Question 1

Equipment with an original cost of $20,000 and accumulated depreciation of $7,500 was sold at a loss of $2,500. As a result of this transaction, cash would:
A)increase by $10,000.
B)decrease by $7,500.
C)increase by $20,000.
D)decrease by $10,000.

Accepted Answer

The equipment's book value is calculated as the original cost ($20,000) minus accumulated depreciation ($7,500), which equals $12,500. Selling it at a loss of $2,500 means the selling price was $10,000 ($12,500 book value - $2,500 loss), which increases cash by $10,000.

Question 2

All of the following are additions to net income when preparing the statement of cash flows under the indirect method except:
A)losses on sales of long term assets.
B)a decrease in Accounts Payable.
C)a decrease in Prepaid Insurance.
D)a decrease in Accounts Receivable.

Accepted Answer

A, C, and D are all adjustments that would add to net income under the indirect method. Losses on sales of long term assets are added back because they represent noncash expenses. Decreases in prepaid expenses and accounts receivable are added back because they indicate cash inflows that were not recognized in net income. However, a decrease in accounts payable represents a cash outflow, so it should be subtracted from net income when preparing the statement of cash flows.

Question 3

What are the two methods used to prepare the statement of cash flows?
A)Indirect and direct
B)Inflow and outflow
C)Sources and uses
D)Cash and noncash

Accepted Answer

The two methods used to prepare the statement of cash flows are the indirect method and the direct method. The indirect method starts with net income and adjusts for non-cash items and changes in current assets and liabilities to arrive at cash flow from operating activities, while the direct method directly shows cash inflows and outflows from operating activities.

Question 4

The difference between the direct and the indirect method applies only to cash from what type of activity?
A)Operating
B)Investing
C)Financing
D)All of these answers are correct.

Accepted Answer

The direct and indirect method only apply to cash flows from operating activities. The direct method reports cash inflows and outflows directly, while the indirect method starts with net income and adjusts for non-cash items and changes in current assets and liabilities to arrive at cash flows from operating activities. Cash flows from investing and financing activities are not affected by this choice.

Question 5

Under the indirect method, which of the following is not an item that is added back to net income in determining net cash flow from operating activities?
A)Decrease in Accounts Receivable
B)Decrease in inventory
C)Depreciation expense
D)Gain on sale of store fixtures

Accepted Answer

Under the indirect method of calculating net cash flow from operating activities, items that are added back to net income include: decrease in accounts receivable, decrease in inventory, depreciation expense. However, gains on sale of store fixtures are not added back as they do not represent cash generated from operating activities but rather a gain on an investing activity.

Question 6

All of the following are deducted from net income when preparing the statement of cash flows under the indirect method except:
A)an increase in Accounts Payable.
B)a decrease in Accrued Liabilities.
C)an increase in Accounts Receivable.
D)an increase in Inventory.

Accepted Answer

An increase in Accounts Payable is added to net income in the operating activities section of the cash flow statement under the indirect method, as it represents a source of cash.

Question 7

Which of the following statements is incorrect regarding preparing a statement of cash flows using the direct method?
A)The direct method shows adjustments to net income.
B)The direct method shows the specific sources and uses of cash that are associated with operating activities.
C)Noncash expenses, gains, and losses are not used in the determination of net cash flow from operating activities.
D)A majority of companies use the indirect method rather than the direct method.

Accepted Answer

The direct method does not show adjustments to net income; instead, it lists specific cash receipts and payments. Adjustments to net income are a characteristic of the indirect method.

Question 8

Under the direct method, which of the following would not be included in the operating section of the cash flow statement?
A)Cash payments for income taxes
B)Cash payments to purchase insurance
C)Cash payments to purchase long-term equipment
D)Cash receipts from customers

Accepted Answer

The operating section of the cash flow statement only includes cash flows related to the company's primary operations. Cash payments for long-term equipment would be classified as investing activities and not included in the operating section. The other options are all related to the company's primary operations and would be included in the operating section under the direct method.

Question 9

Wade Company reported wages expense of $32,000 during the year. The beginning balance in Wages Payable was $1,200, and at the end of the year, the balance in Wages Payable was $1,700. What was the amount of cash paid for employee wages during the year?
A)$29,100
B)$31,500
C)$34,400
D)$32,500

Accepted Answer

The cash paid for wages is calculated as: Wages Expense ($32,000) + Beginning Wages Payable ($1,200) - Ending Wages Payable ($1,700) = $31,500.

Question 10

Which of the following is not an adjustment when arriving at net cash flow from operating activities under the indirect method?
A)Noncash expenses such as depreciation expense
B)Gains and losses on the sale of long-term assets
C)Changes in a company's long-term assets
D)Changes in noncash current asset and current liability accounts

Accepted Answer

Changes in a company's long-term assets are not an adjustment when arriving at net cash flow from operating activities under the indirect method. Adjustments include adding back noncash expenses such as depreciation expense and subtracting gains or adding losses on the sale of long-term assets. Additionally, changes in noncash current asset and current liability accounts are also adjusted.

Question 11

The gain resulting from the sale of equipment shown when using the indirect method to prepare the statement of cash flows is reported in the:
A)operating section as a deduction.
B)investing section as a deduction.
C)operating section as an addition.
D)investing section as an addition.

Accepted Answer

In the indirect method of preparing the statement of cash flows, gains from the sale of equipment are deducted from net income in the operating section to reconcile net income to net cash provided by operating activities. This is because the gain increases net income but does not affect cash flows from operating activities.

Question 12

When using the indirect method to complete the cash flows from operating activities section, what is the proper treatment for an increase in the Accounts Receivable balance?
A)Add the increase to net income
B)Add the increase to cash collections from customers
C)Deduct the increase from net income
D)Add the increase to cash payments to suppliers

Accepted Answer

An increase in the Accounts Receivable balance indicates that sales have been made but the cash has not yet been received. Therefore, this increase needs to be deducted from net income because it represents revenue that has been earned but has not yet resulted in cash inflow.

Question 13

When using the indirect method to complete the cash flows from operating activities section, what is the proper treatment for an increase in the inventory account?
A)Deduct the increase to cash payments to suppliers
B)Add the increase to net income
C)Add the increase to cash collections from customers
D)Deduct the increase from net income

Accepted Answer

An increase in the inventory account means that the company has purchased more inventory, which is an expense that reduces net income. Therefore, the increase should be deducted from net income in order to determine the cash flows from operating activities.

Question 14

Which of the following would be shown as a deduction from net income when calculating net cash flow from operating activities using the indirect method?
A)Decrease in Accounts Payable for inventory purchases
B)Loss on the sale of equipment
C)Decrease in Accounts Receivable
D)Increase in salaries payable

Accepted Answer

A decrease in accounts payable indicates that cash was used to pay off liabilities, which reduces cash flow from operating activities.

Question 15

When the indirect method is used to prepare the statement of cash flows, what is the starting point of the operating activities section?
A)Net income as reported on the income statement
B)Total assets as reported on the balance sheet
C)Sales as reported on the income statement
D)Cash collections from customers

Accepted Answer

The starting point of the operating activities section in the indirect method is net income as reported on the income statement. This is because the operating section of the statement is focused on reconciling net income to net cash flow from operating activities, and therefore starts with the reported net income figure.

Question 16

Pingry Company's Accounts Receivable balance increased by $14,000 during the year. The company's income statement reports sales revenue of $437,500, all on account. How much cash was collected from customers during the year?
A)$437,500
B)$451,500
C)$423,500
D)None of these answers is correct.

Accepted Answer

The cash collected from customers is calculated by subtracting the increase in accounts receivable from the sales revenue: $437,500 - $14,000 = $423,500.

Question 17

Which of the following statements is incorrect regarding the use of the indirect method when preparing the operating activities of the statement of cash flows?
A)A decrease in Accounts Payable is deducted from net income
B)A decrease in Prepaid Insurance is added to net income
C)Gain on the retirement of bonds is deducted from net income
D)Depreciation expense is subtracted from net income

Accepted Answer

Depreciation expense is added to net income, not subtracted, when using the indirect method for the operating activities section of the statement of cash flows.

Question 18

Depreciation for the year was $80,000 and net income was $323,000. Assume the rest of the company's transactions were cash transactions. How much was net cash from operating activities?
A)$243,000
B)$403,000
C)$323,000
D)None of these answers is correct.

Accepted Answer

To calculate net cash from operating activities, we start with net income and add back non-cash expenses, such as depreciation. Therefore, net cash from operating activities is calculated as: 
Net income + Depreciation = $323,000 + $80,000 = $403,000. Therefore, the answer is B.

Question 19

Which of the following would be reported as a financing activity on the statement of cash flows?
A)Dividends collected from an investment in marketable securities.
B)Note payable issued to purchase equipment.
C)Purchase of investment securities.
D)Cash paid for the purchase of treasury stock.

Accepted Answer

The answer of Which of the following would be reported...

Question 20

Which of the following statement is incorrect regarding the investing activities section of the statement of cash flows?
A)Investing activities deal with long-term liabilities (debt) and equity accounts.
B)Increases in long-term asset balances suggest cash outflows to purchase assets.
C)Decreases in long term asset balances suggest cash inflows from selling assets.
D)Investing activities involve cash purchases and cash disposals of long-term assets.

Accepted Answer

Investing activities do not deal with long-term liabilities (debt) and equity accounts. Instead, they deal with the purchase and sale of long-term assets such as property, plant, and equipment, as well as investments in other companies, and loans made to other entities.

Quiz 14: Statement of Cash Flows

Equipment with an original cost of $20,000 and accumulated depreciation of $7,500 was sold at a loss of $2,500. As a result of this transaction, cash would:

All of the following are additions to net income when preparing the statement of cash flows under the indirect method except:

What are the two methods used to prepare the statement of cash flows?

The difference between the direct and the indirect method applies only to cash from what type of activity?

Under the indirect method, which of the following is not an item that is added back to net income in determining net cash flow from operating activities?

All of the following are deducted from net income when preparing the statement of cash flows under the indirect method except:

Which of the following statements is incorrect regarding preparing a statement of cash flows using the direct method?

Under the direct method, which of the following would not be included in the operating section of the cash flow statement?

Wade Company reported wages expense of $32,000 during the year. The beginning balance in Wages Payable was $1,200, and at the end of the year, the balance in Wages Payable was $1,700. What was the amount of cash paid for employee wages during the year?

Which of the following is not an adjustment when arriving at net cash flow from operating activities under the indirect method?

The gain resulting from the sale of equipment shown when using the indirect method to prepare the statement of cash flows is reported in the:

When using the indirect method to complete the cash flows from operating activities section, what is the proper treatment for an increase in the Accounts Receivable balance?

When using the indirect method to complete the cash flows from operating activities section, what is the proper treatment for an increase in the inventory account?

Which of the following would be shown as a deduction from net income when calculating net cash flow from operating activities using the indirect method?

When the indirect method is used to prepare the statement of cash flows, what is the starting point of the operating activities section?

Pingry Company's Accounts Receivable balance increased by $14,000 during the year. The company's income statement reports sales revenue of $437,500, all on account. How much cash was collected from customers during the year?

Which of the following statements is incorrect regarding the use of the indirect method when preparing the operating activities of the statement of cash flows?

Depreciation for the year was $80,000 and net income was $323,000. Assume the rest of the company's transactions were cash transactions. How much was net cash from operating activities?

Which of the following would be reported as a financing activity on the statement of cash flows?

Which of the following statement is incorrect regarding the investing activities section of the statement of cash flows?