Question 1

Cash generated from operating activities may be computed by using:

Accepted Answer

Both the indirect and direct method can be used to compute cash generated from operating activities. The indirect method starts with net income and adjusts for non-cash items and changes in working capital, while the direct method (also known as the income statement method) directly calculates cash receipts and payments from operating activities. Therefore, both methods are valid ways to calculate cash generated from operating activities.

Question 2

Issuance of common stock for cash would result in:

Accepted Answer

Issuance of common stock for cash is a financing activity as it involves raising capital from external sources, which increases cash flow from financing activities. It does not affect cash flow from operating activities, as it does not involve any revenue or expenses generated from the company's core business operations. It also does not involve the purchase or sale of any long-term assets, so it does not affect cash flow from investing activities.

Question 3

Which of the following is a cash flow from investing activities?

Accepted Answer

The sale or purchase of land involves investing activities and is therefore a cash flow from investing activities. A) is incorrect because receiving cash from a bank could be a cash flow from financing activities, operating activities, or investing activities depending on the specific transaction. B) is incorrect because payment of cash dividends is a cash flow from financing activities. D) is incorrect because cash received from customers is a cash flow from operating activities.

Question 4

Transactions dealing with the exchange of cash between the firm and its owners (stockholders)and creditors are called:

Accepted Answer

Financing activities include cash transactions related to the firm's owners (stockholders) and creditors. This includes issuing and repurchasing stock, issuing and retiring debt, and paying dividends to stockholders. Planning, investing, and operating activities involve other cash transactions related to the firm's operations and investments.

Question 5

Cash flows from financing activities would include:

Accepted Answer

Cash from sale of common stock is an example of financing activity as it represents an inflow of cash from issuing equity. Options A and B represent cash flows from investing activities, as they involve the acquisition or disposal of long-term assets such as equipment and land.

Question 6

The purchase of plant and equipment for cash would result in:

Accepted Answer

Purchasing plant and equipment for cash is considered an investing activity, and as such, results in a decrease in cash from investing activities. It does not affect net income from operations.

Question 7

Cost of merchandise sold for the year was $850,000.Inventories were $60,000 and $120,000 at the beginning and end of the year,respectively.There were no changes in accounts payable from the beginning to the end of the year.Cash payment for merchandise to be reported on the cash flow statement using the direct method is:

Accepted Answer

The cash payment for merchandise is calculated as: Cost of Merchandise Sold + Increase in Inventory = $850,000 + ($120,000 - $60,000) = $910,000.

Question 8

When using the direct method to determine the net cash flows from operating activities,major categories would include:

Accepted Answer

The direct method focuses on cash inflows and outflows directly related to operations. Cash received from bank (A) is not necessarily related to operating activities, cash paid for dividends (C) is a financing activity, and cash paid for equipment (D) is an investing activity. Cash paid for salaries (B) is an operating activity and would be included in the net cash flows from operating activities using the direct method.

Question 9

Under the direct method of the statement of cash flows,cash paid for salaries would result in:

Accepted Answer

Under the direct method, cash paid for salaries is considered an operating activity and would result in a decrease in cash flow from operating activities.

Question 10

Which would go into the operating activities section of a statement of cash flows using the direct method?

Accepted Answer

Cash paid for inventory is considered an operating activity because it relates directly to the core business operations of purchasing goods for sale. The direct method of the cash flow statement lists actual cash inflows and outflows from operating activities, including payments to suppliers for inventory.

Question 11

Which of the following is a cash outflow from a financing activity?

Accepted Answer

A purchase of treasury stock is a cash outflow from a financing activity as it involves the use of cash to buy back a company's own shares, which reduces the amount of equity on the company's balance sheet. Choices A, C, and D are cash outflows from operating, investing, and financing activities, respectively.

Question 12

The section of the statement of cash flows from investing activities includes:

Accepted Answer

The section of the statement of cash flows from investing activities includes collecting loans and/or interest, as it relates to investments made by the company. Cash paid for inventory and cash received from customers would be included in the operating activities section.

Question 13

Operating expenses other than depreciation expense for the year were $335,000.Prepaid expenses increased by $7,000.Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

Accepted Answer

Using the direct method, cash payments for operating expenses are determined by starting with the total operating expenses and adjusting for changes in current assets and current liabilities.

Total operating expenses = $335,000

Adjustments for changes in current assets: 
Prepaid expenses increased by $7,000, so we subtract $7,000 from total operating expenses:

$335,000 - $7,000 = $328,000

Therefore, cash payments for operating expenses are $328,000. Answer choice B is the closest to this amount.

Question 14

Operating expenses other than depreciation expense for the year were $400,000.Accrued expenses payable decreased by $35,000.Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

Accepted Answer

The cash payments for operating expenses are determined by adjusting the operating expenses for changes in related balance sheet accounts. As the accrued expenses payable decreased by $35,000, the cash payments for operating expenses would be higher than the operating expenses recorded for the year ($400,000). Therefore, the correct answer is $400,000 + $35,000 = $435,000. Option B is correct.

Question 15

If $15,000 was generated from operations,$7,000 was used for investing activities,and $6,000 was provided by financing activities,the cash balance would:

Accepted Answer

The cash balance would increase by $14,000 because $15,000 was generated from operations, $7,000 was used for investing activities, and $6,000 was provided by financing activities. This means that the net change in cash is $15,000 - $7,000 + $6,000 = $14,000.

Question 16

Under the direct method of the statement of cash flows,a sale of merchandise inventory for cash is a(n):

Accepted Answer

Under the direct method of the statement of cash flows, a sale of merchandise inventory for cash is classified as an operating activity. This is because it relates to the primary operations of the business and is necessary for generating revenue.

Question 17

The accuracy of the statement of cash flows,regardless of method used,can be verified by computing the change in the balance of:

Accepted Answer

The accuracy of the statement of cash flows can be verified by computing changes in cash balance. The statement of cash flows shows the inflows and outflows of cash during a specific period, and the net change in cash should match the change in the cash balance in the balance sheet. Therefore, computing the change in the cash balance can help to ensure the accuracy of the statement of cash flows.

Question 18

Generally Accepted Accounting Principles prefer which method of computing cash flow from operating activities?

Accepted Answer

The Direct method is preferred as it shows the actual cash inflow and outflow directly related to operating activities. The Combination method involves both Direct and Indirect methods, and the Indirect method is less preferable because it starts with net income and adjusts for non-cash transactions, making it less straightforward. The Adjusting method is not a commonly used method for computing cash flow from operating activities.

Question 19

The board of directors is considering approving a plant expansion which will require a sizable advance payment to take place early this year.How will this decision affect the period's cash flows from investing?

Accepted Answer

The advance payment for the plant expansion will be categorized as a cash outflow for investing activities, reducing the cash flows from investing for the period.

Question 20

The method of reporting cash flows from operating activities under which revenues and expenses on the income statement are adjusted to reflect the amount of cash received or expended for each item is the:

Accepted Answer

The direct method reports cash inflows and outflows from operating activities by directly showing the cash received from customers and paid to suppliers, employees, and other operating expenses. This method provides more detailed information about cash flows but is more time-consuming and costly to implement.

Quiz 21: Statement of Cash Flows