Question

16) 16) Doug Smith Industrie 18 Smith Industries purchased a warehouse for $55 million at January 1, 2013 Warehouse has an estimated useful life of 10 years. Doug Smith Industries mitially used the sum-of-the-years-digits depreciation method, and recorded umulated depreciation through December 31, 2017 (3 years) equal to $27 million of January 1, 2018, management decided to change depreciation methods to the traight-line method of depreciation Doug Smith should record depreciation expense for the 2018 year equal to: A) S4 million B) 57 million C) $2.8 D) $5.5 million million During the year, cash and cash equivalents increased by $300 million. Cash flows from investing and financing activities in the aggregate) created positive case Inflow totaling $500 million during the year. What were net cash flows from operating activities in the statement of cash flows? A) Outflow of $200 million B) Inflow of $200 million C) Inflow of $800 million. D) Outflow of $800 million 18) Interest payments (expense) on long-term debt are reported in a statement of cash flows as: A) An investing activity. B) A borrowing activity. C) An operating activity. D) A financing activity. 19) S Company reported net income for 2018 in the amount of $400,000. The company's financial statements also included the following 19) Increase in accounts receivable Decrease in inventory Increase in accounts payable Depreciation expense Gain on sale of land $ 80,000 60,000 200,000 104,000 148,000 What is net cash from operating activities under the indirect method (amounts presented below as "absolute value")? A) S432,000. B) S536.000 C) $580,000. D) $832,000 20) How is depreciation of equipment reported in a statement of cash flows that is prepared using the indirect method? A) A decrease in cash flows from investing activities. B) An increase in cash flows from investing activities. C) A deduction from net income in arriving at cash flows from operating activities. D) An addition to net income in arriving at cash flows from operating activities.

Answer 1

Solution Question #16 Cost of warehouse $55 millions Less: Depreciation charged till Dec. 31, 2017 ($27) millions WDV of the warehouse as at Jan. 01, 2018 $28 millions Remaining estimated useful life as at Jan. 01, 2018 7 Years Note: The change of depreciation method is a change in accounting estimate, hence the depreciation shall be calculated prospectively with the changed method. Depreciation expense for 2018 year $28/7 years= $4 millions The correct option is, A) $4 million Question# 17 $300 millions Net increase in cash and cash equivalents Cash flow from investing and financing activities $500 millions Net cash flow from operating activities ($300M - $500M) ($200) millions The correct option is A) Outflow of $200 million. Question # 18 Interest payments (expense) on long-term debt are reported in a statement of cash flows as: C) An operating activity Explanation: Interest expense is a charge on current year's profit, hence it is shown under operating activity. Question #19 Calculation of net cash flow from operating activities under the indirect method $400,000 Net income Adjustments to reconcile net income to Cash flow from operating activities Depreciation expense $104.000 ($148,000) Gain on sale of land ($80,000) Increase in accounts receivable $60,000 $200,000 Decrease in inventores Increase in accounts payable Net cash provided by operating activities $536,000 The correct option is B) $536,000 Question #20 Depreciation of equipment is reported in a statement of cash flows that is prepared using the indirect method as: D) An addition to net income in arriving at cash flows from operating activities Explanation: Depreciation expense is a non-cash expense (i.e. there in no cash outflow for the depreciation expense), hence to arrive at the actual cash flow provided by operating activities, it is shown as an addition to the net income.