Question 1

Interest payments to creditors are reported in a statement of cash flows as:

Accepted Answer

Interest payments to creditors are considered part of the day-to-day operations of a business and are therefore reported in the statement of cash flows as an operating activity.

Question 2

Which of the following is not true regarding the statement of cash flows?

Accepted Answer

The indirect method derives cash flows indirectly by starting with net income and "working backwards" to convert that amount to a cash basis, not starting with sales revenue.

Question 3

In its 2016 income statement,WME reported $11,000 of interest expense on its outstanding bonds.During the year,WME paid its regular installments of $9,000 of interest in cash.In its reconciliation schedule,WME should:

Accepted Answer

The $2,000 difference between the interest expense reported and the cash paid indicates a decrease in bond discount, which should be added back to net income under the indirect method.

Question 4

In its 2016 income statement,WME reported $58,000 for insurance expense.WME paid $72,000 in insurance premiums during 2016.In its reconciliation schedule,WME should:

Accepted Answer

The question states that WME paid $72,000 in insurance premiums during 2016 and reported an insurance expense of $58,000. This suggests that WME pre-paid for insurance coverage. Therefore, the reconciliation schedule should include a negative adjustment to net income under the indirect method for the increase in prepaid insurance, which would be $14,000 ($72,000 premiums paid - $58,000 reported expense = $14,000 increase in prepaid insurance).

Question 5

Sneed Corporation reported balances in the following accounts for the current year:

Income tax expense was $230 for the year.What was the amount paid for taxes?

Accepted Answer

The answer of Sneed Corporation reported balances in the following...

Question 6

When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities,depreciation is added to net income because:

Accepted Answer

Depreciation is a non-cash expense that was deducted on the income statement, but it does not require a cash outflow. Therefore, it is added back to net income when preparing the statement of cash flows using the indirect method.

Question 7

Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?

Accepted Answer

Cash dividends paid are reported separately and deducted from financing activities in the statement of cash flows. The other options listed are adjustments to net income that are reported in the operating activities section of the statement of cash flows.

Question 8

A 10% stock dividend is reported in connection with a statement of cash flows as:

Accepted Answer

A stock dividend does not represent a significant operating, investing, or financing activity.

Question 9

A loss on the sale of machinery should be reported in the statement of cash flows as:

Accepted Answer

The loss on the sale of machinery is added back to net income when preparing the statement of cash flows using the indirect method because it is a non-cash expense that reduced net income but did not involve an outflow of cash.

Question 10

In its 2016 income statement,WME reported a $40,000 loss on the sale of equipment.In its reconciliation schedule,WME should:

Accepted Answer

Under the indirect method, a loss on the sale of equipment is added back to net income because it is a non-cash expense that reduced net income.

Question 11

Which of the following does not represent a cash flow relating to operating activities?

Accepted Answer

Cash dividends paid to stockholders are not a cash flow related to operating activities. Operating activities include cash received from customers, interest paid to bondholders, and cash paid for salaries. Cash dividends paid to stockholders are classified as a cash flow related to financing activities.

Question 12

How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?

Accepted Answer

Amortization of patents is a non-cash expense. Therefore, it is added back to net income in the operating activities section of the cash flow statement when using the indirect method.

Question 13

On June 4,White Corporation issued $400 million of bonds for $386 million.During the same year,$1 million of the bond discount was amortized.In a statement of cash flows prepared by the indirect method,White Corporation should report:

Accepted Answer

The issuance of bonds for less than face value results in a bond discount. As the discount is amortized over the life of the bond, it is added back to net income to arrive at operating cash flow. Therefore, the $1 million bond discount amortization should be deducted from net income in the indirect cash flow statement, resulting in an addition to net income of $1 million. A financing activity of $400 million would be reported in the investing section, and $386 million should be reported as cash inflow from financing activities.

Question 14

In its 2016 income statement,WME reported $440,000 for the cost of goods sold.WME paid inventory suppliers $380,000 in 2016,and its inventory balance decreased by $41,000 during the year.In its reconciliation schedule,WME should:

Accepted Answer

The decrease in inventory ($41,000) and the difference between the cost of goods sold ($440,000) and payments to suppliers ($380,000) indicate an increase in accounts payable of $19,000, which is a positive adjustment to net income under the indirect method.

Question 15

In its 2016 income statement,WME reported $695,000 for service revenue earned from membership fees.WME received $681,000 cash in advance from members during 2016.In its reconciliation schedule,WME should:

Accepted Answer

The answer of In its 2016 income statement,WME reported $695,000...

Question 16

The amortization of bond discount is included in the statement of cash flows (indirect method)as:

Accepted Answer

The amortization of bond discount is added back to net income in the operating activities section of the statement of cash flows when using the indirect method, because it is a non-cash expense that reduced net income.

Question 17

S Company reported net income for 2016 in the amount of $400,000.The company's financial statements also included the following: 
What is net cash provided by operating activities under the indirect method?

Accepted Answer

The answer of S Company reported net income for 2016...

Question 18

Which of the following is reported as a deduction from net income when using the indirect method to determine net cash flows from operating activities?

Accepted Answer

Amortization of premium on bonds payable is added back to net income when using the indirect method for calculating net cash flows from operating activities because it is a non-cash expense that had reduced net income. Unlike depreciation and amortization of a patent, which are also non-cash expenses but are added back to net income because they reduce it without affecting cash, amortization of premium on bonds payable is specifically related to the financing activities and adjusts for the fact that it does not impact cash flow from operations. Dividends declared are not a business expense and relate to financing activities, not operating activities.

Question 19

An analyst compiled the following information for U Inc.for the year ended December 31,2016:
$\bullet$Net income was $1,700,000.
$\bullet$Depreciation expense was $400,000.
$\bullet$Interest paid was $200,000.
$\bullet$Income taxes paid were $100,000.
$\bullet$Common stock was sold for $200,000.
$\bullet$Preferred stock (8% annual dividend)was sold at par value of $250,000.
$\bullet$Common stock dividends of $50,000 were paid.
$\bullet$Preferred stock dividends of $20,000 were paid.
$\bullet$Equipment with a book value of $100,000 was sold for $200,000.
Using the indirect method,what was U Inc.'s net cash flow from operating activities for the year ended December 31,2016?

Accepted Answer

The answer of An analyst compiled the following information for...

Question 20

In determining cash flows from operating activities (indirect method),adjustments to net income should not include:

Accepted Answer

In the indirect method of calculating cash flows from operating activities, non-cash expenses like depreciation and amortization (choices A, B, and D) are added back to net income because they reduce net income but do not involve an outflow of cash. However, gains on the sale of equipment (choice C) are deducted from net income because they represent a cash inflow that is not part of operating activities but rather an investing activity.

Quiz 21: The Statement of Cash Flows