ikoreaii

The actual coupon payment on a bond is reported on the statement of cash flow as:

A) a financing cash outflow.

B) an investing cash outflow.

C) an operating cash outflow.

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The coupon payment is recorded on the statement of cash flows as an operating cash outflow because cash flow from operations includes a deduction for interest expense.

ikoreaii

For the year ended December 31, 2007, Gremlin Corporation reported the following transactions:

• Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million.
• Purchased a patent for $3.3 million cash.
• Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank.
• Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade.
• Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million.

Calculate Gremlin’s cash flow from investing activities and cash flow from financing activities for the year ended December 31, 2007.

Cash flow from investing activities

Cash flow from financing activities

A) $1.7 million inflow $1.3 million outflow

B) $2.7 million outflow $6.0 million inflow

C) $6.0 million outflow $2.7 million inflow

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Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement.

ikoreaii

Dart Corporation engaged in the following transactions earlier this year:

Transaction #1:	Retired long-term debenture bonds with a face amount of $10 million by issuing 500,000 shares of common stock to the bondholders.
Transaction #2:	Borrowed $5 million from a bank and used the proceeds to purchase equipment used in the manufacturing process.

With respect to these transactions, should Dart report transaction #1 as a financing cash flow and/or transaction #2 as an investing cash flow?

A) Neither should be reported as such.

B) Only one should be reported as such.

C) Both should be reported as such.

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Retiring bonds by issuing common stock to the bondholders is a non-cash transaction and is disclosed separately in a note or supplementary schedule to the cash flow statement, rather than as a financing cash flow. The cash borrowed for the equipment purchase is a financing inflow and the cash cost of the equipment is reported as an investing cash flow in the cash flow statement. Had a bond been issued to the seller of the equipment, it would be treated as a non-cash transaction and reported only in the notes to the cash flow statement.

ikoreaii

Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows?

A) Purchase of plant and equipment used in the manufacturing process with financing provided by the seller.

B) Principal payments received from loans made to others.

C) Sale of held-to-maturity securities for cash.

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The purchase of plant and equipment with financing provided by the seller is a non-cash transaction. Non-cash transactions are disclosed separately in a note or supplementary schedule to the cash flow statement.

Bad5shah

What is the difference between the direct and the indirect method of calculating cash flow from operations?

A) The indirect method starts with gross income and adjusts to cash flow from operations, while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations.

B) Balance sheet items are not included in the cash flow from operations for the direct method, while they are included for the indirect method.

C) The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items.

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The main difference between the direct and indirect methods of calculating cash flows is the way that cash flow from operations is calculated. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with income after taxes and adjusts backwards for non-cash and other items. Both methods will have the same result for operating cash flows. The direct and indirect method calculates the financing and investing cash flows the same way and both methods will result in the same cash flow figure.

Bad5shah

The correct set of cash flow treatments as they relate to interest paid according to U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is:

U.S. GAAP

IAS GAAP

A) CFF CFF

B) CFO or CFF CFO

C) CFO CFO or CFF

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U.S. GAAP treats interest paid as CFO whereas IAS GAAP treats interest paid as either CFO or CFF.

Bad5shah

According to U.S. Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) GAAP, should dividends paid be treated as a cash flow from financing (CFF) or as a cash flow from operations (CFO)?

U.S. GAAP

IAS GAAP

A) CFF CFF or CFO

B) CFF or CFO CFO

C) CFO CFF

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U.S. GAAP treats dividends paid as CFF whereas IAS GAAP treats dividends paid as either CFO or CFF.

Bad5shah

The CORRECT set of cash flow treatments as they relate to interest and dividends received according to U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) is:

U.S. GAAP

IFRS

A) CFO CFI or CFO

B) CFI or CFO CFI

C) CFI CFO

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U.S. GAAP treats interest and dividends received as CFO whereas under IFRS interest and dividends received may be treated as either CFO or CFI.

Bad5shah

Independence, Inc. reports interest received and dividends paid as part of its cash flow from operations. This treatment is acceptable under:

A) IFRS but not under U.S. GAAP.

B) U.S. GAAP but not under IFRS.

C) either IFRS or U.S. GAAP.

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IFRS permits interest received to be reported as either cash flow from operations or cash flow from investing, and permits dividends paid to be reported as either cash flow from operations or cash flow from financing. U.S. GAAP requires interest received to be reported as cash flow from operations, but requires dividends paid to be reported as cash flow from financing.

Bad5shah

For the year ended December 31, 2007, Challenger Company reported the following financial information:

Revenue	$100,000
Cost of goods sold	(40,000)
Cash operating expenses	(20,000)
Depreciation expense	(5,000)
Tax expense	(3,000)
Net income	$32,000
Increase in accounts receivable	$7,500
Decrease in inventory	$2,500
Increase in short-term notes payable	$3,000
Decrease in accounts payable	$1,000

Calculate cash flow from operating activities using the direct method and the indirect method.

Direct method

Indirect method

A) $31,000 $34,000

B) $31,000 $31,000

C) $34,000 $34,000

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CFO is the same under both methods, the only difference is presentation. Direct method: $92,500 cash collections ($100,000 revenue – $7,500 increase in receivables) – $38,500 cash paid to suppliers (– $40,000 COGS + $2,500 decrease in inventory – $1,000 decrease in payables) – $20,000 cash operating expenses – $3,000 tax expense = $31,000. Indirect method: $32,000 net income + $5,000 depreciation expense – $7,500 increase in receivables + $2,500 decrease in inventory – $1,000 decrease in payables = $31,000. The increase in short-term notes payable is a financing activity.