Question 1

If inventory decreases and deferred revenue increase during an accounting period while the indirect method is used,what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

Accepted Answer

When using the indirect method to calculate net cash flows from operating activities, a decrease in inventory is added back to net income because it means less cash was used than reported in net income. An increase in deferred (or unearned) revenue is also added to net income because it represents cash received that has not yet been earned and thus not included in net income.

Question 2

Which of the following is not needed to prepare a statement of cash flows?

Accepted Answer

A statement of retained earnings is not needed to prepare a statement of cash flows. The statement of cash flows shows the inflows and outflows of cash and cash equivalents during a specific period, while the statement of retained earnings shows the changes in retained earnings due to net income, dividends, and other adjustments. The comparative balance sheet, income statement, and additional information on financing and investing activities are required to prepare a statement of cash flows.

Question 3

Brighton,Inc.,uses the indirect method to determine its net cash flow from operating activities.During the course of the year,Brighton,Inc.'s accounts receivable increased by $10,000 and its accounts payable decreased by $5,000.As a result of these two items,the calculation of cash flow from operations will be:

Accepted Answer

Increase in A/R,decreases cash flow: $10,000
Decrease in A/P,decreases cash flow: $5,000
Total decrease $15,000.

Question 4

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } 
\hline \begin{array} { r } 
\text { Cash flow } \
\text { from } \
\text { operating } \
\text { activities }
\end{array} & \begin{array} { r } 
\text { Net } + \
\text { Income }
\end{array} & \text { Depreciation- } & \begin{array} { r } 
\text { Change } + \
\text { in } \
\text { Act/Rec }
\end{array} & \begin{array} { c } 
\text { Change in - } \
\text { inventory }
\end{array} & \begin{array} { r } 
\text { Change in } \
\text { Act/Payables }
\end{array} \
\hline \$ 22,500 & \$ 20,000 & \$ 10,000 & \$ 6,500 & \$ 7,000 & \$ 8,000 \
\hline
\end{array}$$
-Which of the following adjusting journal entries would change the Net Cash Flows from Operating Activities line of the statement of cash flows?

Accepted Answer

Depreciation is already accounted for in the calculation, and recording bad debts expense does not directly affect cash flow from operating activities in the indirect method, as it's a non-cash expense similar to depreciation.

Question 5

When the indirect method is used,details from which of the following balance sheet accounts are used in calculating both operating and financing cash flows?

Accepted Answer

Details from the Retained Earnings account are used in calculating both operating and financing cash flows when the indirect method is used.

Question 6

When the indirect method is used,if accounts receivable increases during the accounting period,the change in accounts receivable is:

Accepted Answer

When using the indirect method, an increase in accounts receivable represents a decrease in cash flow from operations. Therefore, the change in accounts receivable is subtracted from net income to arrive at cash flows from operating activities.

Question 7

Which of the following would be included in calculating net cash flows from investing activities?

Accepted Answer

The cash used for purchases of equipment would be included in calculating net cash flows from investing activities, as this represents an activity that is related to investments in fixed assets. Choices A and C are related to cash flows from operating activities, while choice B is related to cash flows from financing activities.

Question 8

The supplies account decreases and accounts payable increases during an accounting period.When the indirect method is used,what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

Accepted Answer

The answer of The supplies account decreases and accounts payable...

Question 9

Which of the following is $\bold{not}$ provided by the statement of cash flows?

Accepted Answer

The statement of cash flows shows the company's cash inflows and outflows from operating, investing, and financing activities. It provides information on how the company manages current assets and liabilities, expenditures on long-term assets, and reliance on external financing. However, it does not provide current profitability as measured by specific revenues and expenses. That information is typically found in the income statement.

Question 10

Which of the following would be included in calculating net cash flows from operating activities?

Accepted Answer

Net cash flows from operating activities relate to the cash generated or used in the normal operating activities of the business. Cash proceeds from sales is a cash inflow that comes from the primary source of revenue and is included in calculating net cash flows from operating activities. B, C, and D are cash flows for financing and investing activities and are, therefore, not included in the net cash flows from operating activities.

Question 11

Cash flows from investing activities include cash:

Accepted Answer

Cash flows from investing activities include cash inflows from the sale of long-term investments.

Question 12

Cash flows from financing activities:

Accepted Answer

Cash flows from financing activities include all cash transactions between a company and its shareholders, such as issuing and buying back shares, paying dividends, and borrowing and repaying debt.

Question 13

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } 
\hline \begin{array} { r } 
\text { Cash flow } \
\text { from } \
\text { operating } \
\text { activities }
\end{array} & \begin{array} { r } 
\text { Net } + \
\text { Income }
\end{array} & \text { Depreciation- } & \begin{array} { r } 
\text { Change } + \
\text { in } \
\text { Act/Rec }
\end{array} & \begin{array} { c } 
\text { Change in - } \
\text { inventory }
\end{array} & \begin{array} { r } 
\text { Change in } \
\text { Act/Payables }
\end{array} \
\hline \$ 22,500 & \$ 20,000 & \$ 10,000 & \$ 6,500 & \$ 7,000 & \$ 8,000 \
\hline
\end{array}$$
-Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it:

Accepted Answer

Depreciation reduces income but not cash, therefore it needs to be added back to net income when converting it to net cash flow in the statement of cash flows prepared using the indirect method.

Question 14

When the indirect method is used,if prepaid expenses decreases during the accounting period,the change in prepaid expenses is:

Accepted Answer

When using the indirect method for cash flow statement preparation, a decrease in prepaid expenses indicates that more cash was used than was initially recorded as an expense. Therefore, to adjust net income to the cash basis, the decrease in prepaid expenses is added to net income. This adjustment is necessary because the cash flow statement aims to reflect actual cash movements, and the decrease in prepaid expenses represents an outflow of cash not captured in the net income calculation.

Question 15

Cash and cash equivalents include:

Accepted Answer

Cash and cash equivalents refer to highly liquid assets that are easily converted into cash within three months or less. Examples include Treasury bills, commercial paper, and money market funds. Assets with stable long-term value (choice A) and assets that consistently grow in value over the long run (choice C) do not fall under the category of cash and cash equivalents. Choice D is incorrect because not all answers are acceptable.

Question 16

What is the first step in identifying cash flows from operations when the indirect method is used?

Accepted Answer

The first step in identifying cash flows from operations when the indirect method is used is to identify the balance sheet accounts that relate to operating activities. This involves identifying changes in accounts such as accounts receivable, accounts payable, and inventory that are related to the company's operating activities. Once these accounts have been identified, adjustments can be made to net income to arrive at the cash flows from operations. Therefore, option D is the best answer.

Question 17

Which of the following would be included in calculating net cash flows from financing activities?

Accepted Answer

Net cash flows from financing activities include cash received from issuances of debt and equity, as well as cash paid for dividends and other financing costs. Cash proceeds from sales (choice A) would be included in operating activities, dividends received from investments (choice C) would be included in investing activities, and cash used for purchases of equipment (choice D) would be included in investing or operating activities depending on the purpose of the equipment.

Question 18

If the calculation of net cash flows from operating activities starts with net income,the company:

Accepted Answer

If the calculation of net cash flows from operating activities starts with net income, the company is using the indirect method. The first step in this method is to remove all noncash items (such as depreciation and amortization) included in the calculation of net income in order to arrive at net cash flows from operating activities.

Question 19

Cinno Company reported net income of $20,000 for the year ended December 31,2018.During the year,inventories decreased by $7,000,accounts payable decreased by $8,000,depreciation expense was $10,000,and accounts receivable increased by $6,500.Net cash provided by operations in 2018,computed using the indirect method,was:

Accepted Answer

The net cash provided by operations can be calculated using the indirect method as follows:
Net income: $20,000
Add back non-cash expenses:
Depreciation expense: $10,000
Subtract increase in current assets:
Accounts receivable: -$6,500
Subtract decrease in current liabilities:
Inventories: $7,000
Accounts payable: $8,000
Net cash provided by operations: $20,000 + $10,000 - $6,500 - $7,000 - $8,000 = $8,500
Therefore, the correct answer is B, $22,500.

Question 20

A change in a company's cash account is equal to the:

Accepted Answer

A change in a company's cash account equals the changes in liabilities and shareholders' equity minus the change in noncash assets. This is because the accounting equation (Assets = Liabilities + Shareholders' Equity) must always balance, and an increase in cash (an asset) must be balanced by a corresponding increase in liabilities and/or equity, or a decrease in other assets.

Quiz 12: Statement of Cash Flows