000. This has to be added back since it was subtracted when net income was calculated, but itdoes not involve a cash outflow. The decrease in accounts receivable is added since cash collections exceeded credit sales. This means net incomeunderstates cash provided by operating activities. The increase in accounts payable is added since inventory purchases exceeded payments forinventory. This means that cost of goods sold overstates cash used to purchase inventory, which means net income understates cash provided byoperating activities. The final result is a net inflow from operating activities of $506,000 ($296,000 + $90,000 + $24,000 + $50,000 + $46,000).Therefore, this is the correct answer.

A justification for the periodic recording of depreciation expense can be demonstrated by which of the following?

• The association of efforts (expense) with accomplishments (revenue)

• Systematic and rational allocation of cost over the periods benefited

• Immediate recognition of an expense

• Minimization of income tax liability

Answer explanation

Fixed assets are subject to depreciation expense. It is necessary to record depreciation expense because fixed assets provide benefits over multiple periods. Because it is not always possible to match accomplishments (revenue) with efforts (expense) concerning fixed assets, depreciation expense must be calculated in a systematic and rational manner. Therefore, this is the correct answer.

Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the value of this land to appreciate by 500% over thenext three years. How would you expect Holden to report the value of this land on their balance sheet?

• At the expected future value at the time of sale

• At market value

• At historical cost

• At a depreciated value

Answer explanation

In general, assets are reported on the balance sheet at historical cost. One exception is when the asset's value has permanently been reduced(impaired). A second is for trading securities and available-for-sale securities, which are recorded at market value. A third exception is for fixedassets, which are recorded at depreciated cost. The land in this question does not fit any of these exceptions. Therefore, this is the correct answer.

What is one way that cash flows from investing activities are the opposite of cash flows from financing activities?

• Cash flows from investing activities frequently reflect cash flows related to cash the company has loaned to others, whereas cash flows from financing activities frequently reflect cash flows related to cash the company has borrowed from others.

• Cash flows from investing activities frequently reflect cash flows related to the purchase of property, plant, and equipment, whereas cash flows from financing activities frequently reflect cash flows related to the sale of property, plant, and equipment.

• Cash flows from investing activities frequently reflect cash flows related to the purchase of treasury stock, and cash flows from financing activities frequently reflect cash flows related to the sale of treasury stock.

• Cash flows from investing activities frequently reflect cash flows related to the receipt of dividends and interest from purchased securities, whereas cash flows from financing activities frequently reflect cash flows related to the payment of dividends and interest to investors and creditors.

Answer explanation

Investing cash flows are cash flows that involve the purchase and sale of long-term assets. Because loaning money to other companies qualifies asthe purchase of a long-term asset (a note receivable), it is an investing activity. Financing cash flows are cash flows that involve transactions withshareholders and borrowing and repaying debt. Borrowing cash from other entities qualifies as a financing activity. Therefore, this is the correctanswer.

All of the following are associated with Integrated Reporting

except:

• reporting standards determined by the International Integrated Reporting Council (IIRC).

• forward-looking information.

• the Six Capitals.

• a focus on value creation.

Answer explanation

While the International Integrated Reporting Council (IIRC) published a framework about Integrated Reporting, this framework does not include reporting standards. Organizations are free to choose the information it reports.

The following information was abstracted from the accounts of the Oar Corporation at December 31, Year 2:

Total income since incorporation including Year 2 $840,000

Total cash dividends declared 260,000

Proceeds from sale of donated stock (FV on date of donation was $30,000) 90,000

Total value of stock dividends distributed 60,000

Excess of proceeds over cost of treasury stock sold 140,000

The donated stock did not allow the company to exercise significant influence over the investee. What should be the current balance of retained earnings?

• $610,000

• $520,000

• $580,000

• $670,000

Answer explanation

This answer is correct. Retained earnings is increased by income and decreased by dividends. Donated assets are recorded at FV upon receipt and recognized as equity in the period of donation. Equity securities are measured at fair value at the end of each year, and the gain or loss is includedin net income:

Income − Cash dividends − Stock dividends = Retained earnings

$840,000 − $260,000 − $60,000 = $520,000

The excess of proceeds over cost of treasury stock sold would be credited to paid-in capital.

Emerson Industries sold a new issue of common stock to investors. How would this be recorded differently in the statement of cash flows than if they used the stock to purchase equipment?

• The sale of stock to investors should be disclosed in a separate schedule, whereas exchange of stock for equipment should be included in cash flows from investing activities.

• The sale of stock to investors should be included in cash flows from financing activities, whereas exchange of stock for equipment should be disclosed in a separate schedule.

• The sale of stock to investors should be included in cash flows from investing activities, whereas the exchange of stock for equipment should be included in cash flows from financing activities.

• The sale of stock to investors should not be disclosed in the statement of cash flows, whereas exchange of stock for equipment should be disclosed in a separate schedule.

Answer explanation

Issuing stock to investors is classified as a cash inflow from financing activities. Any cash-related transaction involving equity (new stock issuances, stock repurchases, and dividend payments) are considered financing activities. When stock is exchanged for equipment, it is classified as a significant non-cash activity. Significant non-cash activities are disclosed on a supplementary schedule to the statement of cash flows. Therefore, this is the correct answer.

Paul prepares its statement of cash flows using the direct method. In which section of the statement should Paul report the dividends received from an investment?

• Operating activities.

• Financing activities.

• Investing activities.

• Supplemental disclosures.

Answer explanation

This answer is correct because dividends received are reported in the operating section of the statement of cash flows.

Anders Industries currently holds two debts: an $11,000 debt due in 12 months and a $16,000 debt due in 18 months. Anders prepares a classified balance sheet using an 18-month operating cycle. How should these debts be classified?

• $11,000 should be classified as a current liability, and $16,000 should be classified as a long-term liability.

• $16,000 should be classified as a current liability, and $11,000 should be classified as a long-term debt.

• All $27,000 in debt should be classified as current liabilities.

• All $27,000 in debt should be classified as long-term liabilities.

Answer explanation

Liabilities are classified on the balance sheet as either current or long-term depending on when they are expected to be satisfied. Liabilities expected to be satisfied within 12 months or one operating cycle (whichever is longer) and satisfied using current assets are classified as current liabilities. All other liabilities are classified as long-term liabilities. Since the operating cycle is 18 months, that is the “dividing line” between current and long-term. Both liabilities are current liabilities because they will be satisfied within 18 months. Therefore, this is the correct answer.

Blue Fox Industries had the following account balances at year-end.

Sales $452,000

Cash 23,400

Accounts payable 14,300

Rent expense 3,700

Accounts receivable 9,400

Cost of goods sold 214,000

Land 104,000

Unearned revenue 6,800

Gain on sale 17,500

Equipment 28,800

Inventories 2,200

Notes payable 67,000

What is the amount of total current assets reported on the balance sheet?

• $39,900

• $35,000

• $32,800

• $63,800

Answer explanation

Total current assets include:

Cash $23,400

Accounts receivable 9,400

Inventories 2,200

Total $35,000