Answer each TF 3. If the direct method is used in preparing a statement of cash

Question

Answer each TF

3. If the direct method is used in preparing a statement of cash flows, a schedule must be provided that reconciles net income and net cash flow from operations.

4. A transaction involving the issuance of equity securities in exchange for land and building would be excluded from the statement of cash flows.

5. A major reason the FASB replaced the Statement of Changes in Financial Position with the Statement of Cash Flows is to help investors and creditors better predict future cash flows.

6. The forecasts of financial analysts regarding the earnings of companies are independent and objective and are not influenced by the management of companies.

9. Principles-based accounting standards would require an increase in the use of professional judgment on the part of financial statement preparers and independent auditors.

20-23. On June 30, 2012, Smith Company discounted a customer's $180,000, 6-month, 10 percent note receivable dated April 30, 2016. A discount rate of 12 percent was charged by the bank. Smith's proceeds from this discounted note would be

     a. $169,200.

     b. $172,800.

     c. $181,440.

d. $185,220.

e. None of the above

21. Record the journal entry on Smith Company’s books for the creation of the note receivable from the customers’ account receivable.

22. Record the journal entry on Smith Company’s books when it is discounted at the bank.

23. What type of account is the Smith Company Note Receivable (A, L, OE, R, Expense) ? ___________________

Explanation / Answer

Solution:

3) False

In Indirect method of cash flow statement, a schedule reconciles net income and net cash flow from operations must be prepared. In Direct Method this schedule is not required.

4) True

Cash Flow statement only considers the business transactions which involves cash. Since issuance of equity shares in exchange for land and building does not involve any cash, this transaction is excluded from the statement of cash flow.

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