Question 1

Writedowns, amortization charges, and similar book entries have no effect on cash or net income.

Accepted Answer

Writedowns and amortization charges do not affect cash directly, but they reduce net income as they are expenses recorded on the income statement.

Question 2

A loss on the sale of equipment must be added back to net income to arrive at net cash provided by operating activities.

Accepted Answer

A loss on the sale of equipment is a non-cash expense that reduces net income but does not affect cash flow, so it must be added back to net income in the operating activities section of the cash flow statement to accurately reflect cash provided by operating activities.

Question 3

When accounts payable increase during the year, cost of goods sold and expenses on a cash basis are higher than they are on an accrual basis.

Accepted Answer

When accounts payable increase, it means that the company has incurred expenses or purchased goods but has not yet paid for them. On an accrual basis, these expenses or cost of goods sold are recorded when they are incurred, not when they are paid. Therefore, on a cash basis, where transactions are recorded only when cash changes hands, the cost of goods sold and expenses would be lower because the increase in accounts payable represents expenses that have not yet been paid in cash.

Question 4

Some changes in working capital, although they affect cash, do not affect net income.

Accepted Answer

Changes in working capital components such as inventory, accounts receivable, and accounts payable affect the cash flow of a company but do not directly impact the net income since they are not income statement items but rather balance sheet movements.

Question 5

Cash flows from extraordinary transactions and other events whose effects are included in net income, but which are not related to operations, should be reported either as investing activities or as financing activities.

Accepted Answer

Extraordinary transactions and other events that affect net income but are not related to operations are classified as either investing or financing activities in the statement of cash flows, as they do not pertain to the primary, day-to-day operations of the business.

Question 6

When the direct method is used in determining cash provided by operating activities, users of the statement of cash flows are unable to reconcile the net income to the net cash provided by operations because this is only provided when the indirect method is used.

Accepted Answer

The direct method still allows users to reconcile net income to net cash provided by operations because companies that use the direct method are required to provide a reconciliation of net income to net cash provided by operating activities, typically in a separate schedule.

Question 7

Riley Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Riley's statement of cash flows (indirect method), the $25,000 should
A) not be shown.
B) be shown as cash inflow from investing activities.
C) be shown as cash outflow from financing activities.
D) be shown as a deduction from net income in the cash flows from operating activities section.

Accepted Answer

Under the equity method, income recognized from an investment increases net income on the income statement but does not affect cash if no dividends are received. Therefore, on the statement of cash flows prepared using the indirect method, this non-cash income must be deducted from net income to reconcile net income to net cash provided by operating activities.

Question 8

Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.
   The following additional data were provided:
1. Dividends for the year 2008 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. The loss on sale was included in administrative expenses.
3. All depreciation expense is in the selling expense category.
relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company.
-The net cash provided by operating activities is
A) $204,000.
B) $144,000.
C) $120,000.
D) $100,000.

Accepted Answer

$144,000 + $24,000 + ($160,000 + $32,000 - $152,000) - $72,000 + $48,000 + $40,000 - $20,000 = $204,000.

Question 9

Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.
   The following additional data were provided:
1. Dividends for the year 2008 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. The loss on sale was included in administrative expenses.
3. All depreciation expense is in the selling expense category.
relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company.
-The net cash provided (used) by investing activities is
A) $(176,000).
B) $24,000.
C) $120,000.
D) $(144,000).

Accepted Answer

The answer of Paxson Mining Co. has recently decided to...

Question 10

Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.
   The following additional data were provided:
1. Dividends for the year 2008 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. The loss on sale was included in administrative expenses.
3. All depreciation expense is in the selling expense category.
relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company.
-Under the direct method, the cash received from customers is
A) $4,272,000.
B) $4,128,000.
C) $4,200,000.
D) $4,220,000.

Accepted Answer

$108,000 + $4,200,000 - $180,000 = $4,128,000

Question 11

Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.
   The following additional data were provided:
1. Dividends for the year 2008 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. The loss on sale was included in administrative expenses.
3. All depreciation expense is in the selling expense category.
relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company.
-Under the direct method, the cash paid to suppliers is
A) $3,768,000.
B) $3,568,000.
C) $3,528,000.
D) $3,488,000.

Accepted Answer

$3,576,000 + $192,000 - $240,000 = $3,528,000.
$3,528,000 + $48,000 - $88,000 = $3,488,000.

Question 12

Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.
   The following additional data were provided:
1. Dividends for the year 2008 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. The loss on sale was included in administrative expenses.
3. All depreciation expense is in the selling expense category.
relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company.
-The net cash provided (used) by financing activities is
A) $(120,000).
B) $24,000.
C) $(216,000).
D) $96,000

Accepted Answer

($96,000) + ($120,000) = ($216,000)

Question 13

Questions are based on the data shown below related to the statement of cash flows for Litwin, Inc.:
   Additional Information:
a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2008 and 2007, and no receivables were charged against the allowance. Accounts
payable are recorded net of any discount and are always paid within the discount period.
b. The proceeds from the note payable were used to finance the acquisition of property, plant, and equipment. Capital stock was sold to provide additional working capital.
-The amount to be shown on the cash flow statement as net cash provided by investing activities would total what amount?
A) $225,000
B) $750,000
C) $795,000
D) $975,000

Accepted Answer

$225,000 + ($2,190,000 - $1,440,000) = $975,000

Question 14

Questions are based on the data shown below related to the statement of cash flows for Litwin, Inc.:
   Additional Information:
a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2008 and 2007, and no receivables were charged against the allowance. Accounts
payable are recorded net of any discount and are always paid within the discount period.
b. The proceeds from the note payable were used to finance the acquisition of property, plant, and equipment. Capital stock was sold to provide additional working capital.
-What amount of cash was collected from 2008 accounts receivable?
A) $7,500,000
B) $7,020,000
C) $6,540,000
D) $3,270,000

Accepted Answer

$1,080,000 + $7,020,000 - $1,560,000 = $6,540,000.

Question 15

Questions are based on the data shown below related to the statement of cash flows for Litwin, Inc.:
   Additional Information:
a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2008 and 2007, and no receivables were charged against the allowance. Accounts
payable are recorded net of any discount and are always paid within the discount period.
b. The proceeds from the note payable were used to finance the acquisition of property, plant, and equipment. Capital stock was sold to provide additional working capital.
-What amount of cash was paid on accounts payable to suppliers during 2008?
A) $4,605,000
B) $4,425,000
C) $4,095,000
D) $3,735,000

Accepted Answer

$1,095,000 + ($3,915,000 + $1,950,000 - $1,260,000) - $1,275,000 = $4,425,000.

Question 16

The net cash provided by operating activities in Otto Company's statement of cash flows for 2008 was $115,000. For 2008, depreciation on plant assets was $45,000, amortization of patent was $8,000, and cash dividends paid on common stock was $54,000. Based only on the information given above, Otto's net income for 2008 was
A) $115,000.
B) $62,000.
C) $8,000.
D) $116,000.

Accepted Answer

$115,000 - $45,000 - $8,000 = $62,000

Question 17

During 2008, Garber Corporation, which uses the allowance method of accounting for doubtful accounts, recorded a provision for bad debt expense of $25,000 and in addition it wrote off, as uncollectible, accounts receivable of $10,000. As a result of these transactions, net cash flows from operating activities would be calculated (indirect method) by adjusting net income with a
A) $25,000 increase.
B) $10,000 increase.
C) $15,000 increase.
D) $15,000 decrease.

Accepted Answer

The provision for bad debt expense of $25,000 is a non-cash expense and would be added back to net income when calculating net cash flows from operating activities using the indirect method. The write-off of accounts receivable does not affect cash flow, as it is merely an adjustment between accounts receivable and the allowance for doubtful accounts.

Question 18

Snow Incorporated, had net income for 2008 of $5,000,000. Additional information is as follows:
 What should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2008, based solely on the above information?
A) $6,820,000.
B) $6,870,000.
C) $6,740,000.
D) $6,840,000.

Accepted Answer

$5,000,000 + $45,000 + $1,650,000 - $65,000 + $80,000 + $30,000 = $6,740,000.

Quiz 20: Appendix B: Reporting Cash Flows