Question 1

Many accountants prefer which method of computing cash flow from operating activities?

Accepted Answer

The direct method is preferred by many accountants because it provides more detailed information about the actual cash receipts and payments involved in operating activities. The indirect method uses adjustments to reconcile net income to cash flow from operating activities, which can be more complex and less transparent. The combination method and adjusting method are not commonly used.

Question 2

Which of the following adjustments would be in error if made to net income when computing cash from operations using the indirect method?

Accepted Answer

When using the indirect method to compute cash from operations, an increase in Accounts Receivable is subtracted from net income, not added. This is because an increase in Accounts Receivable represents sales that have not yet been collected in cash, thus not affecting cash flow.

Question 3

The Accounts Payable balance has increased during the year.How would this event affect the statement of cash flows operations section-indirect method?

Accepted Answer

An increase in Accounts Payable means the company has more unpaid bills, which implies that it has retained cash that would otherwise have been paid out. In the indirect method of cash flow statement preparation, this increase is added back to net income in the operating activities section, thus positively affecting cash flow from operations.

Question 4

The Accounts Payable balance has decreased during the year.How would this event affect the statement of cash flows operations section-indirect method?

Accepted Answer

The answer of The Accounts Payable balance has decreased during...

Question 5

The balance of Supplies has decreased during the year.How would this event affect the statement of cash flows operations section-indirect method?

Accepted Answer

The answer of The balance of Supplies has decreased during...

Question 6

Management has authorized the purchase of a large quantity of inventory for early December.The purchase will have credit terms of 2/10,n/30,they will authorize payment by the discount date.How will this decision affect the period's cash flows from operations-indirect method?

Accepted Answer

The purchase of a large quantity of inventory will increase the accounts payable balance, which is a liability. As a result, when calculating cash flows from operations using the indirect method, this increase in accounts payable will be added back to net income because it is a non-cash expense. This adjustment will decrease cash flows from operations, not increase them.

Question 7

Of the following,which has a negative effect on the computation of cash flow from operations using the indirect method?

Accepted Answer

An increase in inventory means more cash was used to purchase inventory, which is reflected in the change in inventory on the balance sheet. This increase must be subtracted from net income when calculating cash flow from operations using the indirect method.

Question 8

When using the direct method to determine the net cash flows from operating activities,major categories would not include:

Accepted Answer

The direct method focuses on cash inflows and outflows directly related to operating activities. Cash paid for dividends would be classified as a financing activity, not an operating activity. Therefore, it would not be included in the major categories of the net cash flows from operating activities.

Question 9

Under the indirect method,net income is considered the primary source of cash from operating activities.

Accepted Answer

Under the indirect method, net income is adjusted for non-cash items and changes in working capital to arrive at the cash flows from operating activities. Therefore, net income is considered the primary source of cash from operating activities.

Question 10

Which is not a cash outflow from an operating activity?

Accepted Answer

Paying dividends to stockholders is considered a financing activity, not an operating activity. Operating activities involve the cash flows directly related to earning income, including payments for interest, taxes, and inventory purchases.

Question 11

Cost of merchandise sold for the year was $850,000.Inventories were $60,000 and $90,000 at the beginning and end of the year,respectively.There were no changes in accounts payable from the beginning to the end of the year.Cash payment for merchandise to be reported on the cash flow statement using the direct method is:

Accepted Answer

The direct method of cash flow statement reports cash transactions, and the cost of merchandise sold is a cash transaction. To calculate the cash payment for merchandise, we need to subtract the change in inventory from the cost of merchandise sold, which gives us the cash payments made to suppliers during the year. 
Cash payment for merchandise = Cost of merchandise sold - Decrease in inventory
Cost of merchandise sold = $850,000
Decrease in inventory = $90,000 - $60,000 = $30,000
Cash payment for merchandise = $850,000 - $30,000 = $820,000
However, we need to add any increase in accounts payable during the year since it represents a reduction in cash payments to suppliers. Since there were no changes in accounts payable from the beginning to the end of the year, we do not need to make any adjustments. 
Therefore, the cash payment for merchandise to be reported on the cash flow statement using the direct method is $880,000 (Option D).

Question 12

There was a utility bill received but not paid.How would this nonpayment affect the statement of cash flows operations section-indirect method?

Accepted Answer

The answer of There was a utility bill received but...

Question 13

The statement of cash flows can be used for evaluating,comparing,and predicting future cash flows.

Accepted Answer

The statement of cash flows provides information on the sources and uses of cash during a given period of time, which can be useful in evaluating the ability of a company to generate cash, comparing cash flow performance over time, and predicting future cash flows.

Question 14

For a statement of cash flows to be produced,an accountant needs to compare changes in the related income statements.

Accepted Answer

In order to prepare a statement of cash flows, an accountant needs to compare changes in the related income statement and balance sheet accounts.

Question 15

The method of reporting cash flows from operating activities under which revenues and expenses on the income statement are adjusted to reflect the amount of cash received or expended for each item is the:

Accepted Answer

The direct method of reporting cash flows from operating activities involves showing each major class of gross cash receipts and cash payments. This method adjusts revenues and expenses on the income statement to reflect the amount of cash received or expended for each item. The indirect method, on the other hand, starts with net income and adjusts for non-cash items and changes in current assets and liabilities to arrive at operating cash flows. The other two options, combination method and adjustment method, are not widely recognized methods of reporting cash flows.

Question 16

The Accounts Receivable balance has decreased during the year.How would this event affect the statement of cash flows operations section-indirect method?

Accepted Answer

The decrease in the Accounts Receivable balance indicates that less cash was tied up in outstanding customer payments, resulting in a positive impact on cash flow from operations. This decrease would be reflected in the adjustments made to net income in the operations section of the statement of cash flows using the indirect method.

Question 17

An example of a noncash expense would be depreciation.

Accepted Answer

Depreciation is a noncash expense because it represents the gradual loss of value of an asset over time, but it does not involve an actual cash outflow.

Question 18

Even though the cost of fuel oil is rising,management is considering using up the business's reserves and not ordering any more this period.How will this decision affect the period's cash flows from operations-indirect method?

Accepted Answer

Using up the business's reserves of fuel oil and not ordering any more this period will decrease the cash outflows for purchasing fuel, thereby increasing this period's cash flows from operations.

Question 19

Operating expenses other than depreciation for the year were $335,000.Prepaid expenses decreased by $7,000.Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

Accepted Answer

Operating expenses other than depreciation for the year were $335,000. Prepaid expenses decreased by $7,000. So, cash payments for operating expenses to be reported on the cash flow statement using the direct method would be $335,000 - $7,000 = $328,000.

Question 20

Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method in:

Accepted Answer

Depreciation is a non-cash expense and is included in the operating activities section of the statement of cash flows. The indirect method starts with net income and adjusts for items that affect cash, including depreciation.

Quiz 21: Statement of Cash Flows