Question 1

In comparing the direct method with the indirect method of preparing the statement of cash flows:

Accepted Answer

The answer of In comparing the direct method with the...

Question 2

Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2009. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:

Accepted Answer

Operating cash flows can be calculated using the indirect method. 
Starting with net income: 
Net Income: $216,000 
Add back non-cash expenses: 
Depreciation expense = $10,000 
Subtract changes in working capital: 
Change in accounts payable = ($36,000 - $33,000) = $3,000 decrease 
Change in inventory = ($46,000 - $44,000) = $2,000 increase 
Cash flow from operating activities = $216,000 + $10,000 - $3,000 - $2,000 = $221,000 
Therefore, the correct answer is choice C.

Question 3

The FASB's stated preference for reporting operating cash flows is the:

Accepted Answer

The FASB has expressed a preference for the direct method of reporting operating cash flows because it provides more transparent information of the entity's ability to generate cash and how it is being used.

Question 4

Shady Lane's income tax payable account decreased from $14 million to $12 million during 2009. If its income tax expense was $80 million, what would be shown as an operating cash flow under the direct method?

Accepted Answer

The decrease in income tax payable of $2 million ($14 million - $12 million) indicates a cash outflow of $2 million. However, since the income tax expense was $80 million, the operating cash flow under the direct method would be calculated as $80 million (income tax expense) + $2 million (decrease in income tax payable) = $82 million cash outflow. Therefore, option D is the correct answer.

Question 5

The statement of cash flows reports cash flows from the activities of:

Accepted Answer

The statement of cash flows reports cash flows from financing activities (such as issuing and repaying debt or issuing and buying back stock), investing activities (such as buying or selling property, plant, and equipment or investments in other companies), and operating activities (such as collecting payment from customers or paying suppliers).

Question 6

In the operating activities section of the statement of cash flows, we start with net income:

Accepted Answer

In the indirect method of preparing the statement of cash flows, we start with net income and make adjustments to reconcile net income to cash from operating activities. In the direct method, we list all cash inflows and outflows of the operating activities directly, without starting with net income. Therefore, the correct statement is that we start with net income in the indirect method only.

Question 7

Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?

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The answer of Which of the following is added to...

Question 8

Cash flows from financing activities include:

Accepted Answer

Cash flows from financing activities include activities that involve borrowing or repaying loans, issuing or buying back shares, and paying dividends to shareholders. Dividends paid is an outflow of cash and falls under the category of cash flows from financing activities. Interest received, interest paid, and dividends received fall under cash flows from operating activities or investing activities depending on the nature of the activity of the company.

Question 9

Operating cash flows would exclude:

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The answer of Operating cash flows would exclude:
...

Question 10

Tropical Tours reported revenue of $400,000 for its year ended December 31, 2009. Accounts receivable at December 31, 2008 and 2009, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:

Accepted Answer

The cash collected from customers is calculated by adjusting the revenue for the change in accounts receivable. Since accounts receivable decreased by $3,000 ($35,000 - $32,000), it means that more cash was collected than the revenue reported. Therefore, cash collected = $400,000 + $3,000 = $403,000.

Question 11

Operating cash outflows would include:

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The answer of Operating cash outflows would include:
...

Question 12

Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2009. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:

Accepted Answer

Net income + Increase in accounts payable - Decrease in accounts receivable = Cash flows from operating activities$135,000 + $2,000 - $5,000 = $132,000

Question 13

Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2008 and 2009, respectively. During 2009, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2009 were:

Accepted Answer

The cash outflows for salaries in 2009 can be calculated as salaries expense (from the income statement) minus the increase in salaries payable (from the balance sheet): $620,000 - $30,000 = $590,000. Therefore, the best choice is A.

Question 14

Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2009. Accounts receivable at December 31, 2008 and 2009, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:

Accepted Answer

The direct method for reporting cash flows from operating activities requires adjusting the net income for non-cash items and changes in working capital accounts, including accounts receivable. To calculate cash collected from customers, we need to add the increase in accounts receivable to the revenue reported. Therefore, the cash collected from customers for the year ended December 31, 2009, would be $4,965,000 ($5,000,000 - $320,000 + $355,000).

Question 15

Cash flows from investing do not include cash flows from:

Accepted Answer

Cash flows from investing activities only include transactions related to the purchase or sale of long-term assets such as property, plant, and equipment, as well as investments in other companies. Lending money to another corporation (A) would be classified as a cash flow from financing activities, while the purchase of other corporation's securities (D) could be classified as either a cash flow from investing or financing activities depending on the intent of the investment. The sale of equipment (B) would be classified as a cash flow from investing activities. Borrowing (C) would be classified as a cash flow from financing activities.

Question 16

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

Accepted Answer

Interest expenses and dividend payments are typically classified as financing activities in the statement of cash flows. Therefore, the $2,000 interest on short-term notes payable and the $10,000 interest on long-term bonds would be reported as financing outflows, totaling $12,000. And the $6,000 payment in dividends on common stock would also be reported as a financing outflow. Therefore, the total cash outflows reported in the financing section of the statement of cash flows would be $18,000. There would be no cash outflows reported in the operating section since these expenses are non-cash and non-operating.

Question 17

Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2009. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:

Accepted Answer

The cash flow from operating activities is calculated by adjusting net income for changes in working capital. The decrease in accounts receivable ($23,000 - $22,000 = $1,000) is added to net income, and the increase in accounts payable ($28,000 - $26,000 = $2,000) is also added. Thus, cash flow from operating activities is $45,000 + $1,000 + $2,000 = $48,000.

Question 18

Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:

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The answer of Rowdy's would report net cash inflows (outflows)...

Question 19

Cash flows from investing activities do not include:

Accepted Answer

Cash flows from investing activities are associated with the purchase and sale of long-term assets, such as equipment, property, and securities. Proceeds from issuing bonds are considered financing activities, not investing activities.

Question 20

Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:

Accepted Answer

According to the information given in the question, Shively Mfg. Co. sold equipment. As this sale of equipment is related to the company's investment activities, it would be reported as an investing cash inflow. Therefore, the correct option is (D) Investing cash inflows of $18,000.

Quiz 4: The Income Statement and Statement of Cash Flows