Question 1

If a company uses the direct method of calculating net cash flows from operating activities,it must adjust net income for gains or losses when selling property,plant,and equipment.
BT: Comprehension

Accepted Answer

The direct method calculates cash flows from operating activities by directly listing cash receipts and payments, without adjusting net income for gains or losses from sales of property, plant, and equipment.

Question 2

Indirect method is more detailed as it shows the operating cash receipts and cash payments and is thus more time-consuming and costly.
BT: Knowledge

Accepted Answer

The indirect method does not show operating cash receipts and payments separately; it adjusts net income for changes in balance sheet accounts to calculate cash flow from operating activities.

Question 3

Condensed financial data of Monopoly Corporation appear below:
Additional information: A cash dividend was declared and paid in full during the year.
Instructions: Solve for the missing numbers and summarize your answers in the table below.Be sure to indicate in parenthesis ()if the missing number is negative (that is,a cash outflow).

Accepted Answer

The answer of Condensed financial data of Monopoly Corporation appear...

Question 4

When a company issues shares,it reports a cash inflow from financing activities; when it repurchases shares,it reports a cash outflow for financing activities.
BT: Comprehension

Accepted Answer

This statement is true as issuing shares results in a cash inflow for the company, whereas repurchasing shares results in a cash outflow. Both of these activities are classified as financing activities on the statement of cash flows.

Question 5

The capital acquisitions ratio is often calculated as an average over a number of years for better comparison between companies in the same industry.
BT: Knowledge

Accepted Answer

The statement is true. Calculating the capital acquisitions ratio as an average over several years helps to mitigate the effects of annual fluctuations and provides a better basis for comparison between companies in the same industry.

Question 6

A company had a net increase in cash while it reported a net loss in income.
BT: Comprehension

Accepted Answer

It is possible for a company to have a net increase in cash even if it reports a net loss in income. This could occur if the company sold assets, received loans, or other sources of cash inflow that were greater than the amount of the net loss.

Question 7

Net income assumes that all revenues are eventually realized as cash inflows and all expenses as cash outflows.The quality of income ratio is a measure of the extent to which this assumption should be considered valid.
BT: Analysis

Accepted Answer

The quality of income ratio measures the proportion of net income that is supported by cash flows from operations, indicating the degree to which net income is based on actual cash transactions rather than non-cash accounting entries. Therefore, it is a measure of the quality, or validity, of net income.

Question 8

The calculation of the capital acquisitions ratio uses the cash expenditures for property,plant,and equipment that are reported in the financing activities section of the Statement of Cash Flows.
BT: Knowledge

Accepted Answer

The capital acquisitions ratio uses the cash expenditures for property, plant, and equipment reported in the investing activities section of the Statement of Cash Flows, not the financing activities section.

Question 9

$\begin{array}{lrlr}
\text { Sales revenue } & \$ 909,272 & \text { Amortization expense } & \$ 3,206 \
\text { Cost of goods sold } & 445,563 & \text { Selling. general and administrative } & 91,316\&&\text { expenses }\\text { Interest expense } & 12,402 & \text { Income tax expense } & 143,126 \
\text { Accounts receivable 12/31/06 } & 65,305 & \text { Accounts receivable } 12 / 31 / 07 & 67,810 \
\text { Accounts payable 12/31/06 } & 16,540 & \text { Accounts payable } 12 / 31 / 07 & 17,261\\text { Prepaid expenses 12/31/06 } & 4,107 & \text { Prepaid expenses 12/31/07 } & 3,875 \
\text { Inventory } 12 / 31 / 06 & 7,852 & \text { Inventory } 12 / 31 / 07 & 6,491
\end{array}$
-Use the information provided above to calculate the company's:
a.net income for 2007.
b.net cash flow from operating activities in 2007 using the indirect method.

Accepted Answer

The answer of \(\begin{array}{lrlr}
\text { Sales revenue } & \$...

Question 10

When using the spreadsheet approach for preparing a Statement of Cash Flows using the indirect method,one half of the spreadsheet reflects changes in balance sheet accounts and the other half is used to demonstrate their effect on cash flows.
BT: Knowledge

Accepted Answer

This statement is accurate and describes the basic format of a spreadsheet used for preparing a Statement of Cash Flows using the indirect method. One half of the spreadsheet will show changes in balance sheet accounts such as accounts receivable, accounts payable, and inventory, among others. The other half of the spreadsheet will demonstrate the effect of these changes on cash flows.

Question 11

Cash received from the sale of land would be classified in the statement of cash flows as investing activity.
BT: Comprehension

Accepted Answer

Cash received from the sale of land represents proceeds from investing activity, as the sale of land is a long-term asset and falls under the category of investing activities in the statement of cash flows.

Question 12

For each letter in the T-accounts below,calculate the missing amount and explain (in words)what each item represents.
 $\begin{array}{cc}\text {Accounts Receivable }\\hline
\begin{array}{ll|l}
\text { Jan. } 1&313\&2,573&A\\hline\text { Dee. } 31&295\\hline
\end{array}
\end{array}\quad\quad$$\begin{array}{cc}\text { Prepaid Insurance }\\hline
\begin{array}{ll|l}
\text { Jan } 1&25\&B&42\\hline\text { Dec. } 31&26\\hline
\end{array}
\end{array}\quad\quad$$\begin{array}{cc}\text { Unearned Revenue }\\hline
\begin{array}{ll|l}
&&240&\text { Jan }\315&&C\\hline
&&253&\text { Dec. }\\hline
\end{array}
\end{array}$

Accepted Answer

The answer of For each letter in the T-accounts below,calculate...

Question 13

$\begin{array}{lrlr}
\text { Sales revenue } & \$ 909,272 & \text { Amortization expense } & \$ 3,206 \
\text { Cost of goods sold } & 445,563 & \text { Selling. general and administrative } & 91,316\&&\text { expenses }\\text { Interest expense } & 12,402 & \text { Income tax expense } & 143,126 \
\text { Accounts receivable 12/31/06 } & 65,305 & \text { Accounts receivable } 12 / 31 / 07 & 67,810 \
\text { Accounts payable 12/31/06 } & 16,540 & \text { Accounts payable } 12 / 31 / 07 & 17,261\\text { Prepaid expenses 12/31/06 } & 4,107 & \text { Prepaid expenses 12/31/07 } & 3,875 \
\text { Inventory } 12 / 31 / 06 & 7,852 & \text { Inventory } 12 / 31 / 07 & 6,491
\end{array}$
-Use the information provided above to calculate the net cash flow from operating activities in 2007 using the direct method.

Accepted Answer

The answer of \(\begin{array}{lrlr}
\text { Sales revenue } & \$...

Question 14

Fraudulent financial reporting is more likely to result in overstatements of net cash flow from operating activities than as overstatement of net income.
BT: Analysis

Accepted Answer

Fraudulent financial reporting typically aims to overstate net income to present a more favorable financial position, whereas net cash flow from operating activities is harder to manipulate due to its reliance on actual cash transactions.

Question 15

When calculating net cash flow from financing activities,a company must convert interest expense to cash payments for interest.
BT: Comprehension

Accepted Answer

This statement is false. The conversion of interest expense to cash payments only applies to the calculation of net cash flow from operating activities, not financing activities. Net cash flow from financing activities would include cash inflows and outflows related to obtaining or repaying capital, such as issuing or repurchasing stock, or taking out or repaying loans.

Question 16

The starting and ending balances for relevant asset and liability accounts that changed during the year are presented below.Net income was $650,000 for the year and dividends paid were $150,000.Amortization expense for 2007 was $7,000,and all other changes in accumulated amortization and property,plant,and equipment related to the sale of property at book value.No other non-cash transactions occurred.Use this information to calculate the net cash inflows (outflows)from investing and financing activities in 2007.

Accepted Answer

The answer of The starting and ending balances for relevant...

Question 17

The Extra Surplus Company's Balance Sheet for December 31,2007 and the Income Statement for 2008 are shown below.
Additional Data for 2008:
Sales were $13,000; $8,000 in cash was received from customers.
Bought new land for cash,$10,000.
Sold other land for its book value of $5,000.
Paid $1,000 principal on the long-term note payable and $1,000 in interest.
Issued new shares of stock for $10,000 cash.
$1,000 of dividends were declared and paid.
Paid $5,500 on accounts payable.
No inventory purchases were made; other expenses were incurred on account.
All wages were paid in cash.
Other expenses were on account.
a.Prepare the statement of cash flows for the year ended December 31,2008 using the indirect method.
b.Prepare the statement of cash flows for the year ended December 31,2008 using the direct method.
c.Interpret the statement of cash flows by explaining the main sources and uses of cash during the year.
 Balance Sheet as of December 31,2007
$\begin{array}{lr}
\text { Cash } & \$ 10,000 \
\text { Accounts receivable } & 5,000 \
\text { Inventory } & 12,000 \
\text { Property and equipment, net } & 20,000 \
& \$ 47,000\\
\text { Accounts payable } & \$ 10,000 \
\text { Note payable, long-term } & 5,000 \
\text { Contributed capital } & 20,000 \
\text { Retained earnings } & 12,000 \
& \$ 47,000\\
\text { Income Statement for } 2008\
\text { Sales } & \$ 13,000 \
\text { Cost of goods sold } & 3,000 \
\text { Wage expense } & 3,000 \
\text { Interest expense } & 1,000 \
\text { Other expenses } & 500 \
\text { Net income } & \$ 5,500
\end{array}$

Accepted Answer

The answer of The Extra Surplus Company's Balance Sheet for...

Question 18

Major investing and financing activities that do not involve cash do not have to be reported on the statement of cash flows.
BT: Knowledge

Accepted Answer

All investing and financing activities, regardless of whether or not cash is involved, must be reported on the statement of cash flows using non-cash transaction disclosures.

Question 19

In general,the cash flow from operating activities is considered by many to be the most important component of the Statement of Cash Flows.
BT: Comprehension

Accepted Answer

The answer of In general,the cash flow from operating activities...

Question 20

When the cash flows from operating,investing,and financing activities are combined to give net cash flow for the period,a net decrease in cash is subtracted from the beginning cash to calculate the ending cash balance.
BT: Comprehension

Accepted Answer

This statement is true. The net decrease in cash is subtracted from the beginning cash balance to calculate the ending cash balance.

Quiz 12: Statement Cash Flows

If a company uses the direct method of calculating net cash flows from operating activities,it must adjust net income for gains or losses when selling property,plant,and equipment. BT: Comprehension

Indirect method is more detailed as it shows the operating cash receipts and cash payments and is thus more time-consuming and costly. BT: Knowledge

When a company issues shares,it reports a cash inflow from financing activities; when it repurchases shares,it reports a cash outflow for financing activities. BT: Comprehension

The capital acquisitions ratio is often calculated as an average over a number of years for better comparison between companies in the same industry. BT: Knowledge

A company had a net increase in cash while it reported a net loss in income. BT: Comprehension

Net income assumes that all revenues are eventually realized as cash inflows and all expenses as cash outflows.The quality of income ratio is a measure of the extent to which this assumption should be considered valid. BT: Analysis

The calculation of the capital acquisitions ratio uses the cash expenditures for property,plant,and equipment that are reported in the financing activities section of the Statement of Cash Flows. BT: Knowledge

When using the spreadsheet approach for preparing a Statement of Cash Flows using the indirect method,one half of the spreadsheet reflects changes in balance sheet accounts and the other half is used to demonstrate their effect on cash flows. BT: Knowledge

Cash received from the sale of land would be classified in the statement of cash flows as investing activity. BT: Comprehension

Fraudulent financial reporting is more likely to result in overstatements of net cash flow from operating activities than as overstatement of net income. BT: Analysis

When calculating net cash flow from financing activities,a company must convert interest expense to cash payments for interest. BT: Comprehension

Major investing and financing activities that do not involve cash do not have to be reported on the statement of cash flows. BT: Knowledge

In general,the cash flow from operating activities is considered by many to be the most important component of the Statement of Cash Flows. BT: Comprehension

When the cash flows from operating,investing,and financing activities are combined to give net cash flow for the period,a net decrease in cash is subtracted from the beginning cash to calculate the ending cash balance. BT: Comprehension