Question 1

Using the indirect method, which of the following would be subtracted from profit?

Accepted Answer

An increase in accounts receivable is subtracted from profit because it represents revenue that has been recognized but not yet collected in cash, thus reducing cash flow.

Question 2

Using the indirect method, depreciation expense for the period

Accepted Answer

Depreciation expense is a non-cash charge, so it is added back to profit in the cash flow statement when using the indirect method.

Question 3

Profit reported for the current year was $100,000.Depreciation expense was $25,000.Accounts Receivable and Inventories decreased $5,000 and $15,000, respectively.Prepaid Expenses and Accounts Payable increased, respectively, by $500 and $4,000.Using the indirect method, how much cash was provided by operating activities?

Accepted Answer

The answer of Profit reported for the current year was...

Question 4

Starting with profit and adjusting it for items that affected reported profit but not cash is called the

Accepted Answer

The process described in the question is referring to the indirect method of calculating cash flow from operations. This method starts with reported profit and adjusts for non-cash items, such as depreciation and amortization, and changes in working capital accounts, such as accounts receivable and accounts payable. The other answer choices listed (direct method, working capital method, and cost-benefit method) do not relate to this specific process of adjusting profit for non-cash items.

Question 5

Using the indirect method, which of the following adjustments to convert profit to net cash provided by operating activities is incorrect?

Accepted Answer

The answer of Using the indirect method, which of the...

Question 6

Profit reported for the current year was $200,000.Depreciation expense was $35,000.During the year, Accounts Receivable and Merchandise Inventory increased $18,000 and $26,000, respectively.Prepaid Expenses and Accounts Payable decreased $4,000 and $9,000, respectively.There was also a loss on the sale of equipment of $6,000.Using the indirect method, how much cash was provided by operating activities?

Accepted Answer

The net income is adjusted for non-cash expenses such as depreciation and losses, and for changes in current assets and liabilities that affected operating activities, as follows:

Net income: $200,000 
Add: Depreciation expense: $35,000 
Add: Loss on sale of equipment: $6,000 
Add: Decrease in accounts payable: $9,000 
Add: Increase in accounts receivable: $18,000 
Subtract: Increase in merchandise inventory: ($26,000) 
Subtract: Decrease in prepaid expenses: ($4,000)

Cash provided by operating activities: $192,000

Question 7

In calculating cash flows provided (used) by operating activities using the indirect method, a loss on the sale of equipment is

Accepted Answer

A loss on the sale of equipment is added back to profit in the indirect method because it is a non-cash expense that reduced net income.

Question 8

The indirect and direct methods of preparing the statement of cash flows are identical except for the

Accepted Answer

The indirect and direct methods of preparing the statement of cash flows differ only in the operating activities section. The indirect method adjusts net income for changes in non-cash accounts to calculate cash flow from operations, while the direct method lists all cash receipts and payments from operating activities.

Question 9

In calculating cash flows provided (used) by operating activities using the indirect method, a loss on the sale of equipment will appear as a(n)

Accepted Answer

A loss on the sale of equipment is added back to profit in the operating activities section when using the indirect method, as it is a non-cash expense that reduced net income.

Question 10

In calculating cash flows provided (used) by operating activities using the indirect method, a gain on the sale of equipment is

Accepted Answer

A gain on the sale of equipment is a non-operating item and is therefore deducted from profit when determining cash flows provided by operating activities using the indirect method. This is because a gain on the sale of equipment represents a source of cash that is not generated from the company's normal operations.

Question 11

Monster Cookie Ltd.reported a loss of $12,000 for the year.During the year, accounts receivable decreased $5,000, merchandise inventory increased $4,000, accounts payable increased by $13,000, and depreciation expense of $7,000 was recorded.Using the indirect method, operating activities

Accepted Answer

The net loss of $12,000 is adjusted by adding back non-cash depreciation of $7,000, adding the decrease in accounts receivable of $5,000, subtracting the increase in inventory of $4,000, and adding the increase in accounts payable of $13,000, resulting in net cash provided by operating activities of $9,000.

Question 12

Using the indirect method, which of the following adjustments to convert profit to net cash provided by operating activities is not added to profit?

Accepted Answer

Gains on the sale of equipment are subtracted from profit because they are non-cash items that increase profit but do not affect cash flow from operating activities.

Question 13

Profit reported for the current year was $222,000.Depreciation expense was $35,000.Accounts Receivable and Inventories increased $4,000 and $7,000, respectively.Prepaid Expenses and Accounts Payable decreased $3,000 and $9,000, respectively.Using the indirect method, how much cash was provided by operating activities?

Accepted Answer

The answer of Profit reported for the current year was...

Question 14

In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is

Accepted Answer

An increase in prepaid expenses indicates that the company has paid cash in advance for goods or services that will be used in future periods. This means that the cash outflow has already occurred, but the expenses have not yet been recognized in the income statement. Therefore, when calculating net cash provided by operating activities using the indirect method, the increase in prepaid expenses is deducted from profit to adjust for the non-cash expense and reconcile the difference between cash and accrual accounting.

Question 15

Using the indirect method, which of the following adjustments to convert profit to net cash provided by operating activities is correct?

Accepted Answer

The answer of Using the indirect method, which of the...

Question 16

Using the indirect method, if equipment is sold at a gain, the

Accepted Answer

According to the indirect method, gains on the sale of equipment are deducted in the operating activities section as they are not considered part of the company's core business operations. Therefore, the amount of the gain is deducted in the operating activities section.

Question 17

Using the indirect method, which of the following would not be an adjustment to profit?

Accepted Answer

An increase in Land would not be an adjustment to profit since it is a non-depreciable asset that does not affect the income statement.

Question 18

Guenther Corporation reported profit of $50,000 for the year.During the year, accounts receivable increased by $8,000, accounts payable decreased by $4,000 and depreciation expense of $6,000 was recorded.Using the indirect method, cash provided by operating activities for the year is

Accepted Answer

The cash provided by operating activities is calculated by adjusting the net profit for changes in working capital and non-cash expenses. Start with the profit of $50,000, add back the non-cash depreciation expense of $6,000, subtract the increase in accounts receivable of $8,000, and subtract the decrease in accounts payable of $4,000. This results in $44,000.

Question 19

Using the indirect method, which of the following would be added to profit?

Accepted Answer

According to the indirect method of calculating cash flow from operations, depreciation expense is added back to net income to arrive at the operating cash flows because it is a non-cash expense. Increases in accounts receivable and prepaid expenses are subtracted from net income as they represent decreases in cash flow. Similarly, a decrease in accounts payable is added back to net income as it represents an increase in cash flow.

Question 20

On a statement of cash flows using the indirect method, depreciation expense will

Accepted Answer

Depreciation expense is a non-cash charge that reduces net income. In the indirect method of the statement of cash flows, it is added back to net income in the operating activities section to adjust for the non-cash reduction.

Quiz 13: Financial Analysis: the Big Picture