_12) Felix Company uses the indirect method to prepare the statement of cash flows. Refer to the following income statement:

Additional information provided by the company includes the following:

1) Current assets, other than cash, increased by $24,000

2) Current liabilities decreased by $1,000

How much is the net cash provided by operating activities?

A) $21,000

B) $34,000

C) $29,000

D) $39,000

____13) Martin Company is preparing its statement of cash flows using the indirect method. During the year, they sold equipment for $5,990 cash. The net book value of the asset prior to sale was $5,550. Which of the following statements is true?

A) The gain on sale of $440 would be added back to net income in the operating activities section.

B) The book value of the assets sold would be shown as a negative cash flow in the investing activities section.

C) The cash receipt of $5,990 would be shown as a positive cash flow in the investing activities section.

D) The gain on sale of $440 would be shown as a positive cash flow in the financing activities section.

____14) Which of the following is the major difference between the accounting for equity securities and debt securities?

A) Debt securities are classified as liabilities, while equity securities are classified as assets.

B) Most equity securities are classified as held-to-maturity and most debt securities are classified as trading investments.

C) The revenue from debt securities is interest, while revenue from equity securities is dividends.

D) All debt securities have a maturity date whereas only a few equity securities have a maturity date.

____15) Significant interest investments must be accounted for using the:

A) equity method.

B) consolidation method.

C) discounted cash flow method.

D) acquisition method.

____16) Glitter Services owns 30% of voting stock of Grey Investments. During the year 2015, Grey Investments earned profits of $250,000. Under the equity method, which of the following journal entries will Glitter Services record?


Long-term Investments—Grey Investments 250,000
Cash 250,000


Cash 75,000
Dividend Revenue 75,000


Cash 75,000
Long-term Investments—Grey Investments 75,000


Long-term Investments—Grey Investments 75,000
Revenue from Investments 75,000

II. Short answer: (.5 points each)

1. Angie is studying for her accounting midterm examination. Identify for Angie the advantages and disadvantages of the corporate form of business organization. (Full responses will include a minimum of 4 advantages and two disadvantages.)

2. The board of directors is considering either a stock split or a stock dividend. They understand that total stockholders’ equity will remain the same under either action. However, they are not sure of the different effects of the two types of actions on other aspects of stockholders’ equity. Explain the differences to the directors.

The different effects of a stock split versus a stock dividend are (indicate whether a stock split or stock divided either has no change/increases/decreases each of the stockholder’s equity items):

Item Stock Split Stock Dividend
Total paid-in capital

Total retained earnings

Total par value (common stock)

Par value per share

3. (a) As a source of long term financing, what are the major advantages of bonds over common stock?

(b) What are the major disadvantages in using bonds for long-term financing?

4. What are the reasons that corporations invest in securities?

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