Question 1

When using the direct method, how is the purchase of equipment for cash shown on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Noncash investing and financing activity

Accepted Answer

The purchase of equipment for cash is considered an investing activity and is shown in the cash flows from investing activities section of the statement of cash flows when using the direct method.

Question 2

The following items were reported on the balance sheets and income statement for Bezos Corp.: $\begin{array}{lr}
\text { Accounts payable, December } 31,2016 & \$ 4,000 \
\text { Accounts payable, December } 31,2017 & 48,000 \
\text { Operating expenses } & 286,000
\end{array}$ How would the change in accounts payable be reported in the operating activities section of the statement of cash flows under the indirect method?
A) As an addition to operating expenses
B) As a deduction from operating expenses
C) As an addition to net income
D) As a deduction from net income

Accepted Answer

The increase in accounts payable from $4,000 to $48,000 indicates that not all operating expenses were paid in cash. Under the indirect method, increases in accounts payable are added to net income in the operating activities section of the statement of cash flows, as they represent expenses incurred but not yet paid, thus not reducing the cash during the period.

Question 3

Presented below is the operating activities section of the statement of cash flows for Golden Consulting for 2016: $\begin{array}{lr}
\text { Operating activities: }\
\text { Net income } & \$ 92,000 \
\text { Add: Depreciation } & 20,000 \
\text { Decrease in accounts receivable } & 8,000 \
& \$ 120,000 \
\text { Deduct: Decrease in accounts payable } & \$(6,000) \
\text { Net cash inflow from operating activities } & \$ 114,000
\end{array}$ Which method of preparing the operating activities section has Golden Consulting used?
A) The direct method.
B) The indirect method.
C) Either method.
D) Cannot be determined without further information.

Accepted Answer

Golden Consulting has used the indirect method for preparing the operating activities section of the statement of cash flows, as indicated by the adjustment of net income for non-cash items (depreciation) and changes in working capital accounts (accounts receivable and accounts payable).

Question 4

When using the direct method, how is depreciation expense recorded on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Not reported on the statement of cash flows

Accepted Answer

Depreciation expense is a non-cash charge and does not affect cash flow, thus it is not reported on the statement of cash flows when using the direct method.

Question 5

Each of the following transactions would be classified as either an investing or a financing activity except
A) investments in stock are purchased.
B) a bank loan is obtained.
C) stock is issued to acquire land.
D) dividends are paid.

Accepted Answer

The transaction described in C is a mix of both investing and financing activities. Issuing stock is a financing activity, while using it to acquire land is an investing activity. Therefore, this transaction cannot be classified as either purely investing or financing activity. The other transactions can be easily classified as either investing (A) or financing (B and D) activities.

Question 6

When using the direct method, how is the payment of a cash dividend shown on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Noncash investing and financing activity

Accepted Answer

Payment of cash dividends is shown as a financing activity on the statement of cash flows because it represents a distribution of the company’s profits to shareholders, which is a use of cash from the company’s financing sources.

Question 7

The following items were reported on the balance sheets and income statement for Carlton Co.: $\begin{array}{lr}
\text { Accounts receivable, December } 31,2016 & \$ 185,000 \
\text { Accounts receivable, December } 31,2017 & 178,000 \
\text { Sales-2017 } & 850,000
\end{array}$ What amount would be reported in the operating activities section of the statement of cash flows for collections from customers under the direct method assuming that all sales are on credit?
A) $850,000
B) $857,000
C) $843,000
D) Cannot be determined without further information.

Accepted Answer

To calculate collections from customers under the direct method, we start with sales and adjust for the change in accounts receivable. Sales were $850,000. Accounts receivable decreased from $185,000 to $178,000, indicating that collections were $7,000 more than sales. Therefore, collections from customers would be $850,000 + $7,000 = $857,000.

Question 8

When using the direct method, how is the retirement of bonds payable at their maturity date shown on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Noncash investing and financing activity

Accepted Answer

The retirement of bonds payable at their maturity date is considered a financing activity, therefore it would be shown in the financing section of the statement of cash flows when using the direct method.

Question 9

Which of the following transactions is a significant noncash investing and financing activity?
A) Land is purchased for cash.
B) Bonds are issued for cash.
C) Cash equivalents are purchased.
D) Equipment is acquired by issuing a long-term note.

Accepted Answer

Equipment is acquired by issuing a long-term note is a significant noncash investing and financing activity because it involves the issuance of a long-term note, which represents a long-term liability that must be repaid with future cash flows. This involves financing activity because it involves borrowing money from a creditor and investing activity because it involves the acquisition of equipment. The other choices involve cash transactions rather than noncash transactions.

Question 10

Which of the following statements is false? A) The method of preparing the operating activities section of a statement of cash flows which adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the indirect method. B) The method of preparing the operating activities section of a statement of cash flows which reports major classes of gross cash receipts and cash payments for revenues and expenses is the direct method. C) The FASB prefers the direct method of preparing the operating activities section of the statement of cash flows. D) Most companies use the direct method of preparing the operating activities section of the statement of cash flows.

Accepted Answer

The false statement is D, as most companies actually use the indirect method of preparing the operating activities section of the statement of cash flows. While the FASB prefers the direct method (statement C), it is not commonly used due to its higher cost and complexity. Statement A is true, as the indirect method adjusts net income for non-cash items such as depreciation, deferred taxes, and changes in working capital. Statement B is also true, as the direct method reports cash receipts and payments directly related to operating activities.

Question 11

When using the direct method, how is the issuance of stock for cash shown on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Noncash investing and financing activity

Accepted Answer

Issuance of stock for cash is a financing activity as it involves obtaining funds from investors in exchange for ownership in the company. Therefore, it is shown on the statement of cash flows under financing activities.

Question 12

Klein Corp.acquired land by issuing its common stock.How should this transaction be disclosed when a statement of cash flows is prepared?
A) In a supplemental schedule of noncash investing and financing activities or in a note.
B) The acquisition of land should be reported as an investing activity and the issuance of the stock as a financing activity.
C) Using the master T-account approach.
D) The transaction does not need to be disclosed.

Accepted Answer

This transaction involves an exchange of non-cash assets (land for stock), so it should be disclosed in a supplemental schedule of noncash investing and financing activities or in a note, as it does not involve cash flows directly.

Question 13

The following items were reported on the balance sheets and income statement for the Flying Mullet Company: $\begin{array}{lr}
\text { Accounts receivable, December } 31,2016 & \$ 85,000 \
\text { Accounts receivable, December } 31,2017 & 98,000 \
\text { Sales-2017 } & 750,000
\end{array}$ How would the change in accounts receivable be reported in the operating activities section of the statement of cash flows under the indirect method?
A) As an addition to sales
B) As a deduction from sales
C) As an addition to net income
D) As a deduction from net income

Accepted Answer

The increase in accounts receivable from $85,000 to $98,000 indicates that not all sales were collected in cash. Under the indirect method, this increase in accounts receivable would be deducted from net income in the operating activities section of the statement of cash flows to adjust for revenues that did not result in an increase in cash.

Question 14

The following items were reported on the balance sheets and income statement for Centerton Inc., a service company: $\begin{array}{lr}
\text { Accounts payable, December 31, 2016 } & \$ 64,000 \
\text { Accounts payable, December 31, 2017 } & 48,000 \
\text { Operating expenses-2017 } & 170,000
\end{array}$ What amount would be reported in the operating activities section of the statement of cash flows for payments for operating expenses under the direct method?
A) $186,000
B) $154,000
C) $180,000
D) $170,000

Accepted Answer

To calculate the payments for operating expenses under the direct method, you start with the operating expenses for the year, which is $170,000. Then, you adjust for the change in accounts payable to reflect the actual cash paid. The accounts payable decreased from $64,000 to $48,000, indicating a payment of $16,000 more than the expenses recognized. Therefore, the total payments for operating expenses are $170,000 + $16,000 = $186,000.

Question 15

Occasionally, companies engage in important investing and financing activities which do not affect cash.If the amount of the transaction is significant, how should it be disclosed when financial statements are prepared?
A) In the investing section if the amount of investing activities are greater than the financing activities amount.
B) In the financing section if the amount of financing activities are greater than the investing activities amount.
C) In a note to the financial statements or in a supplemental schedule.
D) The transaction does not need to be disclosed.

Accepted Answer

If the transaction is significant but does not affect cash, it should be disclosed in a note to the financial statements or in a supplemental schedule to provide additional information to users of the financial statements. This allows for transparency and clarity in the financial reporting. Choosing option A or B would not be appropriate as it does not accurately reflect the nature of the transaction. Option D is incorrect as all significant transactions should be disclosed in some manner in the financial statements.

Question 16

Presented below is the operating activities section of the statement of cash flows for Feline Friends Corp.for 2016: $$\begin{array}{l}
\text { Operating activities: }\
\begin{array} { l r } 
\text { Cash collected from customers } & \$ 165,000 \
\text { Cash payments for merchandise } & ( 83,000 ) \
\text { Cash payments for operating expenses } & \underline { ( 58,000 ) } \
\text { Net cash inflow from operating activities } & \underline { \$ 24,000 }
\end{array}
\end{array}$$ Which method of preparing the operating activities section has Feline used?
A) The direct method
B) The indirect method
C) Either method
D) Cannot be determined without further information

Accepted Answer

The direct method is used here because it lists specific types of cash receipts and payments, such as cash collected from customers and cash payments for merchandise and operating expenses.

Question 17

When using the direct method, how is the collection of cash from customers shown on the statement of cash flows?
A) Operating activity
B) Investing activity
C) Financing activity
D) Noncash investing and financing activity

Accepted Answer

The collection of cash from customers is a part of operating activities, as it relates to the core business operations of selling goods or services to customers.

Question 18

Which of the following statements is true?
A) The method of preparing the operating activities section of a statement of cash flows which adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the direct method.
B) The method of preparing the operating activities section of a statement of cash flows which reports major classes of gross cash receipts and cash payments for revenues and expenses is the indirect method.
C) The FASB prefers the indirect method of preparing the operating activities section of the statement of cash flows.
D) Most companies use the indirect method of preparing the operating activities section of the statement of cash flows.

Accepted Answer

Most companies use the indirect method of preparing the operating activities section of the statement of cash flows. While the direct method is theoretically preferred since it provides more detailed information, it is much more time-consuming and expensive to prepare. The FASB allows both methods but does not explicitly prefer one over the other.

Question 19

During 2016, the accounts payable balance of Andreas Corp.decreased.Which of the following statements is true?
A) This decrease indicates that Andreas paid less during the period than it recognized as expenses on the income statement.
B) This decrease is added to net income in the operating activities section of a statement of cash flows prepared under the indirect method.
C) This decrease is deducted from net income in the operating activities section of a statement of cash flows prepared under the indirect method.
D) This decrease is considered only when the operating activities section of a statement of cash flows is prepared under the direct method.

Accepted Answer

A decrease in accounts payable means that fewer payments were made to suppliers during the period than were recognized as expenses on the income statement. Therefore, this decrease should be deducted from net income in the operating activities section of a statement of cash flows prepared under the indirect method. Option A is incorrect because it implies that Andreas paid less than the expenses recognized, which is not necessarily true. Option B is incorrect because a decrease in accounts payable would be subtracted from net income, not added to it. Option D is incorrect because the method used to prepare the statement of cash flows (direct or indirect) does not affect how the change in accounts payable is treated.

Question 20

During 2016, the accounts receivable balance of Dickerson Corp.increased.Which of the following statements is true?
A) This indicates that Dickerson sold more than it collected in cash during the period.
B) This increase is added to net income in the operating activities section of a statement of cash flows prepared under the indirect method.
C) This increase is added to sales recognized on the income statement to determine the cash collections from customers during the period.
D) This increase is considered only when the operating activities section of a statement of cash flows is prepared under the indirect method.

Accepted Answer

An increase in accounts receivable indicates that the company sold more on credit than it collected in cash, meaning it recognized more revenue from sales than it received in cash during the period.

Quiz 12: The Statement of Cash Flows

When using the direct method, how is the purchase of equipment for cash shown on the statement of cash flows?

When using the direct method, how is depreciation expense recorded on the statement of cash flows?

Each of the following transactions would be classified as either an investing or a financing activity except

When using the direct method, how is the payment of a cash dividend shown on the statement of cash flows?

When using the direct method, how is the retirement of bonds payable at their maturity date shown on the statement of cash flows?

Which of the following transactions is a significant noncash investing and financing activity?

Which of the following statements is false?

When using the direct method, how is the issuance of stock for cash shown on the statement of cash flows?

Klein Corp.acquired land by issuing its common stock.How should this transaction be disclosed when a statement of cash flows is prepared?

Occasionally, companies engage in important investing and financing activities which do not affect cash.If the amount of the transaction is significant, how should it be disclosed when financial statements are prepared?

When using the direct method, how is the collection of cash from customers shown on the statement of cash flows?

Which of the following statements is true?

During 2016, the accounts payable balance of Andreas Corp.decreased.Which of the following statements is true?

During 2016, the accounts receivable balance of Dickerson Corp.increased.Which of the following statements is true?