Question 1

Use the following information and the indirect method to calculate the net cash provided or used by operating activities: Income before taxes…………………………………………… $14,000
Depreciation expense..………………………………………… 12,000
Payment on mortgage payable………………………………… 15,000
Gain on sale of land…………………………………………… 7,500
Increase in merchandise inventory……………………………. 2,050
Increase in accounts payable………………………………….. 6,150
Proceeds from sale of land……………………………………. 8,000
Income taxes paid……………………………………………... 1,700

Accepted Answer

To calculate the net cash provided by operating activities using the indirect method, start with the income before taxes ($14,000), add back non-cash expenses (depreciation expense of $12,000), and adjust for the changes in working capital (increase in inventory reduces cash by $2,050, increase in accounts payable increases cash by $6,150). The gain on sale of land ($7,500) is subtracted because it does not affect operating cash flow. The payment on mortgage payable and proceeds from the sale of land are financing and investing activities, respectively, and do not affect operating activities. Income taxes paid ($1,700) is a cash outflow for operating activities. Therefore, the calculation is $14,000 + $12,000 - $7,500 - $2,050 + $6,150 - $1,700 = $20,900.

Question 2

When preparing a statement of cash flows on the indirect method, each of the following should be classified as an operating activity cash flow except:

Accepted Answer

An increase in accounts receivable (A), an increase in prepaid expenses (D), and a decrease in accrued expenses payable (E) all relate to operating activities and should be classified as such in the statement of cash flows. However, a gain from disposal of a long-term asset (C) is a non-operating activity and should be classified as either an investing or financing activity depending on the nature of the disposal. A decrease in accounts payable (B) also relates to operating activities but is not part of the question which asks specifically for items classified as operating activities.

Question 3

A statement of cash flows should reconcile the differences between the beginning and ending balances of:

Accepted Answer

A statement of cash flows is designed to reconcile the differences between the beginning and ending balances of cash and cash equivalents, showing how cash levels have changed over the period.

Question 4

Use the following information about the current year's operations of a company to calculate the cash paid for merchandise.

Accepted Answer

The answer of Use the following information about the current...

Question 5

The reporting of net cash provided or used by operating activities that lists the major items of operating cash receipts, such as receipts from customers, and subtracts the major items of operating cash disbursements, such as cash paid for merchandise, is referred to as the:

Accepted Answer

The direct method of reporting net cash provided or used by operating activities lists cash receipts and cash disbursements and calculates the net amount, whereas the indirect method adjusts net income for non-cash items and changes in working capital accounts, making it a more complicated method. Therefore, the best answer is A, the Direct method of reporting net cash provided or used by operating activities.

Question 6

Becker Corporation paid cash dividends totaling $75,000 during its most recent fiscal year. How should this information be reported on Becker's statement of cash flows?

Accepted Answer

Cash dividends paid are considered a use of funds and are typically reported in the financing activities section of the statement of cash flows. However, there can be flexibility in presentation, and in some cases, dividends paid can be seen as part of operating activities if they are treated as a cost of accessing financial resources.

Question 7

When using the indirect method to calculate and report the net cash provided or used by operating activities, income is adjusted for:

Accepted Answer

The indirect method for calculating and reporting net cash provided or used by operating activities involves adjusting net income for items that affected reported net income but did not affect cash. This includes gains and losses from nonoperating items (A), revenues and expenses that did not provide or use cash (B), and changes in noncash current assets and current liabilities related to operating activities (C, D). Therefore, all of these adjustments are part of the process, making E the correct answer.

Question 8

A company reported that its bonds with a par value of $50,000 and a carrying amount of $57,000 are retired for $60,000 cash, resulting in a loss of $3,000. The amount to be reported under cash flows from financing activities is:

Accepted Answer

The amount of cash received from the retirement of bonds is reported under financing activities in the statement of cash flows. The loss on retirement of bonds is also reported as an outflow of cash under financing activities. Therefore, the net cash outflow of $3,000 ($60,000 cash received - $57,000 carrying amount) is reported as a financing activity of $60,000 cash received and $57,000 carrying amount, resulting in a loss of $3,000, which is reported as an outflow of cash under financing activities.

Question 9

A company's income statement showed the following: income before taxes, $150,000; income taxes paid, $26,000; depreciation expense, $30,000; and gain on sale of property, plant and equipment, $14,000. An examination of the company's current assets and current liabilities showed the following changes as a result of operating activities: accounts receivable decreased $9,400; merchandise inventory increased $18,000; prepaid expenses decreased $6,200; accounts payable increased $3,400. Calculate the net cash provided or used by operating activities.

Accepted Answer

The net cash provided or used by operating activities is computed using the indirect method.

Starting with income before taxes: 
- Add back depreciation expense = $150,000 + $30,000 = $180,000
- Subtract gain on sale of property, plant, and equipment = $180,000 - $14,000 = $166,000
- Adjustments for changes in current assets and liabilities: 
    - Decrease in accounts receivable = $166,000 + $9,400 = $175,400
    - Increase in merchandise inventory = $175,400 - $18,000 = $157,400
    - Decrease in prepaid expenses = $157,400 + $6,200 = $163,600
    - Increase in accounts payable = $163,600 - $3,400 = $160,200

Therefore, the net cash provided or used by operating activities is $141,000 ($160,200 increase in accounts payable - $150,000 income taxes paid).

Question 10

Of the following, which one affects cash during a period?

Accepted Answer

The payment of interest expense accrued in a previous accounting period affects cash because it involves an actual cash outflow to settle the liability.

Question 11

The direct method for the preparation of the operating activities section of the statement of cash flows:

Accepted Answer

The direct method lists each major item of operating cash receipts and cash payments separately, without adjusting for non-cash items or changes in working capital.

Question 12

In preparing a company's statement of cash flows for the most recent year on the indirect method, the following information is available: Income before taxes for the year was $60,000
Accounts payable decreased by $18,000
Accounts receivable decreased by $25,000
Inventories increased by $ 5,000
Depreciation expense was $30,000
Income taxes paid was $ 8,000
Net cash provided by operating activities was:

Accepted Answer

To calculate net cash provided by operating activities using the indirect method, start with income before taxes ($60,000), add back non-cash expenses (depreciation of $30,000), adjust for changes in working capital (accounts receivable decreased by $25,000, adding cash; inventories increased by $5,000, using cash; accounts payable decreased by $18,000, using cash), and subtract income taxes paid ($8,000). The calculation is $60,000 + $30,000 + $25,000 - $5,000 - $18,000 - $8,000 = $84,000.

Question 13

A company's Inventory balance at 12/31/11 was $188,000 and $200,000 at 12/31/10. Its Accounts Payable balance at 12/31/11 was $84,000 and $80,000 at 12/31/10, and its cost of goods sold for 2011 was $720,000. The company's total amount of cash payments for merchandise in 2011 equals:

Accepted Answer

The correct answer is A.The company's total amount of cash payments for merchandise in 2011 equals $704,000. This is calculated as follows:Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold$188,000 + Purchases - $200,000 = $720,000Purchases = $720,000 + $12,000 = $732,000Accounts Payable is a liability account that represents the amount of money that a company owes to its suppliers for goods or services that have been purchased but not yet paid for. The increase in Accounts Payable from 12/31/10 to 12/31/11 is $4,000 ($84,000 - $80,000). This means that the company has not yet paid $4,000 of the $732,000 in purchases that it made in 2011.Therefore, the company's total amount of cash payments for merchandise in 2011 is $732,000 - $4,000 = $728,000.

Question 14

When preparing a statement of cash flows on the indirect method, which of the following is correct?

Accepted Answer

A loss on the sale of land is added back to net income in the operating activities section to adjust for non-cash losses.

Question 15

The first line item in the operating activities section for a statement of cash flows prepared using the indirect method is:

Accepted Answer

The first line item in the operating activities section of a statement of cash flows prepared using the indirect method is typically net income. This is because the indirect method starts with net income and then adjusts for non-cash transactions and changes in working capital to arrive at cash provided by operating activities.

Question 16

The direct method of reporting operating cash flows:

Accepted Answer

The direct method of reporting operating cash flows is recommended but not required by the International Accounting Standards Board (IASB). However, most companies still choose to use this method as it provides a more detailed and transparent view of cash flows.

Question 17

A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:

Accepted Answer

The sale of a machine is considered an investing activity, and the cash received from the sale ($50,000) is the amount reported under cash flows from investing activities.

Question 18

The indirect method for the preparation of the operating activities section of the statement of cash flows:

Accepted Answer

The indirect method starts with net income and then makes adjustments to income for non-cash items and changes in current assets and liabilities to arrive at net cash provided or used by operating activities. There is no requirement for the company to be a merchandiser to use this method, and it may not be the best choice in all circumstances. Choices A and B describe the direct method, which is an alternative way to prepare the operating activities section of the statement of cash flows.

Question 19

Use the following information to calculate cash paid for wages and salaries:

Accepted Answer

The correct choice is determined by calculating the total cash paid for wages and salaries, which includes any adjustments for changes in wages payable or other relevant factors.

Question 20

When using the indirect method to calculate and report net cash provided or used by operating activities, which of the following is subtracted from income?

Accepted Answer

A decrease in wages payable indicates that cash was used to pay off the liability, thus it is subtracted from net income in the indirect method to calculate cash flows from operating activities.

Quiz 16: Statement of Cash Flows