Chapter 2: Statement of Cash Flows

Purpose of the chapter:

• Indicate the primary purpose of the statement of cash flows.

• Distinguish among operating, investing, and financing activities.

• Explain the impact of the product life cycle on a company's cash flows.

• Steps in the Preparation of the Statement of Cash Flows

• Prepare a statement of cash flows using one of two approaches: (a) the indirect method
or (b) the direct method.

Cash flow is the total amount of money being transferred into and out of a business.

Statement of Cash flows is a financial statement that shows how changes in balance sheet

accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing and financing activities.

The primary purpose of the statement of cash flows is to provide information about cash
receipts, cash payments, and the net change in cash resulting from the operating, investing, and
financing activities of a company during the period.

Three parts of the statement of Cash flows:

• Cash flow from Operating Activities

• Cash flow from Investing Activities

• Cash flow from Financing Activities

Operating Activities

Cash from operating activities focuses on the cash inflows and outflows from a company's main
business activities. Example: Collection from Customers, Payment of Salaries, Payment of
Supplies and etc.

Cash flow from operating activities can be solve using two method: Direct method and Indirect
Method

The direct method of presenting the statement of cash flows  presents the specific cash
flows associated with items that affect cash flow while the indirect method of presenting
starts from the net income working back to cash flow from operating activities
Direct Method – Operating Activities

Most items needed in the Operating Activities is found on the income statement (because
it is known as statement of operations) and in current assets and current liabilities
(because it is currently use for the current operation)

Formulas:

Cash Received from Customers =

Net Sales
+ Beginning Accounts Receivable (before allowance for doubtful
accounts)
− Ending Accounts Receivable (before allowance for doubtful accounts)

Cash Payments to Suppliers =

Cost of Goods Sold
+ Ending Inventory
− Beginning Inventory
+ Beginning Accounts Payable
− Ending Accounts Payable

Cash Payments for Expenses =

Expenses (Accrual Basis)
+ Beginning Accrued Expense; Ending Prepaid Expense
− Ending Accrued Expense; Beginning Prepaid Expense

Cash Payment for Income Taxes =

Income Tax Expense
+ Beginning Income Tax Payable
- Ending Income Tax Payable

To get the cash flow from operating activities, All cash receipts are added and all cash
disbursement are deducted.

Illustration:
Presented below is the income statement of Foley, Inc.:
Sales P380,000
Cost of goods sold 225,000
Gross profit P155,000
 Operating expenses 85,000
Income before income taxes 70,000
Income taxes 28,000
Net income P 42,000

In addition, the following information related to net changes in working capital is presented:
Debit Credit
Cash P12,000
Trade accounts receivable 15,000
Inventories 19,400
Salaries payable (operating expenses) 8,000
Trade accounts payable P12,000
Income tax payable 3,000

Present the Operating Activity portion of the statement of cash flows

Answer:
Cash flows from operating activities
Cash received from customers P365,000
Cash payment to suppliers P232,400
Cash Payment for expenses 93,000
Cash payment for income taxes 31,000 356,400
Net cash provided by operating activities P 8,600

Cash Received from Customer:

Sales 380,000
- Increase in Accounts Receivable 15,000
Cash Received from Customer 365,000

Cash Payment to Suppliers:

Cost of Goods Sold 225,000
 +Increase in Inventory 19,400
-Increase in Trade Accounts 12,000
Payable
Cash Payment to Suppliers 232,400

Cash Payment for Expenses

Operating Expenses 85,000
+ Decrease in Salaries Payable 8,000
Cash Payment for Expenses 93,000

Cash payment for income taxes

Income Tax Expense 28,000
+Decrease in income tax expense 3,000
Cash payment for income taxes 31,000

Indirect Method

Since most items used in Operating Activities are found in the income statement, the
indirect method of presenting starts for the net income/loss (add/deduct the noncash
items that affected income) remove the effect of items presented in the income statement
that doesn’t affect cash; add decrease in current assets (except cash); deduct increase in
current assets (except cash); add increase in current liabilities and; deduct decrease in
current liabilities

Formula:
Net Income/Loss
+ Expenses or Losses that doesn’t have cash outflow (example depreciation, amortization)
- Revenue or Gain that doesn’t have cash inflow (land appreciation but land not ye’t sold)
+ decrease in current assets (gross for accounts receivable, allowance doesn’t affect cash)
- increase in current assets
+ increase in current liabilities
- decrease in current liabilities

Illustration:
Refer to the previous illustration, prepare the indirect method.

Answer:
Cash flows from operating activities
Net income P42,000
Adjustments to reconcile net income to net
 cash provided by operating activities:
Increase in trade accounts receivable P(15,000)
Increase in inventories (19,400)
Decrease in salaries payable (operating expenses) (8,000)
Increase in trade accounts payable 12,000
Decrease in income taxes payable (3,000) (33,400)
Net cash provided by operating activities P8,600

Regardless of which method is used, the net cash provided for operating activities for direct
method is always equal to the net cash provided for operating activities for indirect method.

Direct Method or Indirect Method

Direct method is preferred by layman because it is easier to understand and interpret,
indirect method is usually use for reconciliation or it becomes impossible to prepare the
direct method.

Investing Activities
Cash from investing activities focuses on the cash inflows and outflows from a company's non-
current assets. Example: Purchase or Sale of Land, Building and Equipment.

Illustration:
Lange Co. provided the following information on selected transactions during 2018:
Purchase of land by issuing bonds P250,000
Proceeds from issuing bonds 500,000
Purchases of inventory 950,000
Purchases of treasury stock 150,000
Loans made to affiliated corporations 350,000
Dividends paid to preferred stockholders 100,000
Proceeds from issuing preferred stock 400,000
Proceeds from sale of equipment 50,000

Present the Investing Activity portion of the statement of cash flows.

Answer:

Proceeds from sale of equipment 50,000

Loans made to affiliated corporation (350,000)
Net cash provided(used) by Investing Activities (300,000)
The purchase of land from issuing bonds does not affect cash although it affects the non-current
assets

Financing Activities

Cash from financing activities focuses on the cash inflows and outflows from transaction
between owners and creditors. Example: Payment of Long-term debt, Additional Investment.

From the Previous Illustration, Present the Financing Activity portion of the statement of cash
flows:

Answer:

Proceeds from issuing bonds 500,000

Purchases of treasury stock (150,000)
Dividends paid to preferred stockholders (100,000)
Proceeds from issuing preferred stock 400,000
Net cash provided (used) by Financing Activities 650,000

Dividend and Interest

Dividend and Interest Revenue/Expense are generally presented in the Operating Activities,
because it is presented as part of the income statement. Alternatively, Dividend and Interest
Revenue can be presented in the Investing Activities, treated as fruits of investment while
Dividend and Interest Expense can be presented in the Financing Activities, treated as costs of
financing.
Exercise 1: True or False

T 1. The primary purpose of the statement of cash flows is to provide cash-basis information
about the company’s operating, investing, and financing activities.
F 2. The statement of cash flows provides information to help investors and creditors assess
the cash and noncash investing and financing transactions during the period.
T 3. Companies classify some cash flows relating to investing or financing activities as
operating activities.
T 4. The first step in the preparation of the statement of cash flows is to determine the net
cash flow from operating activities.
T 5. The net increase (decrease) in cash reported on the statement of cash flows should
reconcile the beginning and ending cash balances reported in the comparative balance
sheets.
F 6. Under the accrual basis of accounting, net income is usually the same as net cash flow
from operating activities. cash basis
F 7. A company can convert net income to net cash flow from operating activities through
either the direct method or the indirect method. only indirect method
F 8. The direct method, also called the reconciliation method, reports cash receipts and cash
disbursements from operating activities. indirect method
T 9. The indirect method adjusts net income for items that affected reported net income but
did not affect cash.
F 10. The FASB encourages the use of the indirect method over the direct method. direct
method
T 11. When accounts receivable decrease during a period, cash-basis revenues are higher
than revenues reported on an accrual basis.
F 12. When prepaid expenses decrease during a period, expenses on the accrual-basis are
lower than they are on a cash-basis.
F 13. Income from an investment in common stock using the equity method is added to net
income in computing net cash provided from operating activities. deducted
T 14. Cash receipts from customers are computed by adding a decrease in accounts
receivable to revenue from sales.
F 15. Cash payments for operating expenses are computed by subtracting an increase in
prepaid expenses and a decrease in accrued expenses payable from operating expenses.
adding
16. A company should add back bond premium amortization to net income to arrive at net
cash flow from operating activities. (Bonds payable- True; Bonds income- false)
T 17. Companies report the cash flows from purchases and sales of trading securities as cash
flows from operating activities.
T 18. Noncash investing and financing activities are disclosed either in a separate schedule or
in a separate note to the financial statements.
19. When numerous adjustments are necessary, companies often use a cash flow
worksheet instead of preparing a statement of cash flows.
20. The issuance of stock dividends is entered on the cash flow worksheet, but is not
reported in the statement of cash flows.

Exercise 2: Classification
Classify each item as part of Operating (O), Investing (I) or Financial (F) Activities, indicate if
the Items is a Cash Inflow (+) or Cash Outflow (-). Write the word “none” if the item is not
required to be reported in the statement of cash flows
Example:

O- and I+ 1. An insurance policy was canceled at year end, and a cash settlement was received
by the firm. These proceeds were in excess of the book value of the policy.

Operating activity outflow because insurance premiums were paid for the year and Investment
activity inflow because the cash settlement was received to settle a long-term investment.

O+1._Sales discounts lapsed and not taken by customers. (Sales recorded at net originally.)
O+/ None 2. Accrued estimated income taxes for the period. These taxes will be paid next year.
O- (indirect method 3. Amortization of premium on bonds payable.
O+ (indirect method) 4. Premium amortized on investment in bonds.
O+ (indirect method) 5. The book value of trading securities was reduced to fair value.
I-__6.Purchase of available-for-sale securities.
None 7.Declaration of stock dividends (not yet issued).
None 8.Issued preferred stock in exchange for equipment.
O+ (indirect method) 9. Bad debts (under allowance method) estimated and recorded for the
period (receivables classified as current).
O-, I + 10. Gain on disposal of old machinery.
F- 11.Payment of cash dividends (previously declared in a prior period).
O+ 12.Trading securities are sold at a loss.
None 13.Two-year notes issued at discount for a patent.
_____ 14. Amortization of Discount on Notes Receivable (long-term).
O- 15.Decrease in Retained Earnings Appropriated for Self-insurance.

Exercise 3: Multiple Choice

1. It is an objective of the statement of cash flows to
a. discloses changes during the period in all asset and all equity accounts.
b. discloses the change in working capital during the period.
c. provides information about the operating, investing, and financing activities of an
entity during a period.
d. none of these.
2. The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of an entity during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its
needs for external financing.
3. Of the following questions, which one would not be answered by the statement of cash
flows?
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during the period?
d. What was the change in the cash balance during the period?
4. The first step in the preparation of the statement of cash flows requires the use of
information included in which comparative financial statements?
a. Statements of cash flows
b. Balance sheets
c. Income statements
d. Statements of retained earnings
5. A company borrows P10,000 and signs a 90-day nontrade note payable. In preparing a
statement of cash flows (indirect method), this event would be reflected as a(n)
a. addition adjustment to net income in the cash flows from operating activities
section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.
 6. To arrive at net cash provided by operating activities, it is necessary to report revenues
and expenses on a cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate
cash flow journal.
b. estimating the percentage of income statement transactions that were originally
reported on a cash basis and projecting this amount to the entire array of income
statement transactions.
c. eliminating the effects of income statement transactions that did not result in a
corresponding increase or decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as
depreciation, from the net income computation.
7. An increase in inventory balance would be reported in a statement of cash flows using
the indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
8. A statement of cash flows typically would not disclose the effects of
a. capital stock issued at an amount greater than par value.
b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.
9. When preparing a statement of cash flows (indirect method), which of the following is
not an adjustment to reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
10. Declaration of a cash dividend on common stock affects cash flows from operating
activities under the direct and indirect methods as follows:
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
11. In a statement of cash flows, the cash flows from investing activities section should
report
a. the issuance of common stock in exchange for a factory building. (doesn’t affect
cash)
b. stock dividends received. (doesn’t affect cash)
c. a major repair to machinery charged to accumulated depreciation.
 d. the assignment of accounts receivable. (financing)
12. Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a
statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
13. Which of the following would be classified as a financing activity on a statement of cash
flows?
a. Declaration and distribution of a stock dividend (doesn’t affect cash)
b. Deposit to a bond sinking fund (investing)
c. Sale of a loan receivable (investing)
d. Payment of interest to a creditor (could be treated as operating)
14. The amortization of bond premium on long-term debt should be presented in a
statement of cash flows (using the indirect method for operating activities) as a(n)
a. addition to net income.
b. deduction from net income.
c. investing activity.
d. financing activity.
15. Crabbe Company reported P80,000 of selling and administrative expenses on its income
statement for the past year. The company had depreciation expense and an increase in
prepaid expenses associated with the selling and administrative expenses for the year.
Assuming use of the direct method, how would these items be handled in converting
the accrual based selling and administrative expenses to the cash basis?
Increase in
Depreciation Prepaid Expenses
a. Deducted From Deducted From
b. Added To Added To
c. Deducted From Added To
d. Added To Deducted From
16. When preparing a statement of cash flows (indirect method), an increase in ending
inventory over beginning inventory will result in an adjustment to reported net earnings
because
a. cash was increased while cost of goods sold was decreased.
 b. cost of goods sold on an accrual basis is lower than on a cash basis.
c. acquisition of inventory is an investment activity.
d. inventory purchased during the period was less than inventory sold resulting in a net
cash increase. (decrease)
17. When preparing a statement of cash flows, a decrease in accounts receivable during a
period would cause which one of the following adjustments in determining cash flow
from operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
18. In determining net cash flow from operating activities, a decrease in accounts payable
during a period
a. means that income on an accrual basis is less than income on a cash basis.
b. requires an addition adjustment to net income under the indirect method.
c. requires an increase adjustment to cost of goods sold under the direct method.
d. requires a decrease adjustment to cost of goods sold under the direct method.
19. When preparing a statement of cash flows, an increase in accounts payable during a
period would require which of the following adjustments in determining cash flows from
operating activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
20. When preparing a statement of cash flows, a decrease in prepaid insurance during a
period would require which of the following adjustments in determining cash flows from
operating activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
21. When preparing a statement of cash flows, the following are used for which method in
determining cash flows from operating activities?
Gross Accounts Receivable Net Accounts Receivable
a. Indirect Direct
 b. Direct Indirect
c. Direct Direct
d. Neither Indirect
22. Which of the following statements is correct?
a. The indirect method starts with income before extraordinary items.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of
cash flows.
d. All of these.
23. Riley Company reports its income from investments under the equity method and
recognized income of P25,000 from its investment in Wood Co. during the current year,
even though no dividends were declared or paid by Wood during the year. On Riley's
statement of cash flows (indirect method), the P25,000 should
a. not be shown.
b. be shown as cash inflow from investing activities.
c. be shown as cash outflow from financing activities.
d. be shown as a deduction from net income in the cash flows from operating activities
section.

Exercise 4:
Donelly, Inc. has prepared the following comparative balance sheets for 2017 and 2018:
2018 2017
Cash P 297,000 P 153,000
Receivables 159,000 117,000
Inventory 150,000 180,000
Prepaid expenses 18,000 27,000
Plant assets 1,260,000 1,050,000
Accumulated depreciation (450,000) (375,000)
Patent 153,000 174,000
P1,587,000 P1,326,000

Accounts payable P 153,000 P 168,000

Accrued liabilities 60,000 42,000
Mortgage payable — 450,000
Preferred stock 525,000 —
Additional paid-in capital—preferred 120,000 —
Common stock 600,000 600,000
Retained earnings 129,000 66,000
P1,587,000 P1,326,000
1. The Accumulated Depreciation account has been credited only for the depreciation expense
for the period.
2. The Retained Earnings account has been charged for dividends of P138,000 and credited for
the net income for the year.

The income statement for 2018 is as follows:

Sales P1,980,000
Cost of sales 1,089,000
Gross profit 891,000
Operating expenses 690,000
Net income P 201,000

Instructions
(a) From the information above, prepare a statement of cash flows (direct method) for
Donelly, Inc. for the year ended December 31, 2018.
(b) From the information above, prepare a schedule of cash provided by operating activities
using the indirect method.
Exercise 5:
The following information is taken from Reyser Corporation's financial statements:

December 31
2018 2017
Cash P90,000 P 27,000
Accounts receivable 92,000 80,000
Allowance for doubtful accounts (4,500) (3,100)
Inventory 155,000 175,000
Prepaid expenses 7,500 6,800
Land 90,000 60,000
Buildings 287,000 244,000
Accumulated depreciation (32,000) (13,000)
Patents 20,000 35,000
P705,000 P611,700

Accounts payable P 90,000 P 84,000

Accrued liabilities 54,000 63,000
Bonds payable 125,000 60,000
Common stock 100,000 100,000
Retained earnings—appropriated 80,000 10,000
Retained earnings—unappropriated 271,000 302,700
Treasury stock, at cost (15,000) (8,000)
P705,000 P611,700

For 2018 Year

Net income P58,300
Depreciation expense 19,000
Amortization of patents 5,000
Cash dividends declared and paid 20,000
Gain or loss on sale of patents none

Instructions
Prepare a statement of cash flows for Reyser Corporation for the year 2018. (Use the indirect
method.)
Net Income 58,300
Add: Depreciation Expense 19,000
Amortization of Patents 5,000
Doubtful Accounts Expense (4500-3100) 1,400
Increase in A/R (92,000-80,000) (12,000)
Decrease in Inventory (155,000-175,000) 20,000
Increase in Prepaid Expense (7500-6800) (700)
Increase in A/P (90,000-84,000) 6,000
Decrease in Accrued Liabilities (54000-63000) (9,000)
Cash provided by Operating Activities 88,000

Purchase of land (90000-60000) (30,000)

Purchase of Building(287000-244000) (43,000)
Sale of Patent (20000-35000-5000) 10,000
Cash provided by Financing Activities (63,000)

Issuance of B/P(125000-60000) 65,000

Paid Dividends (20,000)
Repurchase of stock(15000-8000) (7,000)
Cash provided by Investing Activities 38,000
Increase in Cash 63,000
Beg Cash 27,000
Ending Cash 90,000

Exercise 6: Short Problems

1. The following information on selected cash transactions for 2018 has been provided by
Simpson Company:
Proceeds from sale of land P160,000
Proceeds from long-term borrowings 400,000
Purchases of plant assets (144,000)
Purchases of inventories 680,000
Proceeds from sale of Simpson common stock 240,000
 What is the cash provided (used) by investing activities for the year ended December 31,
2018, as a result of the above information?
a. P16,000 (160,000-144,000)
b. P256,000.
c. P160,000.
d. P800,000.

2. Selected information from Adison Company's 2018 accounting records is as follows:

Proceeds from issuance of common stock P 400,000
Proceeds from issuance of bonds 1,200,000
Cash dividends on common stock paid (160,000)
Cash dividends on preferred stock paid (60,000)
Purchases of treasury stock (120,000)
Sale of stock to officers and employees not included above 100,000
Adison's statement of cash flows for the year ended December 31, 2018, would show
net cash provided (used) by financing activities of
a. P60,000.
b. P (220,000).
c. P160,000.
d. P1,360,000.

3. During 2018, Ogden Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Ogden,
converted into common shares of Ogden P 360,000
Payment in 2018 of cash dividend declared in 2017 to
preferred shareholders 186,000
Payment for the early retirement of long-term bonds payable
(carrying amount P2,220,000) 2,250,000
Proceeds from the sale of treasury stock (on books at cost of P258,000) (300,000)
The amount of net cash used in financing activities to appear in Ogden's statement of
cash flows for 2018 should be
a. P1,590,000.
b. P1,776,000.
c. P2,136,000.
d. P2,148,000.

4. Tobin Company sold some of its plant assets during 2018. The original cost of the plant
assets was P750,000 and the accumulated depreciation at date of sale was P700,000.
 The proceeds from the sale of the plant assets were P105,000. The information
concerning the sale of the plant assets should be shown on Tobin's statement of cash
flows (indirect method) for the year ended December 31, 2018, as a(n)
a. subtraction from net income of P55,000 and a P50,000 increase in cash flows from
financing activities.
b. addition to net income of P55,000 and a P105,000 increase in cash flows from
investing activities.
c. subtraction from net income of P55,000 and a P105,000 increase in cash flows from
investing activities.
d. addition of P105,000 to net income.

5. An analysis of the machinery accounts of Doonan Company for 2018 is as follows:

Machinery, Net of
Accumulated Accumulated
Machinery Depreciation
Depreciation
Balance at January 1, 2018 P500,000 P125,000 P375,000
Purchases of new machinery in 2018
for cash 200,000 — 200,000
Depreciation in 2018 — 100,000 (100,000)
Balance at Dec. 31, 2018 P700,000 P225,000 P475,000

The information concerning Doonan’s machinery accounts should be shown in Doonan’s

statement of cash flows (indirect method) for the year ended December 31, 2018, as
a(n)
a. subtraction from net income of P100,000 and a P200,000 decrease in cash flows
from financing activities.
b. addition to net income of P100,000 and a P200,000 decrease in cash flows from
investing activities.
c. P100,000 increase in cash flows from financing activities.
d. P200,000 decrease in cash flows from investing activities.

6. Equipment which cost P213,000 and had accumulated depreciation of P114,000 was
sold for P111,000. This transaction should be shown on the statement of cash flows
(indirect method) as a(n)
a. addition to net income of P12,000 and a P111,000 cash inflow from financing
activities.
b. deduction from net income of P12,000 and a P99,000 cash inflow from investing
activities.
 c. deduction from net income of P12,000 and a P111,000 cash inflow from investing
activities.
d. addition to net income of P12,000 and a P99,000 cash inflow from financing
activities.

7. During 2018, equipment was sold for P156,000. The equipment cost P252,000 and had a
book value of P144,000. Accumulated Depreciation—Equipment was P687,000 at
12/31/17 and P735,000 at 12/31/18. Depreciation expense for 2018 was
a. P60,000.
b. P96,000.
c. P156,000.
d. P192,000. (687,000-144,000-735,000= 192,000)
Use the following information for questions 8 and 9.
Equipment that cost P300,000 and had a book value of P156,000 was sold for P180,000. Data
from the comparative balance sheets are:
12/31/18 12/31/17
Equipment P2,160,000 P1,950,000
Accumulated Depreciation 660,000 570,000

8. Depreciation expense for 2018 was

a. P258,000.
b. P234,000. (300,000-156,000-570,000+660,000)
c. P54,000.
d. P36,000.

9. Equipment purchased during 2018 was

a. P510,000. (1,950,000-300,000-2,160,000)
b. P300,000.
c. P210,000.
d. P90,000.

Use the following information for questions 10 and 11.

The balance in retained earnings at December 31, 2017 was P720,000 and at December 31,
2018 was P582,000. Net income for 2018 was P500,000. A stock dividend was declared and
distributed which increased common stock P200,000 and paid-in capital P110,000. A cash
dividend was declared and paid.

10. The amount of the cash dividend was

a. P248,000.
 b. P328,000. (720,000+500,000-200,000-110,000-582,000)
c. P442,000.
d. P638,000.

11. The stock dividend should be reported on the statement of cash flows (indirect method)
as
a. an outflow from financing activities of P200,000.
b. an outflow from financing activities of P310,000.
c. an outflow from investing activities of P310,000.
d. Stock dividends are not shown on a statement of cash flows.

12. The following information was taken from the 2018 financial statements of Sawyer
Corporation:
Bonds payable, January 1, 2018 P 500,000
Bonds payable, December 31, 2018 2,000,000
During 2018
• A P450,000 payment was made to retire bonds payable with a face amount of
P500,000.
• Bonds payable with a face amount of P200,000 were issued in exchange for
equipment.
In its statement of cash flows for the year ended December 31, 2018, what amount
should Sawyer report as proceeds from issuance of bonds payable?
a. P1,500,000
b. P1,750,000
c. P1,800,000 (2,000,000-200,000)
d. P2,200,000

13. Richman Corporation had net income for 2018 of P3,000,000. Additional information is
as follows:
Depreciation of plant assets P1,200,000
Amortization of intangibles 240,000
Increase in accounts receivable 420,000
Increase in accounts payable 540,000
Richman's net cash provided by operating activities for 2018 was
a. P4,560,000. (3,000,000+1,200,000+240,000+540,000)
b. P4,440,000.
c. P4,320,000.
d. P1,680,000.
14. Net cash flow from operating activities for 2018 for Fordham Corporation was P300,000.
The following items are reported on the financial statements for 2018:
Cash dividends paid on common stock 20,000
Depreciation and amortization 12,000
Increase in accounts receivables 24,000
Based on the information above, Fordham’s net income for 2018 was
a. P312,000. (300,000-12,000+24,000)
b. P296,000.
c. P264,000.
d. P256,000.

15. During 2018, Hogan Company earned net income of P384,000 which included
depreciation expense of P78,000. In addition, the company experienced the following
changes in the account balances listed below:
Increases Decreases
Accounts payable P45,000 Accounts receivable P12,000
Inventory 36,000 Accrued liabilities 24,000
Prepaid insurance 33,000
Based upon this information what amount will be shown for net cash provided by
operating activities for 2018?
a. P492,000 (384,00+78,000+45,000-36,000+12,000-24,000+33,000)
b. P465,000
c. P285,000
d. P267,000

16. Robley Company reported net income of P340,000 for the year ended 12/31/08.
Included in the computation of net income were: depreciation expense, P60,000;
amortization of a patent, P32,000; income from an investment in common stock of Brett
Inc., accounted for under the equity method, P48,000; and amortization of a bond
discount, P12,000. Robley also paid an P80,000 dividend during the year. The net cash
provided by operating activities would be reported at:
a. P396,000. (340,000+60,000+32,000-48,000+12,000)
b. P316,000.
c. P284,000.
d. P204,000.

Use the following information for questions 17 and 18.

Weimers Company provided the following information on selected transactions during 2018:
Dividends paid to preferred stockholders P 150,000
 Loans made to affiliated corporations 750,000
Proceeds from issuing bonds 900,000
Proceeds from issuing preferred stock 1,050,000
Proceeds from sale of equipment 450,000
Purchases of inventories 1,200,000
Purchase of land by issuing bonds 300,000
Purchases of treasury stock 600,000

17. The net cash provided (used) by investing activities during 2018 is
a. P (600,000).
b. P (300,000).
c. P150,000.
d. P450,000. (Proceeds from sale of equipment)

18. The net cash provided (used) by financing activities during 2018 is
a. P (1,650,000).
b. P450,000.
c. P750,000.
d. P1,200,000. (900,000-150,000+1,050,000-600,000)

19. The net cash provided by operating activities in Otto Company's statement of cash flows
for 2018 was P115,000. For 2018, depreciation on plant assets was P45,000, amortization of
patent was P8,000, and cash dividends paid on common stock was P54,000. Based only on the
information given above, Otto’s net income for 2018 was
a. P115,000.
b. P62,000. (115,000-45,000-8,000)
c. P8,000.
d. P116,000.

20. During 2018, Garber Corporation, which uses the allowance method of accounting for
doubtful accounts, recorded a provision for bad debt expense of P25,000 and in addition
it wrote off, as uncollectible, accounts receivable of P10,000. As a result of these
transactions, net cash flows from operating activities would be calculated (indirect
method) by adjusting net income with a
a. P25,000 increase.
b. P10,000 increase.
c. P15,000 increase.
d. P15,000 decrease.

Use the following information for questions 21 and 22.

A flood damaged a building and contents. Floods are unusual and infrequent in this area. The
receipts from insurance companies totaled P300,000, which was P90,000 less than the book
values. The tax rate is 30%.

21. On the statement of cash flows (indirect method), the receipts from insurance
companies should
a. be shown as an addition to net income of P210,000.
b. be shown as an inflow from investing activities of P210,000.
c. be shown as an inflow from investing activities of P300,000.
d. not be shown.

22. On the statement of cash flows (indirect method), the flood loss should
a. be shown as an addition to net income of P63,000.
b. be shown as an addition to net income of P90,000.
c. be shown as an inflow from investing activities of P63,000.