Question 1

When using the indirect method to report cash flows from operating activities,depreciation expense is subtracted from net income to arrive at cash flows from operating activities.

Accepted Answer

In the indirect method, depreciation expense is added back to net income because it is a non-cash expense that reduces net income but does not affect cash flow.

Question 2

Hackett Company's prepaid rent was $12,000 at December 31 Year 1 and $15,000 at December 31,Year 2.Hackett reported rent expense of $45,000 on its Year 2 income statement.What would be reported as cash paid for rent on the statement of cash flows?
A)$42,000
B)$45,000
C)$48,000
D)$60,000

Accepted Answer

The cash paid for rent would be the difference between the prepaid rent at the beginning and end of the year, plus rent expense incurred during the year. Therefore, cash paid for rent would be ($15,000 - $12,000) + $45,000 = $48,000, which is option C.

Question 3

Which of the following adjustments to net income is correct when using the indirect method for computing cash flows from operating activities?
A)Subtract losses from sales of securities.
B)Add an increase in accounts receivable.
C)Subtract gains from sales of equipment.
D)Deduct an increase in accounts payable.

Accepted Answer

The answer of Which of the following adjustments to net...

Question 4

Two components of return on equity are liquidity and solvency.

Accepted Answer

The two components of return on equity are profitability and leverage or financial structure, not liquidity and solvency.

Question 5

The formula for working capital is ________.
A)total assets - current liabilities
B)current assets - current liabilities
C)total assets - total liabilities
D)current assets - total liabilities

Accepted Answer

Working capital is calculated as the difference between current assets and current liabilities. This represents the amount of funds available for everyday business operations. Option A uses total assets, which includes non-current assets that may not be readily available for immediate use. Option C uses total liabilities, which includes long-term liabilities that may not require immediate payment. Option D subtracts total liabilities from only current assets, which does not provide an accurate representation of working capital.

Question 6

When using the direct method of reporting cash flows from operating activities,increases in accounts receivable are subtracted from revenues to arrive at cash receipts from customers.

Accepted Answer

This statement is true. The direct method of reporting cash flows from operating activities involves subtracting increases in accounts receivable from revenues to determine cash receipts from customers.

Question 7

Which of the following adjustments to net income is incorrect when using the indirect method for computing cash flows from operating activities?
A)Deduct depreciation expense from net income.
B)Add a decrease in inventory to net income.
C)Deduct an increase in prepaid expenses from net income.
D)Add an increase in accounts payable to net income.

Accepted Answer

The answer of Which of the following adjustments to net...

Question 8

There is an inverse relationship between a company's solvency level and risk of default.

Accepted Answer

A company's solvency level refers to its ability to meet its financial obligations in the long-term, which reduces its risk of default. Therefore, there is an inverse relationship between solvency level and risk of default, meaning that as solvency level increases, risk of default decreases.

Question 9

The two components of return on equity are return on assets and financial leverage.

Accepted Answer

Return on equity (ROE) is derived from two components - return on assets (ROA) and financial leverage. ROA is the net income generated by the assets of the company, and financial leverage refers to the extent to which the company uses debt to finance its assets.

Question 10

Hackett,Inc had property tax payable of $75,000 and $110,000 at the end of 2016 and 2017 respectively.During 2017,Hackett recorded $750,000 in property tax expense on its income statement.Cash outflows for property tax during 2017 were ________.
A)$715,000
B)$750,000
C)$785,000
D)$640,000

Accepted Answer

The cash outflows for property tax during 2017 can be calculated by adjusting the property tax expense with the change in property tax payable: $750,000 (expense) - ($110,000 - $75,000) (increase in payable) = $715,000.

Question 11

Liquidity measures a company's ability to meet its long-term obligations as they become due.

Accepted Answer

Liquidity measures a company's ability to meet its short-term obligations as they become due, not necessarily its long-term obligations.

Question 12

Williams Corporation reported Cost of Goods Sold of $950,000 for December 31,2017.Accounts payable on the balance sheet were $65,000 for December 31,2016 and $58,000 for December 31,2017.Merchandise Inventory was $82,000 for December 31,2016 and $96,000 for December 31,2017.Cash paid for purchases during 2017 was ________.
A)$957,000
B)$971,000
C)$929,000
D)$943,000

Accepted Answer

To find cash paid for purchases, use the formula: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Rearrange to find Purchases: Purchases = COGS + Ending Inventory - Beginning Inventory. Then adjust for changes in Accounts Payable: Cash Paid = Purchases + Beginning Accounts Payable - Ending Accounts Payable. Calculating: Purchases = $950,000 + $96,000 - $82,000 = $964,000. Cash Paid = $964,000 + $65,000 - $58,000 = $971,000.

Question 13

The direct method of reporting cash flows from operating activities begins with net income from the income statement.

Accepted Answer

The answer of The direct method of reporting cash flows...

Question 14

There is a direct relationship between a company's interest coverage ratio and degree of solvency.

Accepted Answer

The answer of There is a direct relationship between a...

Question 15

The formula for current ratio is ________.
A)current assets divided by noncurrent assets
B)current assets divided by total assets
C)current assets divided by current liabilities
D)current assets divided by total liabilities

Accepted Answer

Current ratio is calculated by dividing current assets by current liabilities. This gives an indication of a company's short-term liquidity, i.e., whether it has enough current assets to cover its current liabilities. Option A is incorrect as it divides current assets by noncurrent assets, which is not relevant for calculating liquidity. Option B is incorrect as it divides current assets by total assets, which includes noncurrent assets as well, making it an inaccurate measure of liquidity. Option D is incorrect as it divides current assets by total liabilities, which does not give an accurate representation of a company's ability to meet its short-term obligations.

Question 16

Presented below are the comparative balance sheets and income statement for Pierce Manufacturing Corporation (in $ Million)for the year ended December 31,Year 2:
   Prepare the operating section of the statement of cash flows using the direct method and a reconciliation using the indirect method.

Accepted Answer

The answer of Presented below are the comparative balance sheets...

Question 17

Solvency measures a company's ability to meet its long-term obligations as they become due.

Accepted Answer

Solvency is the ability of a company to meet its long-term obligations, such as paying off its debt or financing its expansion plans. It is an important financial metric that indicates whether a company is financially stable enough to continue operating in the long-term.

Question 18

When using the direct method,losses on the sale of long-term assets are added to net income in the operating activities section.

Accepted Answer

When using the direct method, losses on the sale of long-term assets are reported as a separate item under the investing activities section, not in the operating activities section.

Question 19

Deluxe Hotels reported revenues of $560,000 for the year ended December 31,2017.Accounts receivable at December 31,2016 and 2017 were $65,000 and $52,000.If Deluxe uses the direct method of reporting operating cash flows,the company would report cash collected from customers of ________.
A)$560,000
B)$573,000
C)$495,000
D)$547,000

Accepted Answer

The answer of Deluxe Hotels reported revenues of $560,000 for...

Question 20

When using the indirect method of preparing the statement of cash flows,an increase in accounts payable should be treated as ________.
A)a cash outflow
B)inflow and outflow of cash
C)an addition to net income
D)a deduction from net income

Accepted Answer

The answer of When using the indirect method of preparing...

Quiz 6: Statements of Financial Position and Cash Flows and the Annual Report

When using the indirect method to report cash flows from operating activities,depreciation expense is subtracted from net income to arrive at cash flows from operating activities.

Hackett Company's prepaid rent was $12,000 at December 31 Year 1 and $15,000 at December 31,Year 2.Hackett reported rent expense of $45,000 on its Year 2 income statement.What would be reported as cash paid for rent on the statement of cash flows?

Which of the following adjustments to net income is correct when using the indirect method for computing cash flows from operating activities?

Two components of return on equity are liquidity and solvency.

The formula for working capital is ________.

When using the direct method of reporting cash flows from operating activities,increases in accounts receivable are subtracted from revenues to arrive at cash receipts from customers.

Which of the following adjustments to net income is incorrect when using the indirect method for computing cash flows from operating activities?

There is an inverse relationship between a company's solvency level and risk of default.

The two components of return on equity are return on assets and financial leverage.

Hackett,Inc had property tax payable of $75,000 and $110,000 at the end of 2016 and 2017 respectively.During 2017,Hackett recorded $750,000 in property tax expense on its income statement.Cash outflows for property tax during 2017 were ________.

Liquidity measures a company's ability to meet its long-term obligations as they become due.

The direct method of reporting cash flows from operating activities begins with net income from the income statement.

There is a direct relationship between a company's interest coverage ratio and degree of solvency.

The formula for current ratio is ________.

Presented below are the comparative balance sheets and income statement for Pierce Manufacturing Corporation (in $ Million)for the year ended December 31,Year 2: Prepare the operating section of the statement of cash flows using the direct method and a reconciliation using the indirect method.

Solvency measures a company's ability to meet its long-term obligations as they become due.

When using the direct method,losses on the sale of long-term assets are added to net income in the operating activities section.

Deluxe Hotels reported revenues of $560,000 for the year ended December 31,2017.Accounts receivable at December 31,2016 and 2017 were $65,000 and $52,000.If Deluxe uses the direct method of reporting operating cash flows,the company would report cash collected from customers of ________.

When using the indirect method of preparing the statement of cash flows,an increase in accounts payable should be treated as ________.