Question 1

Which of the following is a correct statement of one of the rules for converting net income to the cash flow from operating activities using the indirect method?

Accepted Answer

Increases in noncash current liabilities are added to and decreases in noncash current liabilities are subtracted from net income to determine net cash flow from operating activities.Decreases in noncash current assets are added to and increases in noncash current assets are subtracted from net income to determine net cash flow from operating activities.Noncash expenses and losses are added to and gains are subtracted from net income to determine net cash flow from operating activities.

Question 2

Which method of reporting cash flows from operating activities is used by most businesses in preparing the statement of cash flows?

Accepted Answer

Because the indirect method is easier,most companies use this method.

Question 3

When using the indirect method to prepare the operating activities section of the statement of cash flows,how is an increase in noncash current assets handled?

Accepted Answer

Decreases in noncash current assets are added to and increases in noncash current assets are subtracted from net income to determine net cash flow from operating activities.

Question 4

When using the indirect method to complete the cash flows from operating activities section of the statement of cash flows,what is the proper disposition of depreciation expense?

Accepted Answer

Because depreciation expense reduces net income,but is a noncash expense,it is added back to net income to arrive at net cash flows from operating activities.

Question 5

On January 1,Year 2,the balance of Jacobs Corporation's Accounts Receivable was $40,000.Sales on account for Year 2 amounted to $320,000 and the ending balance of Accounts Receivable was $64,000.What is the amount of cash collected from customers?

Accepted Answer

Ending balance of accounts receivable of $64,000 = Beginning balance of accounts receivable of $40,000 + Increase due to credit sales of $320,000 - Decrease due to cash collected from customers (the unknown)
Cash collected from customers = $40,000 + $320,000 - $64,000 = $296,000

Question 6

Phillips Co.reported total credit sales of $460,000 for Year 2.Its accounts receivable totaled $70,000 and $100,000 at the beginning and end of the year,respectively.What was the cash collected from customers during Year 2?

Accepted Answer

Ending balance of accounts receivable of $100,000 = Beginning balance of accounts receivable of $70,000 + Increase due to credit sales of $460,000 - Decrease due to cash collected from customers (the unknown)
Cash collected from customers = $70,000 + $460,000 - $100,000 = $430,000

Question 7

When using the indirect method to complete the cash flows from operating activities section of the statement of cash flows,what is the proper disposition of a loss on disposal of equipment?

Accepted Answer

Because losses decrease net income,but do not use cash for operating activities,losses are added back to net income to arrive at net cash flows from operating activities.

Question 8

Which of the following transactions is a use of cash?

Accepted Answer

Cash flows reported as financing activities include cash payments (outflows)to purchase treasury stock.The short-term borrowing of cash is a source of cash.The acquisition of land by issuing a short-term note and the issuance of a stock dividend are noncash investing and financing activities.

Question 9

Hilliard Company,a small consulting firm,charges all of its operating expenses on Accounts Payable.On January 1,Year 2,Hilliard's Accounts Payable balance was $24,000 and,during Year 2,an additional $216,000 of operating expenses were charged on account.On December 31,Year 2,the Accounts Payable balance was $72,000.What is the amount of cash paid for expenses during Year 2?

Accepted Answer

Ending balance of accounts payable of $72,000 = Beginning balance of accounts payable of $24,000 + Increase due to expenses charge on account of $216,000 - Decrease due to cash paid for expenses (the unknown)
Cash paid for expenses = $24,000 + $216,000 - $72,000 = $168,000

Question 10

Which of the following statements best explains the correct handling of depreciation on the statement of cash flows when using the indirect method?

Accepted Answer

Because depreciation expense reduces net income,but is a noncash expense,it is added to net income to arrive at cash flows from operating activities.

Question 11

During Year 1,Mallard Company earned $165,000 of sales revenue on account and accrued $122,500 of operating expenses.The company also earned $26,400 of service revenue that had previously been recorded as unearned revenue.In addition,a $2,200 stock dividend was issued to the stockholders.What can be said about cash flows considering these transactions?

Accepted Answer

Because none of the events described affect cash,none of them affect cash flows.

Question 12

Erie Company reports the following comparative balance sheets and income statement information for the current year.
Comparative Balance Sheets
12/31/2015 12/31/2016
  
-What was the cash received from customers during the year?

Accepted Answer

Ending balance of accounts receivable of $16,000 = Beginning balance of accounts receivable of $32,000 + Increase due to credit sales of $280,000 -Decrease due to cash collected from customers (the unknown)
Cash collected from customers = $32,000 + $280,000 - $16,000 = $296,000

Question 13

Erie Company reports the following comparative balance sheets and income statement information for the current year.
Comparative Balance Sheets
12/31/2015 12/31/2016
  
-Assuming accounts payable is used for inventory purchases only,what was the amount of cash paid for inventory purchases during the year?

Accepted Answer

Ending balance of inventory of $24,000 = Beginning balance of inventory of $8,000 + Increase due to inventory purchased on account (the unknown)- Decrease due to cost of goods sold of $160,000
Inventory purchased on account = $24,000 - $8,000 + $160,000 = $176,000
Ending balance of accounts payable of $32,000 = Beginning balance of accounts payable of $48,000 + Increase due to inventory purchased on account of $176,000 - Decrease due to cash paid for inventory (the unknown)
Cash paid for inventory = $48,000 + $176,000 - $32,000 = $192,000

Question 14

On January 1,Year 1,Colgate Corporation decided to switch from the direct method to the indirect method of preparing the statement of cash flows.Assuming a positive net income figure but a decrease in the cash balance,what can be said about the change in method of preparing the statement?

Accepted Answer

The amount of net cash flow from operating activities is the same whether it is presented using the indirect or the direct method.

Question 15

The financial statements of Gregg Co.reported wages expense of $160,000 during Year 2,wages payable of $16,000 at the end of Year 1,and wages payable of $22,000 at the end of Year 2.What amount of cash was paid for wages during Year 2?

Accepted Answer

Year 2:
Ending balance of wages payable of $22,000 = Beginning balance of wages payable of $16,000 + Increase due to wages expense of $160,000 - Decrease due to payment of wages payable (the unknown)
Outflow for payment of wages = $16,000 + $160,000 - $22,000 = $154,000

Question 16

Which of the following is an incorrect statement of one of the rules for converting net income to the cash flow from operating activities using the indirect method?

Accepted Answer

Because they are included in net income,gains are subtracted from net income to determine net cash flow from operating activities.

Question 17

When using the indirect method to prepare the operating activities section of the statement of cash flows,how is a decrease in current liabilities handled?

Accepted Answer

Increases in noncash current liabilities are added to and decreases in noncash current liabilities are subtracted from net income to determine net cash flow from operating activities.

Question 18

Which section of the statement of cash flows is prepared using either the direct or indirect method?

Accepted Answer

Under generally accepted accounting principles,the operating activities section of the statement of cash flows can be presented using either the direct or the indirect method.

Question 19

Ervin Company began the accounting period with $64,000 in accounts receivable.The ending balance in accounts receivable was $40,000.If the credit sales during the period were $588,000,what is the amount of cash received from customers?

Accepted Answer

Ending balance of accounts receivable of $40,000 = Beginning balance of accounts receivable of $64,000 + Increase due to credit sales of $588,000 - Decrease due to cash collected from customers (the unknown)
Cash collected from customers = $64,000 + $588,000 - $40,000 = $612,000

Question 20

The following beginning and ending balances were drawn from the records of Allen Co.

If Allen Co.sold equipment that had an original cost of $175,000 and accumulated depreciation of $75,000 for $62,500,how much did Allen pay for new equipment?

Accepted Answer

Ending balance of equipment of $275,000 = Beginning balance of equipment of $350,000 + Increase due to purchase of equipment (the unknown)- Decrease due to cost of equipment sold of $175,000
Outflow for purchase of equipment = $275,000 - $350,000 + $175,000 = $100,000

Quiz 12: Statement of Cash Flows