Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS

1. (L.O. 2) Which of the following would not produce an inflow of cash?
   1. Issuance of stock.
   2. Issuance of debt.
   3. Sale of plant assets at a price equal to 50% of book value.
   4. Purchase of an investment.

   Approach and Explanation: Prepare the journal entry for each transaction listed. Find the one without a debit to Cash. The journal entries for the transactions are constructed as follows:

   

2. (L.O. 2) Which of the following is an investing activity?
   1. Receipt of interest on bonds held as an investment.
   2. Sale of common stock.
   3. Sale of treasury stock.
   4. Collection of a loan receivable.

   Approach and Explanation: Write down the definition of investing activities. Compare the answer selections with your definition. Investing activities include (a) acquiring and disposing of investments (short-term and long-term) and productive long-lived assets and (b) lending money and collecting the loans. Collection of interest is an operating activity. Both the sale of common stock and the sale of treasury stock are financing activities. The collection of a loan receivable is an investing activity. (Solution = d.)

3. (L.O. 2) An example of a cash flow from an operating activity is:
   1. payment to employees for services.
   2. payment of dividends to stockholders.
   3. receipt of proceeds from the sale of an investment.
   4. receipt of proceeds from the sale of common stock to stockholders.