Question 1

Sterling Sails reported net income of $30,000; depreciation expenses of $19,000; an increase in Accounts Payable of $2,000; and an increase in current notes receivable of $3,000. Net Cash Flows from operating activities under the indirect method is:

Accepted Answer

Net Cash Flows from operating activities is calculated as: Net Income + Depreciation + Increase in Accounts Payable - Increase in Notes Receivable = $30,000 + $19,000 + $2,000 - $3,000 = $48,000.

Question 2

The records of Eclectic Lighting showed a net loss of $30,000; depreciation expense of $24,000; and an increase in supplies on hand of $4,000. The amount of net cash flow from operating activities using the indirect method is:

Accepted Answer

The net cash flow from operating activities starts with the net loss of $30,000. Depreciation expense, a non-cash expense, is added back, resulting in $30,000 - $24,000 = $6,000. The increase in supplies on hand is a use of cash and is subtracted, leading to $6,000 - $4,000 = $2,000. Therefore, the net cash flow from operating activities is ($10,000), as the calculation should correctly be $30,000 (loss) + $24,000 (depreciation) = -$6,000, then -$6,000 - $4,000 (increase in supplies) = -$10,000.

Question 3

Records for Serenity Sounds show net income of $35,000; depreciation expense of $11,000; and cash dividends paid of $4,000. The cash flow from operating activities on the cash flow statement using the indirect method is:

Accepted Answer

To calculate the cash flow from operating activities using the indirect method, we start with net income and make adjustments for non-cash expenses and changes in working capital accounts. Thus, the calculation is as follows:
Net income = $35,000
Add back depreciation expense = $11,000
Operating cash flow before changes in working capital = $46,000
Subtract cash dividends paid = $4,000
Cash flow from operating activities = $46,000 - $4,000 = $42,000

Question 4

Green Timber reported net income of $53,000; depreciation expenses of $11,000; a gain on a land sale of $3,000; and a decrease in Accounts Receivable of $3,500. Under the indirect method, net Cash Flows from operations is:

Accepted Answer

Net Cash Flows = Net Income + Depreciation Expenses - Gain on Land Sale - Change in Accounts Receivable
Net Cash Flows = $53,000 + $11,000 - $3,000 - (-$3,500) = $64,500

Question 5

If $10,000 was generated from operations, $1,000 was used for investing activities and $7,000 was generated from financing activities, the cash balance must have increased by:

Accepted Answer

The cash balance increased by $16,000, calculated as $10,000 (operations) - $1,000 (investing) + $7,000 (financing) = $16,000.

Question 6

Under the direct method, the only section that differs from the indirect method is the financing activities section.

Accepted Answer

The direct method and the indirect method differ in the presentation of the cash flows from operating activities section, not the financing activities section.

Question 7

S&C's records show Accounts Receivable amounted to $205,000 at the beginning of the year and $240,000 at the end of the year. Income reported on the Income Statement for the year was $310,000. The cash flow from operating activities on the cash flow statement using the indirect method is:

Accepted Answer

The cash flow from operating activities can be calculated using the indirect method by starting with the net income and adjusting for changes in working capital. Here, the net income is $310,000. Accounts Receivable increased by $35,000 ($240,000 - $205,000), which means the company earned more on credit than it collected in cash. To adjust for this in the cash flow statement, we subtract the increase in Accounts Receivable from the net income. Therefore, the cash flow from operating activities is $310,000 - $35,000 = $275,000.

Question 8

Gains and losses on the sale of plant, property and equipment are ignored in the direct method of preparing a Statement of Cash Flows.

Accepted Answer

In the direct method of preparing a Statement of Cash Flows, only cash transactions are considered. Gains and losses on the sale of plant, property, and equipment are non-cash items and are therefore ignored.

Question 9

TLR Productions' Accounts Receivable increased by $44,000 and its Accounts Payable increased by $29,000. What is the net effect on cash from operations under the indirect method?

Accepted Answer

Under the indirect method, an increase in accounts receivable is subtracted from net income as it indicates that sales were made but payment has not been received yet, leading to a decrease in cash. Similarly, an increase in accounts payable is added back to net income as it indicates that expenses were incurred but payment has not been made yet, leading to an increase in cash. Therefore, the net effect on cash from operations is a decrease of $15,000 ($44,000 - $29,000).

Question 10

The Betta Group had net income of $32,000. Accounts Receivable increased by $3,000; accounts payable decreased by $4,000. Depreciation expense for the year was $1,400. Additional transactions include: the purchase of land in exchange for stock $55,000; the sale of treasury stock $3,500; issued bonds $3,000; acquired a building by issuing a note $79,000. Using the indirect method, the net increase (decrease)in cash for the year is:

Accepted Answer

The answer of The Betta Group had net income of...

Question 11

Enterprise Industries' Accounts Receivable decreased by $27,000 and its Accounts Payable decreased by $17,000. What is the net effect on cash from operations under the indirect method?

Accepted Answer

Decrease in Accounts Receivable indicates that the company has collected more cash from its customers. Decrease in Accounts Payable indicates that the company has paid off some of its outstanding debts. Both these changes result in an increase in cash from operations. 
Net effect on cash from operations = decrease in A/R - decrease in A/P
= $27,000 - (-$17,000)
= $44,000
Since the question is asking for the net effect on cash, we take the sum of both these changes. Therefore, the correct answer is D, +$10,000.

Question 12

Under the direct method, gains and losses on the sale of a fixed asset are reported in the investing section of the cash flow statement.

Accepted Answer

Under the direct method, gains and losses on the sale of a fixed asset are not reported in the investing section of the cash flow statement; instead, the proceeds from the sale are reported. Gains and losses affect the operating section as adjustments to reconcile net income to net cash provided by operating activities.

Question 13

In the direct method of preparing a cash flow statement, interest received and interest expense are reported in the financing activities section.

Accepted Answer

Interest received is typically reported in the operating activities section, and interest expense can also be reported in the operating activities section, not in the financing activities section, according to the direct method of preparing a cash flow statement.

Question 14

One formula for determining cash collections from customers is to take Sales plus the increase in Accounts Receivable.

Accepted Answer

The formula for determining cash collections from customers is to take Sales minus the decrease in Accounts Receivable. This is because an increase in Accounts Receivable means that some sales have not yet been collected, and therefore cannot be included in cash collections.

Question 15

If $9,000 was generated from operations (indirect method); $3,000 was used for investing activities; and $8,000 was generated from financing activities, the cash balance:

Accepted Answer

The cash balance increased by $14,000, calculated by adding the cash generated from operations ($9,000) and financing activities ($8,000), and subtracting the cash used for investing activities ($3,000).

Question 16

In the direct method, each line of the Income Statement is converted from the accrual basis to cash basis.

Accepted Answer

The direct method of cash flow statement preparation involves converting each line item of the income statement from accrual basis to cash basis to reflect actual cash transactions.

Question 17

The FASB recommends use of the direct method, rather than the indirect method, of preparing a cash flow statement.

Accepted Answer

The FASB does recommend the use of the direct method for preparing the cash flow statement, as it provides more detailed information about the sources and uses of cash. However, the indirect method is also allowed and commonly used.

Question 18

The Vintage Boutique had net income of $53,000. Accounts Receivable increased by $28,000; inventory decreased by $18,000; accounts payable increased by $4,000 and salaries payable decreased by $1,200. The amount of cash flow from operating activities under the indirect method is:

Accepted Answer

Cash flow from operating activities can be calculated using the indirect method by adjusting net income for changes in operating working capital accounts. Therefore, cash flow from operating activities for The Vintage Boutique can be calculated as follows:
Net Income $53,000
Add: Decrease in inventory $18,000
Add: Increase in accounts payable $4,000
Add: Decrease in salaries payable $1,200
Subtract: Increase in accounts receivable ($28,000)
Cash flow from operating activities $45,800. Therefore, the correct answer is B)$45,800.

Question 19

Because depreciation is not cash-based, it is NOT reported in the direct method of the Statement of Cash Flows.

Accepted Answer

Depreciation is a non-cash expense, meaning it does not involve the actual outflow of cash. Therefore, it is not included in the direct method of the Statement of Cash Flows, which only shows cash inflows and outflows from operating, investing, and financing activities. Depreciation may be included in the indirect method of the Statement of Cash Flows, which reconciles net income to cash flows from operating activities by adjusting for non-cash items such as depreciation.

Question 20

Under the direct method, amortization expense is added to net income.

Accepted Answer

Under the direct method, amortization expense is not added to net income because the direct method involves listing the cash flows from operating activities as actual cash receipts and payments, and amortization expense is a non-cash expense that does not affect cash flow.

Quiz 11: The Statement of Cash Flows