A review of the balance sheet of Peterson Inc. revealed the following changes in the account balances:

a. Increase in long-term investment

b. Increase in accounts receivable

c. Increase in common stock

d. Increase in long-term debt

e. Decrease in accounts payable

f. Decrease in supplies inventory

g. Increase in prepaid insurance

h. Decrease in retained earnings

Required:

Classify each change in the balance sheet account as a cash flow from operating activities, a cash flow from investing activities, a cash flow from financing activities, or a noncash investing and financing activity.

Stanfield Inc. reported the following items in its statement of cash flows presented using the indirect method.

a. Decrease in inventory

b. Paid a cash dividend to stockholders

c. Purchased equipment for cash

d. Issued long-term debt

e. Depreciation expense

f. Sold a building for cash

Required:

Indicate whether each item should be classified as a cash flow from operating activities, a cash flow from investing activities, or a cash flow from financing activities.

What does an increase in accounts payable imply? How would this increase in accounts payable be reported under the indirect method?

Romo Inc. reported the following information for the current year: operating expenses, $325,000; increase in prepaid expenses,$6,200; and decrease in accrued liabilities, $8,800. What is the amount of cash paid for operating expenses that Romo would report on its statement of cash flows under the direct method?

a.$310,000

b. $322,400

c.$327,600

d. $340,000

What does an increase in inventory imply? How would this increase in inventory be reported under the indirect method?

Smoltz Company reported the following information for the current year: cost of goods sold, $252,500; increase in inventory,$21,700; and increase in accounts payable, $12,200. What is the amount of cash paid to suppliers that Smoltz would report on its statement of cash flows under the direct method?

a.$218,600

b. $243,000

c.$262,000

d. $286,400

How is the sale of equipment at a loss reported on the statement of cash flows? Assume the indirect method is used to prepare the statement of cash flows.

Chasse Building Supply Inc. reported net cash provided by operating activities of $243,000, capital expenditures of$112,900, cash dividends of $35,800, and average maturities of long-term debt over the next 5 years of$122,300. What is Chasse’s free cash flow and cash flow adequacy ratio?

a. $94,300 and 0.77, respectively

b.$94,300 and 0.82, respectively

c. $130,100 and 1.06, respectively

d.$165,900 and 1.36, respectively

Where do the components of the changes in retained earnings appear in the statement of cash flows? Assume the indirect method is used to prepare the statement of cash flows.

Why are depreciation, depletion, and amortization added to net income when the indirect method is used to report net cash flows from operating activities?

Refer to the information for Cornett Company above. What amount should Cornett report on its statement of cash flows as net cash flows from financing activities?

a. $65,200

b.$94,800

c. $100,000

d. None of these

What is a statement of cash flows?

Which of the following is not a use of the statement of cash flows?

a. Aids in the prediction of future cash flow.

b. Provides a measure of the future obligations of the company.

c. Helps estimate the amount of funds that will be needed from creditors or stockholders.

d. Provides insights into the quality and reliability of reported income.

Suppose that an insurance company classifies people into one of three classes — good risks, average risks, and bad risks. Their records indicate that the probabilities that good, average, and bad risk persons will be involved in an accident over a 1-year span are, respectively, .05, .15, and .30. If 20 percent of the population are “good risks,” 50 percent are “average risks,” and 30 percent are “bad risks,” what proportion of people have accidents in a fixed year? If policy holder A had no accidents in 1987, what is the probability that he or she is a good (average) risk?