Question 1

Adophus, Inc.'s 2010 income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2010 balance sheet reported the following: accounts receivable beginning balance of $50,000 and ending balance of $40,000; accounts payable beginning balance of $22,000 and ending balance of $28,000. Therefore, based only on this information and using the indirect method, the 2010 net cash inflow from operating activities was

Accepted Answer

The answer of Adophus, Inc.'s 2010 income statement reported total...

Question 2

Lagos Corp. recorded sales of $345,000 in 2010, in addition its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: $\begin{array} { l l } 
\text { Jan. 1, 2010 } & \text { Dee.31, 2010 } &\
\text { A.cornts Receivible } & \$ 65,000 &\$90,000\
\text { A.cedrts Fayable } & \$ 32,000&\$28,000
\end{array}$ How much cash did Lagos collect from customers in 2010?

Accepted Answer

The answer of Lagos Corp. recorded sales of $345,000 in...

Question 3

Which of the following is an approximation of a cash-based measure of pretax operating earnings?

Accepted Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an approximation of a company's cash-based measure of pretax operating earnings, as it excludes non-cash expenses (depreciation and amortization), interest, and taxes.

Question 4

A cash inflow from financing activities includes:

Accepted Answer

A cash inflow from financing activities includes any funds received from the issuance of debt or equity, such as proceeds from the issuance of bonds payable.

Question 5

When net income is high relative to operating cash flows, we describe the firm as having recorded

Accepted Answer

When net income is high relative to operating cash flows, it suggests that the firm has recorded income-increasing accruals. This means that the company may have recognized revenue or incurred expenses in its financial statements that have not yet resulted in cash movements. As a result, the reported net income is higher than the cash generated by the company's operations.

Question 6

A firm's cash flows will differ from net income each period for all of the following reasons except:

Accepted Answer

The reasons given in options A, B, and D are all valid reasons why a firm's cash flows may differ from net income. Option C, however, does not necessarily apply to all firms. Some firms may have positive cash flows even if they are sustaining losses, if they have strong cash management practices in place.

Question 7

Which of the following companies would you expect to report significant amounts of cash provided by financing activities?

Accepted Answer

A yet-to-be-profitable biotechnology company would likely report significant amounts of cash provided by financing activities because it would need to raise funds through issuing debt or equity to finance its operations and research activities, given its lack of profitability.

Question 8

The expense incurred by issuing stock options should be

Accepted Answer

The expense incurred by issuing stock options is a non-cash expense and should be added back to net income in the operating activities section of the cash flow statement to adjust for the fact that it does not involve an outlay of cash.

Question 9

As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except:

Accepted Answer

The statement of cash flows cannot eliminate negative cash flows from operations. It can help identify the sources and uses of cash, but cannot change the actual cash flows.

Question 10

Academic research has found that market rates of return on common stock are the most highly correlated with

Accepted Answer

The answer of Academic research has found that market rates...

Question 11

Which of the following is a cash flow from operating activities?

Accepted Answer

Purchase of merchandise for resale is a cash flow from operating activities because it represents a cash outflow directly related to the company's primary operations. Choices A, C, and D are cash flows from investing activities (sale of long-term investments in common stock), financing activities (payment of a note payable), and investing activities (sale of a piece of land no longer used in operations), respectively.

Question 12

As products move through the maturity phase, companies invest to ___________ productive capacity.

Accepted Answer

During the maturity phase of a product's lifecycle, companies typically focus on maintaining their productive capacity rather than increasing or decreasing it significantly. This is because the demand for the product stabilizes, and the goal is to optimize production to meet this stable demand efficiently.

Question 13

Tinker Company reported sales revenue of $500,000 and total expenses of $450,000 (including depreciation) for the year ended December 31, 2010. During 2010, accounts receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for 2010 was

Accepted Answer

The net cash inflow from operating activities is calculated using the indirect method by starting with net income and adjusting for non-cash expenses and changes in working capital. Net income is sales revenue minus total expenses, which is $500,000 - $450,000 = $50,000. Depreciation expense, a non-cash expense, is added back, giving $50,000 + $10,000 = $60,000. Changes in working capital are then accounted for: accounts receivable decreased by $5,000 (increasing cash), inventory increased by $4,000 (decreasing cash), and accounts payable increased by $6,000 (increasing cash). The net change in cash from working capital changes is $5,000 - $4,000 + $6,000 = $7,000. Therefore, the total net cash inflow from operating activities is $60,000 + $7,000 = $67,000.

Question 14

Under the indirect method of preparing the statement of cash flows, addbacks to net income include all of the following except:

Accepted Answer

Asset write-downs are not added back to net income under the indirect method of preparing the statement of cash flows because they do not affect cash flow; instead, they represent a realized loss on the value of an asset. Depreciation expense, deferred tax expense, and share-based compensation are non-cash expenses and thus are added back to net income in the indirect method.

Question 15

All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers, except:.

Accepted Answer

Restaurants typically experience a short lag between the expenditure of cash and the receipt of cash from customers, as customers pay for their meals at the time of service.

Question 16

When net income is low relative to operating cash flows, we describe the firm as having recorded

Accepted Answer

When net income is low relative to operating cash flows, it typically indicates that the firm has recorded income-decreasing accruals, such as higher provisions for bad debts or an increase in inventory. These accruals decrease net income but do not impact operating cash flows.

Question 17

Kraco Corporation reported 2010 net income of $450,000, including the effects of depreciation expense of $60,000, and amortization expense on a patent of $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities using the indirect method for 2010 was

Accepted Answer

The answer of Kraco Corporation reported 2010 net income of...

Question 18

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

Accepted Answer

The gain is subtracted from net income in the operating activities section because the indirect method starts with net income and then adjusts for non-cash items and non-operating gains and losses. The gain on sale of equipment is a non-operating item and must be subtracted to calculate cash flow from operating activities.

Question 19

Which of the following transactions would not create a cash flow?

Accepted Answer

Amortization of a patent is a non-cash expense and therefore does not result in a cash inflow or outflow. Choice A, payment of a cash dividend, involves a cash outflow. Choice B, purchasing of the company's own stock, involves a cash outflow. Choice D, selling equipment at book value, involves a cash inflow.

Question 20

Which of the following would not be a cash flow from investing activities?

Accepted Answer

Collection of interest revenue on a long-term note receivable is considered a cash flow from operating activities, not investing activities. The other choices are all cash flows from investing activities.

Quiz 3: Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows