Case Study 1 - Activity Classification (Statement of Cash Flows)
You are provided with the following transactions that took place during a recent fiscal year.
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Statement of
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Cash
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Cash Flow
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Inflow,
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Activity
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Outflow, or
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Transaction
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Affected
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No Effect?
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(a) Recorded depreciation expense on the plant assets.
(b) Recorded and paid interest expense.
(c) Recorded cash proceeds from a sale of plant assets.
(d) Acquired land by issuing common stock.
(e) Paid a cash dividend to preferred stockholders.
(f) Paid a cash dividend to common stockholders.
(g) Recorded cash sales.
(h) Recorded sales on account.
(i) Purchased inventory for cash.
(j) Purchased inventory on account.
Instructions
Complete the table indicating whether each item (1) affects operating (O) activities, investing (I) activities, financing (F) activities, or is a noncash (NC) transaction reported in a separate schedule; and (2) represents a cash inflow or cash outflow or has no cash flow effect. Assume use of the indirect approach.
Case Study 2 - Indirect Method (Statement of Cash Flows)
Presented below are the financial statements of Rajesh Company.
Rajesh Company
Comparative Balance Sheets
December 31
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Assets
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2014
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2013
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Cash
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$ 37,000
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$ 20,000
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Accounts receivable
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33,000
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14,000
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Inventory
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30,000
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20,000
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Equipment
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60,000
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78,000
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Accumulated depreciation-equipment
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(29,000)
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(24,000)
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Total
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$
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131,000
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$
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108,000
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Liabilities and Stockholders' Equity
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Accounts payable
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$
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29,000
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$
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15,000
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Income taxes payable
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7,000
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8,000
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Bonds payable
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27,000
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33,000
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Common stock
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18,000
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14,000
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Retained earnings
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50,000
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38,000
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Total
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$
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131,000
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$
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108,000
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Rajesh Company
Income Statement
For the Year Ended December 31, 2014
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Sales revenue
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$242,000
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Cost of goods sold
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175,000
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Gross profit
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67,000
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Operating expenses
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24,000
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Income from operations
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43,000
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Interest expense
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3,000
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Income before income taxes
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40,000
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Income tax expense
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8,000
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Net income
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$ 32,000
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Additional data:
1. Depreciation expense is 13,300.
2. Dividends declared and paid were $20,000.
3. During the year, equipment was sold for $9,700 cash. This equipment cost $18,000 originally and had accumulated depreciation of $8,300 at the time of sale.
Instructions
(a) Prepare a statement of cash flows using the indirect method.
(b) Compute free cash flow.
Case Study 3 - Direct Method (Statement of Cash Flows)
Data for Rajesh Company are presented in Case Study 2. Further analysis reveals the following.
1. Accounts payable pertain to merchandise suppliers.
2. All operating expenses except for depreciation were paid in cash.
3. All depreciation expense is in the operating expenses.
4. All sales and purchases are on account.
Instructions
(a) Prepare a statement of cash flows for Rajesh Company using the direct method.
(b) Compute free cash flow.
Case Study 4 - Journalize Stock Transactions
Fallow Co. had the following transactions during the current period.
Mar. 2 Issued 5,000 shares of $1 par value common stock to attorneys in payment of a bill for $38,000 for services provided in helping the company to incorporate.
June 12 Issued 60,000 shares of $1 par value common stock for cash of $475,000.
July 11 Issued 1,000 shares of $100 par value preferred stock for cash at $110 per share.
Nov. 28 Purchased 2,000 shares of treasury stock for $18,000.
Instructions
Journalize the transactions.
Multiple Choice Questions
1. James Erskine and Pamela White are starting a new business. They are trying to determine whether to go to the trouble of incorporating or simply shake hands to form a partnership. Which of the following is a reason to create a partnership?
A) Partnerships can raise large amounts of money more easily than corporations.
B) Partnerships offer limited liability for their owners.
C) Partnerships are not subject to double taxation of income.
D) Partnerships are more likely to have a continuous life than a corporation.
2. Several years ago the Catawba Corporation was incorporated. The company was authorized to issue ten million shares of $0.02 par value common stock. Currently, eight million shares remain unissued. In addition, the company is holding 25,000 treasury shares. How many shares are issued and how many shares are outstanding, respectively, for Catawba Corporation?
A) Issued-18,000,000, Outstanding-1,975,000
B) Issued-10,000,000, Outstanding-2,000,000
C) Issued-2,000,000, Outstanding-2,025,000
D) Issued-2,000,000, Outstanding-1,975,000
3. When incorporated by the state of Nebraska, Stan Company was authorized to issue ten million shares of common stock with a $0.10 par value. At first, one million shares were issued for $5 per share. Later, another four million were issued at $6 per share. What is the amount to be reported as the capital in excess of par value and also as the total of contributed capital?
A) Capital in Excess of Par Value-$500,000, Contributed Capital-$1,000,000
B) Capital in Excess of Par Value-$28,500,000, Contributed Capital-$29,000,000
C) Capital in Excess of Par Value-$28,800,000, Contributed Capital-$30,000,000
D) Capital in Excess of Par Value-$29,000,000, Contributed Capital-$30,000,000
4. The Gatellan Company wants to acquire a building worth $2 million from Alice Wilkinson. The company does not have sufficient cash and does not want to take out a loan so it offers to issue 90,000 shares of its $1 par value common stock in exchange for the building. Wilkinson wants more assurance of receiving a dividend each year and asks for 18,000 shares of the company's $100 par value preferred stock paying an annual dividend rate of 5 percent. Eventually, the parties come to an agreement and the
Gatellan Company records capital in excess of par value of $200,000. Which of the following happened?
A) Gatellan issued the common stock but it had no known fair value.
B) Gatellan issued the common stock but it had no known fair value.
C) Gatellan issued the preferred stock and it had no known fair value.
D) Gatellan issued the preferred stock and it had a $102 per share fair value.
5. The Hansbrough Company has 20,000 shares outstanding of $100 par value preferred stock with a 6 percent annual dividend rate. This company also has five million shares of $1 par value common stock outstanding. No dividends at all were paid in either Year One or Year Two. Near the end of Year Three, a cash dividend of $400,000 is scheduled to be distributed. If the preferred stock dividend is cumulative, how is this dividend allocated?
A) Preferred-$ 60,000, Common-$340,000
B) Preferred-$120,000, Common-$180,000
C) Preferred¬-$240,000, Common-$160,000
D) Preferred-$360,000, Common-$ 40,000
6. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
A) LIFO will have the highest ending inventory.
B) FIFO will have the highest cost of goods sold.
C) FIFO will have the highest ending inventory.
D) LIFO will have the lowest cost of goods sold.
7. Romanoff Industries had the following inventory transactions occur during 2013:
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Units
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Cost/unit
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2/1/13
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Purchase
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18
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$45
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3/14/13
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Purchase
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31
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$47
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5/1/13
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Purchase
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22
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$49
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The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's after-tax income using FIFO? (Rounded to whole dollars)
A) $1,184
B) $774
C) $1,106
D) $829
8. Drago Company purchased equipment on January 1, 2012, at a total invoice cost of $800,000. The equipment has an estimated salvage value of $20,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used?
A) $160,000
B) $320,000
C) $156,000
D) $312,000
9. A change in the estimated useful life of equipment requires
A) a retroactive change in the amount of periodic depreciation recognized in previous years.
B) that income for the current year be increased.
C) that the amount of periodic depreciation be changed in the current year and in future years.
D) that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
10. Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is
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A)
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Cash
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300,000
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Interest Expense
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18,000
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Notes Payable
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300,000
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Interest Payable
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18,000
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B)
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Cash
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300,000
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Notes Payable
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300,000
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C) Cash
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300,000
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Interest Expense
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18,000
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Notes Payable
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318,000
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D) Interest Expense
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18,000
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Cash
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282,000
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Notes Payable
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300,000
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11. When an interest-bearing note matures, the balance in the Notes Payable account is
A) less than the total amount repaid by the borrower.
B) equal to the total amount repaid by the borrower.
C) the difference between the maturity value of the note and the face value of the note.
D) greater than the total amount repaid by the borrower.
True/False Questions
1. Corporation management is both an advantage and a disadvantage of a corporation compared to a proprietorship or a partnership.
A) True
B) False
2. Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.
A) True
B) False
3. When a corporation is formed, organization costs are recorded as an asset.
A) True
B) False
4. Each share of common stock gives the stockholder the ownership rights to vote at stockholder meetings, share in corporate earnings, keep the same percentage ownership when new shares of stock are issued, and share in assets upon liquidation.
A) True
B) False
5. The number of issued shares is always greater than or equal to the number of authorized shares.
A) True
B) False
6. A journal entry is required for the authorization of capital stock.
A) True
B) False
7. Publicly held corporations usually issue stock directly to investors.
A) True
B) False
8. The trading of capital stock on a securities exchange involves the transfer of already issued shares from an existing stockholder to another investor.
A) True
B) False
9. The market price of common stock is usually the same as its par value.
A) True
B) False
10. Retained earnings is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
A) True
B) False
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