Question 1

The indirect method and the direct method of preparing the statement of cash flows

Accepted Answer

The indirect and direct methods of preparing the statement of cash flows always produce the same totals for net cash from operating activities. The difference between the two methods lies in how the cash flows from operating activities are presented, not in the total amount reported.

Question 2

A supplementary schedule reconciling net income to net cash flow from operating activities is

Accepted Answer

The supplementary schedule reconciling net income to net cash flow from operating activities is only needed when using the direct method. This is because the direct method does not show a clear link between net income and operating cash flows, so this schedule is necessary to adjust for non-cash transactions and other factors that affect cash flow.

Question 3

Depreciation expense is not a source of cash; however,it is added to net income when determining net cash flow from operations under the indirect method.

Accepted Answer

Depreciation expense is a non-cash expense, meaning it does not involve actual cash outflows. However, it is still included in the calculation of net cash flow from operations under the indirect method because it affects net income, which is used to determine operating cash flows.

Question 4

Purchases of inventory minus the increase in accounts payable equals

Accepted Answer

Cash paid for inventory is calculated as purchases of inventory minus the increase in accounts payable, reflecting the actual cash outflow to acquire inventory.

Question 5

Cost of goods sold plus the increase in inventory equals cash paid for inventory.

Accepted Answer

Cost of goods sold plus the decrease in inventory equals cash paid for inventory.

Question 6

Which of the following statements is incorrect,regarding the effect of depreciation expense on a statement of cash flows using the indirect method?

Accepted Answer

Depreciation expense does not represent an inflow of cash, but rather is a non-cash expense that reduces the value of an asset over time. Therefore, the statement that says depreciation expense represents an inflow of cash is incorrect. The other statements are true.

Question 7

Molecule Labs,Inc.had sales of $450,000,all received in cash.Total operating expenses were $350,000.All expenses except depreciation were paid in cash.Depreciation of $60,000 was included in the operating expenses.Ignore income taxes.Calculate net income and net cash provided by operating activities using the direct method.

Accepted Answer

The answer of Molecule Labs,Inc.had sales of $450,000,all received in...

Question 8

The indirect method of determining cash from operations is most often used as this method produces larger positive cash flows than the direct method.

Accepted Answer

The indirect method of determining cash from operations can produce either a larger or smaller positive cash flow than the direct method, depending on the specific circumstances of the company. The indirect method starts with net income and makes adjustments to convert it to cash from operations, while the direct method directly calculates cash received from customers and cash paid to suppliers and employees. Some companies prefer the indirect method because it requires less detailed information, while others prefer the direct method because it provides more transparency and clarity about the sources and uses of cash.

Question 9

Cash received from customers is equal to sales plus the increase in accounts receivable.

Accepted Answer

Cash received from customers is equal to sales minus the increase in accounts receivable. If accounts receivable decreases, then the cash received will be more than sales.

Question 10

The balance sheet equation provides the conceptual basis for all financial statements and can be rearranged to incorporate the statement of cash flows as follows:

Accepted Answer

The correct equation is A) Cash + Noncash assets = Liabilities + Stockholders' equity. This is because the balance sheet equation (Assets = Liabilities + Stockholders' equity) includes both cash and noncash assets as part of the total assets.

Question 11

To determine cash collections from customers,we take sales and add the increase in Accounts Receivable.

Accepted Answer

To determine cash collections from customers, we need to subtract the decrease in Accounts Receivable from sales. If there is an increase in Accounts Receivable, it means that some of the sales are yet to be collected, and thus, should not be included in cash collections.

Question 12

If an accountant establishes the sales for the month and adds the beginning balance of accounts receivable and subtracts the accounts receivable balance at the end of the month,this would determine

Accepted Answer

Subtracting the beginning accounts receivable balance from the sales for the month and then adding the ending accounts receivable balance will give the total amount of money collected from customers during the month, which is the cash collections from customers for the month.

Question 13

Purchases of inventory minus the increase in accounts payable equals cash paid for inventory.

Accepted Answer

Purchases of inventory minus the increase in accounts payable equals cash paid for inventory because the increase in accounts payable represents the portion of purchases not yet paid in cash.

Question 14

Increases in cash stem from 1.increases in liabilities.
2)increases in stockholders' equity.
3)increases in noncash assets.
4)decreases in liabilities.
5)decreases in stockholders' equity.
6)decreases in noncash assets.

Accepted Answer

Increases in cash can result from increases in liabilities (e.g., taking on new debt), increases in stockholders' equity (e.g., issuing new shares), and decreases in noncash assets (e.g., selling inventory for cash).

Question 15

The Financial Accounting Standards Board (FASB)prefers the indirect method of determining cash flows from operations.

Accepted Answer

The Financial Accounting Standards Board (FASB) does not express a preference for the indirect method over the direct method for reporting cash flows from operations. Both methods are acceptable under GAAP, but the FASB encourages the use of the direct method while still allowing the indirect method.

Question 16

In 2012,Jaycox Custom Bikes had net income of $575,000.Jaycox also recorded $215,000 in depreciation.The company also had the following changes in its balance sheet accounts.
 $\begin{array}{ll}
\text { Accounts Receivable } & \$ 26,000 \text { increase } \
\text { Inventories } & 11,000 \text { decrease } \
\text { Accounts Payable } & 19,000 \text { decrease }
\end{array}$ 
Compute the net cash provided by operating activities using the indirect method.

Accepted Answer

The answer of In 2012,Jaycox Custom Bikes had net income...

Question 17

An increase in stockholders' equity can be calculated as

Accepted Answer

An increase in stockholders' equity can be calculated as new issuance of stock plus net income less cash dividends declared. This is because new issuance of stock increases the stockholders' equity, net income also positively impacts the equity and cash dividends declared reduce the equity.

Question 18

After analyzing the following statement of cash flows
1.State the method Pet Halt Services uses to prepare its operating section of the statement of cash flows and explain how you arrived at your answer.
2.Explain why depreciation expense is added back to net income in the operating section of the statement of cash flows.
$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$\text { Pet Halt Services }$
$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$\text { Statement of Cash Flows (Partial) }$
$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$\text { For the Month ending January } 31,2012$

$\begin{array}{lr}
\text {Cash flows from Operating Activities:}\
\text {Net Incone}& \$ 120,000 \
\text {Adjustments to reconcile net income to cash}\
\text {provided (used) by operating activities}\
\text { Depreciation expense } & 18,000 \
\text { Increase in accounts receivable } & (29,000) \
\text { Increase in accounts payable } & 33,000 \
\text { Net cash provided by (used for) operating activities } & \underline{\$ 142,000}\

\end{array}$

Accepted Answer

The answer of After analyzing the following statement of cash...

Question 19

A decrease in accounts receivable is added to the financing activities when preparing a statement of cash flows using the indirect method.

Accepted Answer

A decrease in accounts receivable is subtracted from net income when preparing a statement of cash flows using the indirect method. It is not added to the financing activities section.

Question 20

Depreciation expense is not a source of cash; however,it is subtracted from net income when determining net cash flow from operations under the direct method.

Accepted Answer

Depreciation expense is not a source of cash and is not subtracted from net income when determining net cash flow from operations under the direct method; it is a non-cash expense and is relevant under the indirect method for adjusting net income to arrive at cash flow from operations.

Quiz 5: Statement of Cash Flows