Question 1

When the indirect method is used, if accounts receivable increases during the accounting period, the change in accounts receivable is:

Accepted Answer

The answer of When the indirect method is used, if...

Question 2

When the indirect method is used, details from which of the following balance sheet accounts are used in calculating both operating and financing cash flows?

Accepted Answer

The retained earnings account is used in both the operating and financing sections of the statement of cash flows under the indirect method.

Question 3

Assume a company uses the indirect method to prepare its statement of cash flows. If inventory decreases and unearned revenue increases during an accounting period, what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

Accepted Answer

A decrease in inventory indicates that less cash was used to purchase inventory, so it is added back to net income. An increase in unearned revenue means cash was received but not yet earned, so it is also added to net income.

Question 4

Cash flows from financing activities:

Accepted Answer

Cash flows from financing activities includes all cash inflows and outflows between a company and its stockholders. This includes issuing and repurchasing stock, paying out dividends, and borrowing/repaying loans. It does not necessarily result in negative cash flows, as a company may receive cash inflows from issuing stock or taking out loans, which could offset any outflows from paying dividends or repurchasing stock.

Question 5

Consider the following information:  The company would report a net cash inflow from operating activities of:

Accepted Answer

The answer of Consider the following information:  The company...

Question 6

When a company uses the direct method to determine the net cash flows from operating activities, cash flows from operating activities will:

Accepted Answer

When a company uses the direct method to determine the net cash flows from operating activities, the cash flows from operating activities will be identical to the amount reported using the indirect method. The only difference is that the direct method presents a more detailed breakdown of the cash inflows and outflows, while the indirect method starts with net income and makes adjustments to arrive at the net cash flow from operating activities. However, the end result should be the same in both methods.

Question 7

A change in a company's cash account is equal to the:

Accepted Answer

A change in a company's cash account will impact its overall balance sheet equation, which requires that assets equal liabilities plus stockholders' equity. Therefore, any change in the cash account must be offset by an equal and opposite change in one or more of the other categories. This means that the changes in liabilities, stockholders' equity, and noncash assets must all be taken into account when analyzing the impact of a change in the cash account.

Question 8

Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it:

Accepted Answer

Depreciation is a non-cash expense that reduces net income but does not impact cash flow. Therefore, it is added back to net income in a statement of cash flows prepared using the indirect method to accurately reflect the cash inflows and outflows of the business.

Question 9

Assume a company uses the direct method to prepare its statement of cash flows. If the company's inventory and accounts payable both increase during the accounting period, how would these changes affect cash flow calculations?

Accepted Answer

The answer of Assume a company uses the direct method...

Question 10

Brighton, Inc., uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's accounts receivable increased by $10,000 and its accounts payable decreased by $5,000. As a result of these two items, the calculation to determine cash flows from operating activities will be:

Accepted Answer

Under the indirect method, increases in accounts receivable and decreases in accounts payable are subtracted from net income to calculate operating cash flows.

Thus, the increase in accounts receivable of $10,000 would decrease operating cash flows by $10,000, while the decrease in accounts payable of $5,000 would increase operating cash flows by $5,000.

Therefore, the overall effect would be a decrease in operating cash flows of $10,000 - $5,000 = $5,000. Hence, the correct answer is option D.

Question 11

What is the first step in calculating cash flows from operations when the indirect method is used?

Accepted Answer

The answer of What is the first step in calculating...

Question 12

When the direct method is used to determine the net cash flow from operating activities, other operating expenses are converted into cash outflows by:

Accepted Answer

The answer of When the direct method is used to...

Question 13

Assume a company uses the indirect method to prepare its statement of cash flows. If the supplies account decreases and accounts payable increases during an accounting period, what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

Accepted Answer

The answer of Assume a company uses the indirect method...

Question 14

Assume a company uses the direct method to prepare its statement of cash flows. If the company's accounts receivable increase during the accounting period, the change in accounts receivable
Is:

Accepted Answer

An increase in accounts receivable indicates that not all sales were collected in cash, so it is subtracted from sales revenue to determine the actual cash collected from customers.

Question 15

Almost all U.S. companies have used the indirect method of preparing the statement of cash flows:

Accepted Answer

The Financial Accounting Standard Board has stated a preference for the direct method of preparing the statement of cash flows, but most companies still use the indirect method due to its simplicity and compatibility with their accounting systems.

Question 16

Which of the following journal entries would change the Net Cash Flows from Operating Activities line of the statement of cash flows?

Accepted Answer

Recording cash paid for interest on a long-term note payable affects the net cash flows from operating activities as it is an actual cash outflow. The other entries are non-cash transactions or adjustments.

Question 17

Which of the following is not needed to prepare a statement of cash flows?

Accepted Answer

A statement of retained earnings is not needed to prepare a statement of cash flows. The statement of cash flows is prepared using information from the comparative balance sheet, income statement, and additional information on financing and investing activities.

Question 18

When the direct method is used to determine the net cash flows from operating activities, which of the following adjustments must be made to interest expense to determine total interest payments?

Accepted Answer

When using the direct method to determine net cash flows from operating activities, adjustments must be made to interest expense to determine total interest payments. To determine total interest payments, we need to add any decreases in interest payable and subtract any increases in interest payable. This is because a decrease in interest payable implies that interest expenses were paid during the period, while an increase in interest payable suggests that interest expenses were accrued but not yet paid. Thus, the correct answer is B, which adds decreases in interest payable and subtracts increases in interest payable to determine total interest payments.

Question 19

Cinno Company reported net income of $20,000 for the year ended December 31, 2011. During the year, inventories decreased by $7,000, accounts payable decreased by $8,000, depreciation expense was $10,000, and accounts receivable increased by $6,500. Net cash provided by operations in 2011, computed using the indirect method, was:

Accepted Answer

Net income = $20,000
Depreciation expense = $10,000 (added back to net income since it's a non-cash expense)
Decrease in inventory = $7,000 (added back to net income since it represents cash that was tied up in inventory)
Decrease in accounts payable = $8,000 (subtracted from net income since it represents a use of cash)
Increase in accounts receivable = $6,500 (subtracted from net income since it represents a use of cash)

Therefore, net cash provided by operations = $20,000 + $10,000 + $7,000 - $8,000 - $6,500 = $22,500.

Question 20

When the indirect method is used, if prepaid expenses decrease during the accounting period, the change in prepaid expenses is:

Accepted Answer