Question 1

The first section of the statement of cash flows derives cash flow from operations.Both U.S.GAAP and IFRS permit firms to report cash flow from operations using the __________.
A)direct method, only
B)indirect method, only
C)direct and indirect methods
D)adjustment method, only
E)income method, only

Accepted Answer

Both U.S.GAAP and IFRS permit firms to report cash flow from operations using both direct and indirect methods. The direct method shows the actual cash receipts and cash payments during the period, while the indirect method starts with net income and adjusts for non-cash items to derive cash flow from operations.

Question 2

U.S.GAAP
A)permits firms to report cash flow from operations using the direct or indirect method.
B)requires firms to report cash flow from operations using the direct method.
C)requires firms to report cash flow from operations using the indirect method.
D)permits firms to use the cash receipts and disbursements statement.
E)permits firms to use the funds flow statement.

Accepted Answer

U.S.GAAP permits firms to report cash flow from operations using either the direct or indirect method. The choice between the two methods is left to the discretion of the company.

Question 3

The Farley Company had retained earnings at the beginning of the year totaling $100,000.At the end of the year retained earnings totaled $200,000.Depreciation was $50,000 for the year and the company paid dividends of $150,000.What is the amount recorded as Net Income in the operating activities section of the statement of cash flows prepared using the indirect method?
A)a net loss of $150,000
B)a net income of $150,000
C)a net income of $0
D)a net income of $250,000
E)a net loss of $50,000

Accepted Answer

We can use the following formula to calculate the net income:
Net Income = Ending Retained Earnings - Beginning Retained Earnings + Dividends - Depreciation

Substituting the values given in the problem, we get:
Net Income = $200,000 - $100,000 + $150,000 - $50,000
Net Income = $200,000 - $50,000
Net Income = $250,000

Therefore, the amount recorded as Net Income in the operating activities section of the statement of cash flows prepared using the indirect method is $250,000.

Question 4

The primary difference between a cash flow statement prepared using the indirect method and one prepared using the direct method is
A)the financing section is different.
B)the investing section is different.
C)the operating section is different.
D)all three sections of the cash flow statement are different.
E)the investing and financing sections are different.

Accepted Answer

The primary difference between the cash flow statement prepared using the indirect method and the direct method lies in the operating activities section. The indirect method starts with the net income figure and adjusts it for non-cash expenses, whereas the direct method reports each cash inflow and outflow from operating activities separately. The investing and financing sections may differ slightly, but both methods report the same overall cash flows from these activities.

Question 5

Which method of preparing the statement of cash flows is required by U.S.GAAP?
A)direct
B)indirect
C)funds flow
D)either direct or indirect may be used if appropriate note disclosure is included
E)either direct or funds flow may be used if appropriate note disclosure is included

Accepted Answer

U.S. GAAP allows for either the direct or indirect method to be used for preparing the statement of cash flows. However, if the direct method is used, a reconciliation of net income to net cash provided by operating activities (which is essentially the indirect method) must also be provided.

Question 6

While the indirect method is prevalent in the construction of cash flow statements in the U.S., why might a firm choose to construct its cash flow statement using the direct method?
A)The direct method will always show a higher net change in cash.
B)The direct method is usually easier for users to understand.
C)The direct method is required by some industries.
D)The direct method will always make the firm's management look better.
E)None of the above answer choices is correct.

Accepted Answer

While the indirect method is more commonly used in the U.S., some firms may choose to use the direct method if they believe it is easier for users to understand. This can be particularly true for smaller or simpler companies where there may not be as many adjustments needed for the indirect method. None of the other answer choices are accurate statements about the direct method.

Question 7

The amount of cash a department store received from customers during a period equals the sales for the period, reduced by the _____ during this period or increased by the _____ during the period.
A)decrease in accounts payable; increase in accounts payable
B)increase in accounts payable; decrease in accounts payable
C)decrease in accounts receivable; increase in accounts receivable
D)increase in accounts receivable; decrease in accounts receivable
E)none of the above

Accepted Answer

The amount of cash received from customers is the sales for the period. This sales amount can be reduced if customers pay with credit, reducing the accounts receivable, or increased if customers pay with cash before the end of the period, increasing the accounts receivable. Therefore, an increase in accounts receivable would increase the cash received from customers, while a decrease in accounts receivable would reduce it. Option D is the only one with this logic.

Question 8

U.S.GAAP
A)permits firms to report cash flow from operations using the direct or indirect method.
B)prefers the direct method of reporting cash flow from operations over the indirect method.
C)states that the direct method must show a reconciliation between net income and cash flow from operations either at the bottom of the statement of cash flows or in a separate note.
D)includes all of the above.
E)includes none of the above.

Accepted Answer

US GAAP permits firms to report cash flow from operations using either the direct or indirect method. However, it prefers the direct method of reporting as it provides a more detailed breakdown of cash inflows and outflows. Furthermore, US GAAP states that the direct method must show a reconciliation between net income and cash flow from operations either at the bottom of the statement of cash flows or in a separate note. Therefore, all of the given options are correct.

Question 9

The statement of cash flows usually presents cash flow from operations in the _____ format, beginning with net income for the period.The statement then adjusts for revenues not providing cash, for expenses not using cash, and for changes in working capital accounts.
A)funds flow
B)direct
C)indirect
D)profit and loss
E)working capital

Accepted Answer

The statement of cash flows usually presents cash flow from operations in the indirect format, which starts with net income for the period, and then adjusts for non-cash revenue and expenses and changes in working capital accounts. The funds flow statement is a different type of financial statement that shows changes in a company's long-term funds, while the direct and profit and loss formats do not provide the necessary adjustments. Working capital is a relevant concept to the statement of cash flows, but it is not a format.

Question 10

Increased earnings
A)are reflected as an increase in cash flow.
B)do not always generate an increase in cash flow.
C)result in a decrease in cash flow only if dividends are paid.
D)are the starting point for the direct method cash flow statement.
E)include none of the above.

Accepted Answer

Increased earnings do not always generate an increase in cash flow as other factors such as changes in working capital or investments may impact cash flow.

Question 11

The first section of the statement of cash flows derives cash flow from _____ activities.The _____ method reports the amounts of cash received from customers less cash disbursed to suppliers, employees, lenders, and taxing authorities.
A)operating; direct
B)operating; indirect
C)investing; direct
D)investing; indirect
E)financing: direct

Accepted Answer

The first section of the statement of cash flows derives cash flow from operating activities. The direct method reports the amounts of cash received from customers less cash disbursed to suppliers, employees, lenders, and taxing authorities.

Question 12

Which of the following is the method of reporting amounts of cash received from customers less cash disbursed to various suppliers, employees, lenders for interest payments, and taxing authorities, allowed by U.S.GAAP?
A)the direct method
B)the indirect method
C)both the direct method and the indirect method
D)the schedule of cash receipts and cash disbursements
E)the funds flow statement

Accepted Answer

The direct method is the method of reporting amounts of cash received from customers less cash disbursed to various suppliers, employees, lenders for interest payments, and taxing authorities, allowed by U.S. GAAP.

Question 13

There are several types of adjustments required to compute cash flow from operations from net income. One adjustment is an addition to net income each year for _____ because it uses no cash during that period.
A)payments to employees
B)payments to suppliers
C)tax payments
D)depreciation and amortization
E)none of the above

Accepted Answer

Depreciation and amortization are non-cash expenses that reduce net income but do not use any cash during the period. Therefore, they need to be added back to net income to calculate cash flow from operations.

Question 14

Why is depreciation expense added back to net income in the operating section of the indirect cash flow statement?
A)Depreciation expense represents cash outflows for a firm.
B)Depreciation expense represents cash inflows for a firm.
C)Depreciation expense represents a noncash expense that must be moved to the investing section of the cash flow statement.
D)Depreciation expense represents a noncash expense that must be added to net income to cancel its affect within the net income calculation.
E)Depreciation expense represents a cash expense that must be added to net income to cancel its affect within the net income calculation.

Accepted Answer

Depreciation is a noncash expense because it represents the allocation of the cost of a fixed asset over its useful life. It does not involve actual cash outflows or inflows. Therefore, it is added back to net income in the operating section of the indirect cash flow statement to cancel its effect within the net income calculation and to reflect the cash generated or used by the company's operating activities.

Question 15

Although the guidance in U.S.GAAP and IFRS states a preference that companies present cash flows from operations using the _____, most companies present cash flows from operations as _____.
A)a reconciliation of net income to operating cash flow (the direct method); direct method
B)direct method; a reconciliation of net income to operating cash flow (the indirect method)
C)cash method; accrual method
D)accrual method; cash method
E)none of the above

Accepted Answer

Both U.S.GAAP and IFRS recommend using the direct method to present cash flows from operations. However, many companies find it easier to use the indirect method, which involves a reconciliation of net income to operating cash flow. Therefore, most companies present cash flows from operations as a reconciliation of net income to operating cash flow (the indirect method).

Question 16

The _____ method begins with net income for a period and then shows adjustments to net income to convert revenues to cash received from customers and to convert expenses to cash disbursed to various suppliers of goods and services.Most companies use this method.
A)direct
B)indirect
C)adjustment
D)income
E)free cash

Accepted Answer

The method being described here is the indirect method of preparing the statement of cash flows. This method adjusts net income by adding back non-cash expenses and adjusting for changes in working capital accounts to arrive at the cash flows from operating activities.

Question 17

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period. As an outcome of correct double-entry recording of all transactions, the net change in cash will be _____ the net change in all noncash accounts.
A)greater than
B)less than
C)equal to
D)greater than or be less than
E)greater than or be equal to

Accepted Answer

The statement of cash flows uses the indirect method to calculate the net change in cash for the accounting period. This method involves adjusting net income for any non-cash items and changes in non-cash balance sheet accounts such as accounts receivable, accounts payable, and inventory. The final section of the statement reconciles the net change in these non-cash accounts to the actual change in cash for the period. Therefore, the net change in cash will be equal to the net change in all noncash accounts.

Question 18

If the balance sheet shows the same beginning and ending balance for depreciable assets, there
A)have been no financing activities during the year.
B)have been no investing activities during the year.
C)may have been investing activities.
D)may have been financing activities.
E)have been no investing and financing activities during the year.

Accepted Answer

The balance sheet shows the financial position of a company at a specific point in time. The beginning and ending balances for depreciable assets are the same, which means that there has been no change in the value of these assets during the year. This could be due to a number of factors, including:* The company has not purchased or sold any depreciable assets during the year.* The company has purchased and sold depreciable assets, but the total value of the assets purchased is equal to the total value of the assets sold.* The company has depreciated its depreciable assets by the same amount that it has purchased new assets.Since there has been no change in the value of depreciable assets, there have been no investing activities related to these assets during the year. However, there may have been financing activities, such as the issuance of debt or equity, that have affected the company's overall financial position.

Question 19

If cash decreases by $10,000 during the year, liabilities decrease by $5,000, and shareholders' equity increases by $5,000, what is the total change in noncash assets for the year?
A)a decrease of $5,000
B)an increase of $10,000
C)a decrease of $10,000
D)an increase of $5,000
E)an increase of $15,000

Accepted Answer

The answer of If cash decreases by $10,000 during the...

Question 20

Firms have some choice as to when they disburse cash.Delaying payments to suppliers and others during the last several days of an accounting period conserves cash and thereby _____ cash flow from operations for that period, and _____ cash flow from operations during the second period.
A)increases; decreases
B)increases; increases
C)decreases; ; increases
D)decreases; decreases
E)increases; has no effect

Accepted Answer

Delaying payments to suppliers and others at the end of an accounting period conserves cash, which increases cash flow from operations for that period because less cash is going out. However, because these payments are merely delayed and not eliminated, they will decrease cash flow from operations in the subsequent period when the payments are eventually made.

Quiz 6: Statement of Cash Flows

The first section of the statement of cash flows derives cash flow from operations.Both U.S.GAAP and IFRS permit firms to report cash flow from operations using the __________.

U.S.GAAP

The primary difference between a cash flow statement prepared using the indirect method and one prepared using the direct method is

Which method of preparing the statement of cash flows is required by U.S.GAAP?

While the indirect method is prevalent in the construction of cash flow statements in the U.S., why might a firm choose to construct its cash flow statement using the direct method?

The amount of cash a department store received from customers during a period equals the sales for the period, reduced by the _ during this period or increased by the _ during the period.

U.S.GAAP

The statement of cash flows usually presents cash flow from operations in the _____ format, beginning with net income for the period.The statement then adjusts for revenues not providing cash, for expenses not using cash, and for changes in working capital accounts.

Increased earnings

The first section of the statement of cash flows derives cash flow from _ activities.The _ method reports the amounts of cash received from customers less cash disbursed to suppliers, employees, lenders, and taxing authorities.

Which of the following is the method of reporting amounts of cash received from customers less cash disbursed to various suppliers, employees, lenders for interest payments, and taxing authorities, allowed by U.S.GAAP?

There are several types of adjustments required to compute cash flow from operations from net income. One adjustment is an addition to net income each year for _____ because it uses no cash during that period.

Why is depreciation expense added back to net income in the operating section of the indirect cash flow statement?

Although the guidance in U.S.GAAP and IFRS states a preference that companies present cash flows from operations using the _, most companies present cash flows from operations as _.

The _____ method begins with net income for a period and then shows adjustments to net income to convert revenues to cash received from customers and to convert expenses to cash disbursed to various suppliers of goods and services.Most companies use this method.

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period. As an outcome of correct double-entry recording of all transactions, the net change in cash will be _____ the net change in all noncash accounts.

If the balance sheet shows the same beginning and ending balance for depreciable assets, there

If cash decreases by $10,000 during the year, liabilities decrease by $5,000, and shareholders' equity increases by $5,000, what is the total change in noncash assets for the year?

Firms have some choice as to when they disburse cash.Delaying payments to suppliers and others during the last several days of an accounting period conserves cash and thereby _ cash flow from operations for that period, and _ cash flow from operations during the second period.