Question 1

The Vintage Boutique had net income of $50,000.Accounts Receivable increased by $30,000;inventory decreased by $20,000;amounts payable increased by $4,000 and salaries payable decreased by $1,000.The amount of cash flow from continuing operating activities under the indirect method is:

Accepted Answer

Net income: $50,000
Add back depreciation and amortization (not given in the question): -
Changes in working capital:
Increase in accounts receivable: $30,000
Decrease in inventory: ($20,000)
Increase in amounts payable: $4,000
Decrease in salaries payable: ($1,000)
Cash flow from operating activities: $50,000 + $30,000 - $20,000 + $4,000 - $1,000 = $43,000. Therefore, the correct answer is B.

Question 2

If $10,000 was generated from operations,$4,000 was used for investing activities and $6,000 was generated from financing activities,the cash balance must have increased by:

Accepted Answer

The answer of If $10,000 was generated from operations,$4,000 was...

Question 3

Records for Serenity Sounds show net income of $30,000;depreciation expense of $10,000;and cash dividends paid of $5,000.The cash flow from operating activities on the cash flow statement using the indirect method is:

Accepted Answer

The cash flow from operating activities using the indirect method is computed by adjusting net income for non-cash items and changes in working capital. Starting with net income of $30,000, we add back depreciation expense of $10,000 (which is a non-cash expense), and subtract cash dividends paid of $5,000.

Therefore, the cash flow from operating activities is:

Net income + Depreciation expense - Cash dividends paid 
= $30,000 + $10,000 - $5,000 
= $35,000

However, the question asks for the cash flow from operating activities using the indirect method, so we need to adjust for changes in working capital accounts (such as accounts receivable, accounts payable, etc.) which are not given in the question. Therefore, the best choice is B, which is closest to the calculated cash flow of $35,000.

Question 4

Enterprise Industries' Accounts Receivable decreased by $30,000 and its Accounts Payable decreased by $16,000.What is the net effect on cash from operations under the indirect method?

Accepted Answer

Under the indirect method, changes in accounts receivable and accounts payable are both added back to net income to calculate cash flow from operations. 
Therefore, the net effect on cash from operations is:
+$30,000 (decrease in Accounts Receivable)
-$16,000 (decrease in Accounts Payable)
= +$14,000. 
Thus, the correct answer is D: +$14,000.

Question 5

One formula for determining cash collections from customers is to take Sales plus the increase in Accounts Receivable.

Accepted Answer

The formula for determining cash collections from customers is to take Sales minus the increase in Accounts Receivable.

Question 6

Green Timber reported net income of $52,000;depreciation expenses of $13,000;a gain on a land sale of $3,000;and a decrease in Accounts Receivable of $1,500.Under the indirect method,net Cash Flows from operations is:

Accepted Answer

Using the indirect method, we start with net income and make adjustments for non-cash expenses, gains, and changes in working capital. 
Starting with net income of $52,000: 
- add back depreciation expenses of $13,000 
- add back gain on land sale of $3,000 
- subtract decrease in accounts receivable of $1,500 
Net cash flows from operations = $52,000 + $13,000 + $3,000 - $1,500 = $66,500. 
Therefore, the correct choice is B.

Question 7

The records of Eclectic Lighting showed a net loss of $30,000;depreciation expense of $25,000;and an increase in supplies on hand of $5,000.The amount of net cash flow from operating activities using the indirect method is:

Accepted Answer

The net cash flow from operating activities is calculated by adjusting the net loss with non-cash expenses and changes in working capital. Start with the net loss of $30,000, add back the depreciation expense of $25,000 (a non-cash expense), and subtract the increase in supplies of $5,000 (an increase in current assets decreases cash flow). This results in a net cash flow of ($30,000 + $25,000 - $5,000) = ($10,000).

Question 8

Dividends received by a company appear in the operating activities section of a direct method cash flow statement.

Accepted Answer

Dividends received by a company are considered cash inflows from operating activities and are therefore included in the operating activities section of a direct method cash flow statement.

Question 9

Gains and losses on the sale of plant,property and equipment are ignored in the direct method of preparing a Statement of Cash Flows.

Accepted Answer

Gains and losses on the sale of plant, property and equipment are not included in the operating activities section of the direct method of preparing a Statement of Cash Flows.

Question 10

Under the direct method,amortization expense is added to net income.

Accepted Answer

Under the direct method, amortization expense is not added to net income because the direct method involves listing the cash flows from operating activities as actual cash receipts and payments, and amortization expense is a non-cash expense that does not affect cash flow.

Question 11

S&C's records show Accounts Receivable amounted to $215,000 at the beginning of the year and $245,000 at the end of the year.Income reported on the Income Statement for the year was $300,000.The cash flow from operating activities on the cash flow statement using the indirect method is:

Accepted Answer

The increase in Accounts Receivable ($245,000 - $215,000 = $30,000) indicates that not all reported income was received in cash. Therefore, the cash flow from operating activities is $300,000 (income) - $30,000 (increase in Accounts Receivable) = $270,000.

Question 12

In the direct method,each line of the Income Statement is converted from the accrual basis to cash basis.

Accepted Answer

The answer of In the direct method,each line of the...

Question 13

The FASB recommends use of the direct method,rather than the indirect method,of preparing a cash flow statement.

Accepted Answer

The FASB recommends the use of the direct method for preparing a cash flow statement because it provides more transparent information about the sources and uses of cash. However, the indirect method is also allowed under GAAP.

Question 14

TLR Productions' Accounts Receivable increased by $48,000 and its Accounts Payable increased by $27,000.What is the net effect on cash from operations under the indirect method?

Accepted Answer

Under the indirect method of cash flow calculation, an increase in accounts receivable is considered a decrease in cash from operations and an increase in accounts payable is considered an increase in cash from operations.

Therefore, the net effect on cash from operations is:

Accounts Receivable increase: -$48,000
Accounts Payable increase: +$27,000

Net effect on Cash from Operations: -$21,000 (Decrease in cash from operations)

Question 15

In the direct method of preparing a cash flow statement,interest received and interest expense are reported in the financing activities section.

Accepted Answer

In the direct method, interest received and interest expense are reported in the operating activities section, not the financing activities section.

Question 16

If $10,000 was generated from operations (indirect method);$4,000 was used for investing activities;and $6,000 was generated from financing activities,the cash balance:

Accepted Answer

The answer of If $10,000 was generated from operations (indirect...

Question 17

Under the direct method,the only section that differs from the indirect method is the financing activities section.

Accepted Answer

The direct method and the indirect method differ in the presentation of the cash flows from operating activities section, not the financing activities section.

Question 18

Because depreciation is not cash-based,it is NOT reported in the direct method of the Statement of Cash Flows.

Accepted Answer

Depreciation is a non-cash item that is added back to net income in the operating activities section of the indirect method of the statement of cash flows. Therefore, it is not reported in the direct method where only cash inflows and outflows are reported.

Question 19

Sterling Sails reported net income of $35,000;depreciation expenses of $20,000;an increase in Accounts Payable of $2,000;and an increase in current notes receivable of $3,000.Net Cash Flows from operating activities under the indirect method is:

Accepted Answer

Net cash flows from operating activities is calculated by adjusting net income for non-cash expenses and changes in working capital. Start with net income of $35,000, add back depreciation of $20,000, add the increase in Accounts Payable of $2,000, and subtract the increase in notes receivable of $3,000. This results in $35,000 + $20,000 + $2,000 - $3,000 = $54,000.

Question 20

Under the direct method,gains and losses on the sale of a fixed asset are reported in the investing section of the cash flow statement.

Accepted Answer

Under the direct method, gains and losses on the sale of a fixed asset are not reported in the investing section of the cash flow statement; instead, the proceeds from the sale are reported. Gains and losses affect the operating section as adjustments to reconcile net income to net cash provided by operating activities.

Quiz 11: The Statement of Cash Flows