Exam 10: Statement of Cash Flows

Select transactions of Irene Accounting Inc. (IAI)are listed below. IAI uses the indirect method to determine cash flows from operating activities. 1. IAI sells an investment at amortized cost for $28,000. The investment's book value is $20,000. 2. IAI's income tax expense totaled $30,000. Its income tax payable account increased $5,000, while its deferred income tax liability account decreased $18,000. 3. IAI declares a cash dividend of $3,000. The dividends payable account increases $1,000. 4. At year-end IAI increases its allowance for bad debts by $15,000. Required: Discuss how the activities listed above would be reported in the statement of cash flows. For items with multiple reporting options, identify all available options. For items not reported on the statement of cash flows, indicate the disclosure requirements, if any.

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Question 1

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1. The $8,000 gain on sale ($28,000 - $20,000 = $8,000)is deducted as an adjustment from net income in the cash flows from operating activities section. The $28,000 cash received is reported as a cash inflow from investments at amortized cost and is included in the investing activities section of the cash flow statement.
2. The $43,000 net cash paid for taxes is reported as a cash outflow from operating activities ($30,000 income tax expense + $18,000 decrease in deferred income taxes payable account - $5,000 decrease in income taxes payable account = $43,000).
3. The net cash outflow of $2,000 ($3000 declared - $1,000 increase in the dividends payable account)is reported as either a cash outflow from operating activities or a cash outflow from financing.
4. The $15,000 is a non-cash expense and will be added back to net income as an adjusting entry in the cash flow from operating activities section. From a practical perspective, this function is accomplished by adjusting net income by the increase or decrease in net accounts receivable.

Angela's Angels Corp.'s policy is to report all cash inflows from interest and dividends in the investing section and cash outflows arising from interest and dividends in the financing section. Angela's activities for the year ended December 31, 2019 included the following: • Declared and issued a stock dividend valued at $15,000. • Issued $300,000 in ordinary shares. • Accounts payable decreased $38,000 during the year. • Paid $910,000 to repurchase bonds. The book value of the bonds was $1,000,000. • Made a $25,000 principal payment on a bank loan. • Interest expense for the period was $12,000. The interest payable account increased $2,000. • Declared a $12,000 cash dividend payable on January 15, 2020. • Acquired the right to use an automobile valued at $30,000 under a lease agreement. Required: a. Prepare the cash flows from financing activities section of the statement of cash flows. b. Identify how the activities listed above that are not financing activities would be reported in the statement of cash flows assuming that the statement is prepared using the indirect method.

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Question 2

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a. * Note that while interest paid can also be classified as an operating activity, Angela's has adopted a policy of reporting interest and dividend paid as a financing activities.
b.
• The stock dividend is a non-cash activity and is not reported on the statement of cash flows. Note disclosure is appropriate.
• The decrease in accounts payable is reported as a decrease in cash from operating activities.
• The gain on repurchase of bonds will be deducted from net income in the operating activities section (indirect method).
• The declaration of the dividend is not reported on the statement of cash flows as it was not paid in 2019. Rather, this amount is used to explain the change in retained earnings during the year.
• The acquisition of the right to use an automobile under a lease agreement is a non-cash activity and is not reported on the statement of cash flows. Material non-cash transactions are reported in the notes to the financial statements.