Question

Q#1

Fashion Company reported the following:
Common stock, $3 par, 10,000 shares authorized, 5,000 shares issued and outstanding
What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the dividend is
declared?

a. Retained earnings in the amount of $15,000 is transferred to the contributed capital accounts.
b. Cash decreases $30,000.
c. Additional Paid-in Capital decreases $30,000.
d. A stock dividend has no effect on any stockholders' equity accounts.

Q#2

Below is information for Toronto Imports Corp. for 2015 and 2016:

Bonds payable, December 31, 2015 $500,000
Bonds payable, December 31, 2016 800,000
Loss on bond retirement--2016 15,000
Interest expense on bonds--2016 45,000
At the end of 2016, Toronto issued bonds at par value for $800,000 cash. The proceeds from these bonds were used to retire
the $500,000 bond issue outstanding at the end of 2015 (before their maturity date). All interest expense was paid in cash
during 2016.
The following statements describe how Toronto reported the cash flow effects of the items described above on its 2016
statement of cash flows. The indirect method is used to prepare the operating activities section. Which of the following has
been reported incorrectly by Toronto?

a. Payments of $560,000 were reported as a cash outflow in the investing activities section.
b. Proceeds of $800,000 from the issuance of bonds were reported as a cash inflow in the financing activities section.
c. The loss on bond retirement of $15,000 was added to net income in the operating activities section.
d. Interest expense of $45,000 was not reported separately because it is included in net income in the operating activities section.

Q#3

When using the indirect method, how is the decrease in accounts payable shown on the statement of cash flows?

a. Financing activity
b. Noncash investing and financing activity
c. Investing activity
d. Operating activity

Q#4

When using the indirect method, how is the issuance of stock to retire a long-term debt shown on a statement of cash flows?

a. Investing activity
b. Operating activity
c. Noncash investing or financing activity
d. Financing activity

Q#5

Which of the following operating activities results in a cash outflow?

a. Collecting accounts receivable
b. Making cash sales
c. Paying creditors for merchandise
d. Receiving deposits recorded as unearned revenue

Answer 1

Q1) answer : a. Retained earnings in the amount of $15,000 is transferred to the contributed capital accounts.

=> Stock dividend = 5000 shares * 10% * $30 = $15000 and under the stock dividend no cash dividend is given, but retained earnings of equivalent amount is being transferred to capital accounts. Entry being: Debit Retained Earnings $15000 , Credit Common Stock/Paid in capital in excess of par $15000.

Q2) answer : a. Payments of $560,000 were reported as a cash outflow in the investing activities section.

=> The issuance of bond can never be a investing activities, but it is a financing activities. So, this statement is wrong.

Q3) answer : d. Operating activity

=> Change in the position of working capital is reported under the operating activities and AP is the part of working capital.

Q4) answer : d. Financing activity

=> Raising of fund through issuing of stock and retirement of debt are the financing activities.

Q5) answer : c. Paying creditors for merchandise

=> Payment to creditors of suppling merchandise is the cash outflow on making the payment, which is recorded under the operating activities.

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