Question 1

In its 2009 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2009. In its reconciliation schedule, WME should:
A)Show a $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue.
B)Show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.
C)Show a $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue.
D)Show a $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue.Unearned revenue, a liability account, increased by the cash received for $681,000 and decreased by the $695,000 revenue recognized.Thus, unearned revenue decreased by $14,000.

Accepted Answer

The $14,000 represents the decrease in unearned revenue, which is a liability account. Under the indirect method, a decrease in a liability account results in a negative adjustment to net income. Therefore, the correct answer is to show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.

Question 2

The amortization of bond discount is included in the statement of cash flows (indirect method) as:
A)A financing cash inflow.
B)An investing activity.
C)An addition to net income.
D)A deduction from net income.

Accepted Answer

The amortization of bond discount is added back to net income in the operating activities section of the statement of cash flows when using the indirect method, because it is a non-cash expense that reduced net income.

Question 3

An analyst compiled the following information for U, Inc. for the year ended December 31, 2009: 
$\bullet$ Net income was $1,700,000.
$\bullet$ Depreciation expense was $400,000.
$\bullet$ Interest paid was $200,000.
$\bullet$ Income taxes paid were $100,000.
$\bullet$ Common stock was sold for $200,000.
$\bullet$ Preferred stock (eight percent annual dividend) was sold at par value of $250,000.
$\bullet$ Common stock dividends of $50,000 were paid.
$\bullet$ Preferred stock dividends of $20,000 were paid.
$\bullet$ Equipment with a book value of $100,000 was sold for $200,000.
Using the indirect method, what was U Inc.'s net cash flow from operating activities for the year ended December 31, 2009?
A)$2,000,000.
B)$2,030,000.
C)$2,080,000.
D)$2,100,000.Cash flows from operations using the indirect method are computed by taking net income plus noncash expenses ) = $2,000,000.Note that interest and income taxes paid are expenses shown on the income statement and will already be factored into net income.The other information relates to financing and investing cash flows.

Accepted Answer

Cash flows from operations using the indirect method are computed by taking net income plus noncash expenses ) = $2,000,000.Note that interest and income taxes paid are expenses shown on the income statement and will already be factored into net income.The other information relates to financing and investing cash flows.

Question 4

Which of the following is reported as a deduction from net income when using the indirect method to determine net cash flows from operating activities?
A)Depreciation expense.
B)A bad debt written off under the allowance method.
C)Amortization of premium on bonds payable.
D)Dividends declared.

Accepted Answer

Amortization of premium on bonds payable is deducted from net income because it represents a non-cash item that increases net income, thus it needs to be subtracted to arrive at the cash flow from operating activities.

Question 5

On December 31, 2009, Tiras Company reported net income of $50,000 and sales of $200,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Tiras will report cash collected from customers in its 2009 statement of cash flows (indirect method) in the amount of:
A)$0.
B)$245,000.
C)$205,000.
D)$195,000.When using the indirect method to determine cash flows from operating activities, cash collected from customers is not calculated or reported.

Accepted Answer

When using the indirect method, the change in accounts receivable is used to calculate cash collected from customers. In this case, accounts receivable increased by $5,000 ($25,000 ending balance - $20,000 beginning balance). Since an increase in accounts receivable means that sales were made but the cash was not collected yet, the $5,000 increase in accounts receivable must be subtracted from net income to arrive at cash collected from customers. Therefore, the calculation is: $50,000 (net income) - $5,000 (increase in accounts receivable) = $45,000. However, this is not the correct answer choice given, as it is not an option. The correct answer is A, as cash collected from customers is not calculated or reported when using the indirect method.

Question 6

How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?
A)A decrease in cash flows from investing activities.
B)An increase in cash flows from investing activities.
C)A deduction from net income in arriving at cash flows from operations.
D)An addition to net income in arriving at cash flows from operations.

Accepted Answer

Amortization of patents is a non-cash expense. Therefore, it is added back to net income in the operating activities section of the cash flow statement when using the indirect method.

Question 7

In its 2009 income statement, WME reported a $40,000 loss on the sale of equipment. In its reconciliation schedule, WME should:
A)Report a $40,000 cash outflow for the direct method.
B)Show a $40,000 positive adjustment to net income under the indirect method.
C)Show a $40,000 negative adjustment to net income under the indirect method.
D)None of these is correct.This loss reduces net income, but has no effect on cash flow.

Accepted Answer

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

Question 8

Interest payments to creditors are reported in a statement of cash flows as:
A)An investing activity.
B)A borrowing activity.
C)A financing activity.
D)An operating activity.

Accepted Answer

Interest payments to creditors are considered part of the day-to-day operations of a business and are therefore reported in the statement of cash flows as an operating activity.

Question 9

Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?
A)Cash dividends paid.
B)A change in accounts receivable.
C)Depreciation.
D)A change in a prepaid expense.

Accepted Answer

The payment of cash dividends is reported as a financing activity on the statement of cash flows, not as an adjustment to net income when using the indirect method to compute net cash flows from operating activities.

Question 10

In its 2009 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:
A)Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.
B)Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.
C)Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
D)Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.When interest expense exceeds the cash paid, the effective interest rate exceeds the stated interest rate; therefore, the bond was sold at a discount.

Accepted Answer

If WME paid $9,000 of interest in cash and recorded interest expense of $11,000, the bond was sold at a discount. Therefore, WME should show a positive adjustment to net income of $2,000 for the decrease in bond discount under the indirect method in the reconciliation schedule. This adjustment is necessary to reconcile the difference between the cash paid and the interest expense recorded on the income statement.

Question 11

A loss on the sale of machinery should be reported in the statement of cash flows as:
A)An adjustment to net income under the indirect method.
B)An operating activity under the direct method.
C)An investing activity cash outflow.
D)A noncash investing activity.

Accepted Answer

The loss on the sale of machinery is added back to net income when preparing the statement of cash flows using the indirect method because it is a non-cash expense that reduced net income but did not involve an outflow of cash.

Question 12

Which of the following does not represent a cash flow relating to operating activities?
A)Cash dividends paid to stockholders.
B)Cash received from customers.
C)Interest paid to bondholders.
D)Cash paid for salaries.Dividends paid to stockholders are considered cash flows relating to financing activities.However, U.S.GAAP requires interest paid to bondholders to be considered an operating activity.

Accepted Answer

Cash dividends paid to stockholders are considered cash flows relating to financing activities.

Answer: C
 U.S.GAAP requires interest paid to bondholders to be considered an operating activity.

Therefore, the best choice is A.

Question 13

When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities, depreciation is added to net income because:
A)It was deducted as an expense on the income statement, but does not require cash.
B)It was deducted as an expense on the income statement and affects the amount of cash.
C)It is a significant portion of the year's expenses.
D)It represents a source or inflow of cash.

Accepted Answer

Depreciation is added back to net income in the cash flow statement because it is a non-cash expense that was subtracted from net income on the income statement. This adjustment is necessary to accurately reflect the cash generated from operating activities.

Question 14

In determining cash flows from operating activities (indirect method), adjustments to net income should not include:
A)An addition for depreciation expense.
B)An addition for bond discount amortization.
C)An addition for a gain on sale of equipment.
D)An addition for patent amortization.

Accepted Answer

In the indirect method of calculating cash flows from operating activities, non-cash expenses like depreciation and amortization (choices A, B, and D) are added back to net income because they reduce net income but do not involve an outflow of cash. However, gains on the sale of equipment (choice C) are deducted from net income because they represent a cash inflow that is not part of operating activities but rather an investing activity.

Question 15

In its 2009 income statement, WME reported $58,000 for insurance expense. WME paid $72,000 in insurance premiums during 2009. In its reconciliation schedule, WME should:
A)Show a $14,000 positive adjustment to net income under the indirect method for the increase in prepaid insurance.
B)Show a $14,000 negative adjustment to net income under the indirect method for the decrease in prepaid insurance.
C)Show a $14,000 negative adjustment to net income under the indirect method for the increase in prepaid insurance.
D)Show a $14,000 positive adjustment to net income under the indirect method for the decrease in prepaid insurance.Prepaid insurance, an asset account, increased by the cash payment of $72,000 and decreased by the $58,000 portion that was expensed.Thus, prepaid insurance increased by $14,000.

Accepted Answer

The reconciliation schedule under the indirect method adjusts for changes in non-cash accounts such as prepaid insurance. Since prepaid insurance increased by $14,000 ($72,000 - $58,000), the adjustment to net income would be negative (subtracting from reported net income) for the increase in prepaid insurance. Therefore, choice C is the correct answer.

Question 16

On June 4, White Corporation issued $400 million of bonds for $386 million. During the same year, $1 million of the bond discount was amortized. In a statement of cash flows prepared by the indirect method, White Corporation should report:
A)A financing activity of $400 million.
B)An addition to net income of $1 million.
C)An investing activity of $386 million.
D)A deduction from net income of $1 million.It is a financing activity of $386 million and an addition to net income of $1 million.

Accepted Answer

The amortization of the bond discount increases net income by $1 million in the operating activities section of the cash flow statement.

Question 17

A 10% stock dividend is reported in connection with a statement of cash flows as:
A)A financing activity.
B)An investing activity.
C)A noncash activity.
D)Not reported in the statement of cash flows.A stock dividend does not represent a significant operating, investing, or financing activity.

Accepted Answer

A stock dividend does not represent a significant operating, investing, or financing activity.

Question 18

In its 2009 income statement, WME reported $440,000 for the cost of goods sold. WME paid inventory suppliers $380,000 in 2009, and its inventory balance decreased by $41,000 during the year. In its reconciliation schedule, WME should:
A)Show a $19,000 positive adjustment to net income under the indirect method for the increase in accounts payable.
B)Show a $19,000 positive adjustment to net income under the indirect method for the decrease in accounts payable.
C)Show a $19,000 negative adjustment to net income under the indirect method for the increase in accounts payable.
D)Show a $19,000 negative adjustment to net income under the indirect method for the decrease in accounts payable.Decrease in inventory balance by $41,000 indicates that purchases were less than cost of goods sold by $41,000, totaling $399,000.If cash paid to suppliers was $380,000, accounts payable increased by $19,000.

Accepted Answer

The decrease in inventory indicates that purchases were less than the cost of goods sold, and since the cash paid was less than the purchases, accounts payable increased by $19,000. This increase in accounts payable is a source of cash, leading to a positive adjustment to net income.

Question 19

S Company reported net income for 2009 in the amount of $400,000. The company's financial statements also included the following: What is net cash provided by operating activities under the indirect method?
A)$432,000
B)$536,000
C)$580,000
D)$832,000

Accepted Answer

The answer of S Company reported net income for 2009...

Question 20

Which of the following is not true regarding the statement of cash flows?
A)The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis.
B)Noncash transactions sometimes are reported also in conjunction with the statement.
C)Either the direct or the indirect method can be used to calculate and report the net cash increase or decrease from operating activities.
D)The statement of cash flows provides information about cash flows that the other statements either do not provide or provide only indirectly.The indirect method derives cash flows indirectly by starting with net income and "working backwards" to convert that amount to a cash basis.

Accepted Answer

The answer of Which of the following is not true...

Quiz 21: The Statement of Cash Flows

In its 2009 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2009. In its reconciliation schedule, WME should:

The amortization of bond discount is included in the statement of cash flows (indirect method) as:

Which of the following is reported as a deduction from net income when using the indirect method to determine net cash flows from operating activities?

How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?

In its 2009 income statement, WME reported a $40,000 loss on the sale of equipment. In its reconciliation schedule, WME should:

Interest payments to creditors are reported in a statement of cash flows as:

Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?

In its 2009 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:

A loss on the sale of machinery should be reported in the statement of cash flows as:

Which of the following does not represent a cash flow relating to operating activities?

When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities, depreciation is added to net income because:

In determining cash flows from operating activities (indirect method) , adjustments to net income should not include:

In its 2009 income statement, WME reported $58,000 for insurance expense. WME paid $72,000 in insurance premiums during 2009. In its reconciliation schedule, WME should:

On June 4, White Corporation issued $400 million of bonds for $386 million. During the same year, $1 million of the bond discount was amortized. In a statement of cash flows prepared by the indirect method, White Corporation should report:

A 10% stock dividend is reported in connection with a statement of cash flows as:

In its 2009 income statement, WME reported $440,000 for the cost of goods sold. WME paid inventory suppliers $380,000 in 2009, and its inventory balance decreased by $41,000 during the year. In its reconciliation schedule, WME should:

S Company reported net income for 2009 in the amount of $400,000. The company's financial statements also included the following: What is net cash provided by operating activities under the indirect method?

Which of the following is not true regarding the statement of cash flows?