1.5 Statement Of Cash Flows Flashcards
All of the following should be classified under the operating section in a statement of cash flows except a
A. Decrease in inventory
B. Depreciation expense
C. Decrease in prepaid insurance
D. Purchase of land and building in exchange for a long-term note
D. Purchase of land and building in exchange for a long-term note.
A company entered into the following transactions during the year
- purchased stock for $200,000
- purchased electronic equipment for use on the manufacturing floor for $300,000
- paid dividends to shareholders of the company in the amount of $800,000
The amount to be reported in the investing activities section of the company’s statement of cash flows would be
A. $200,000
B. $500,000
C. $800,000
D. $1,300,000
B. $500,000
In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
A. Operating activities
B. Borrowing activities
C. Lending activities
D. Financing activities
A. Operating activities
A company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on its statement of cash flows as a(n)
A. Financing activity
B. Investing activity
C. Operating activity
D. Non-cash financing and investing activity
D. Non-cash financing and investing activity
The exchange of debt for a long-lived asset does not involve a cash flows. It is therefore classified as a noncash financing and investing activity.
To calculate cash flows using the indirect method, which one of the following items must be added back to net income?
A. Interest income
B. Depreciation expense
C. Marketing expense
D. Revenue
B. Depreciation expense
All of the following should be classified as investing activities in the statement of cash flows except
A. Cash inflows from the sale of a manufacturing plant
B. Cash inflows from the sale of bonds of other entities
C. Cash outflows to purchase manufacturing equipment
D. Cash outflows to lenders for interest
D. Cash outflows to lenders for interest
Consider the following financial data for a company that is preparing its cash flow statement.
- Amortization expense: $150,000
- Cash dividends paid to common shareholders: $75,000
- Net Income: $1,500,000
- Work-in-process inventory increase over the prior year: $300,000
- Gain on sale of equipment: $50,000
Using the indirect method, cash flow from operating activities would be
a. $1,225,000
b. $1,300,000
c. $1,350,000
d. $1,375,000
b. $1,300,000
Net Income + Amortization expense - inventory increase - gain on sale of equipment
The presentation of the major classes of operating cash receipts (such as receipts from customers) less the major classes of operating cash disbursement (such as cash paid for merchandise) is best described as the
a. format of the statement of cash flows
b. direct method of calculating net cash provided or used by operating activities
c. indirect method of calculating net cash provided or used by operating activities
d. cash method of determining income in conformity with generally accepted accounting principles.
b. direct method of calculating net cash provided or used by operating activities
The most commonly used method for calculating and reporting a company’s net cash flow from operating activities on its statement of cash flows is the
a. direct method
b. indirect method
c. single-step method
d. multiple-step method
b. indirect method
Which one of the following would result in a decrease to cash flow in the indirect method of preparing a statement of cash flows?
a. Amortization expense
b. Proceeds from the issuance of common stock
c. Decrease in inventories
d. Decrease in income taxes payable
d. Decrease in income taxes payable
Decrease in current liabilities such as accounts payable and income taxes payable are deducted from net income when determining cash flow indicating that cash was used to decrease the balances in these accounts.
The information reported in the statement of cash flows should help investors, creditors, and others to assess all of the following except the
a. company’s ability to pay dividends and meet obligations
b. company’s ability to generate future cash flows
c. management with respect to the efficient and profitable use of the firm’s resources
d. cash and noncash investing and financing transactions during the period.
c. management with respect to the efficient and profitable use of the firm’s resources.
For the fiscal year just ended, an entity had the following results:
Net income: $920,000
Depreciation expense: 110,000
Increase in accounts payable: 45,000
Increase in net accounts receivable: 73,000
Increase in deferred income tax liability: 16,000
Net cash flow from operating activities is
A. $1,018,000
B. $928,000
C. $1,074,000
D. $986,000
A. $1,018,000
The following is the net cash flow from operating activities calculated using the indirect method:
Net income: 920,000
Add) Increase in AP: 45,000
Add) Increase in deferred tax liability: 16,000
Add) Depreciation expense: 110,000
Minus) increase in net AR: (73,000)
= Net cash provided by operating activities: $1,018,000
The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from purchases to cash paid to suppliers. An increase in inventory is subtracted from net income. It indicates that purchases were greater than cost of goods sold. A decrease in inventory is added to net income. It indicates that purchases were less than cost of goods sold. However, the change in inventory is not given, so it is assumed to be zero. The increase in accounts payable is added to net income. It indicates that cash paid to suppliers was $45,000 less than purchases. Thus, the net effect of the changes in inventory and accounts payable is that cash paid to supplier was $45,000 ($0+45,000) less than than the accrual basis cost of goods sold. The increase in a deferred income tax liability (debit income tax expense, credit deferred liability) is a noncash item. The adjustment is a $16,000 addition to net income. Depreciation ($110,000) also is a noncash item that is added to net income. The net accounts receivable balance increased by $73,000, implying that cash collections were less than sales. If sales, collections, write-offs, and recognition of bad debt expense were the only relevant transactions, $73,000 should be subtracted from net income. Use of the change in net accounts receivable as a reconciliation adjustment is a short-cut method. It yields the same net adjustment to net income as separately including the effects of the change in gross accounts receivable, bad debt expense (a noncash item resulting in an addition), and bad debt write-offs (reflecting that write-offs did not result in collections).
Selected financial information for Kristina Company for the year just ended is shown below.
Net income: $2,000,000
Increase in net accounts receivable: 300,000
Decrease in inventory: 100,000
Increase in accounts payable: 200,000
Depreciation expense: 400,000
Gain on the sale of available-for-sale securities: 700,000
Cash receivable from the issue of common stock: 800,000
Cash paid for dividends: 80,000
Cash paid for the acquisition of land: 1,500,000
Cash received from the sale of available-for-sale securities: 2,800,000
Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is
A. $2,000,000
B. $3,100,000
C. $1,700,000
D. $2,400,000
C. $1,700,000
The following is the net cash flow from operating activities calculated using the indirect method:
Net income: $2,000,000
Add) Decrease in inventory: $100,000
Add) Increase in AP: 200,000
Add) Depreciation expense: 400,000
Minus) Increase in net AR (300,000)
Minus) Gain on sale of securities (700,000)
= Net cash provided by operating activities: $1,700,000
The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from purchases to cash paid to suppliers. The $100,000 decrease in inventory is added to net income. It indicates that purchases were $100,000 less than cost of goods sold. The $200,000 increase in accounts payable is added to net income. It indicates that cash paid to supplier was $200,000 less than purchases. Thus, the net effect of the changes in inventory and accounts payable is that cash paid to suppliers was $300,000 (100,000 + 200,000) less than the accrual basis cost of goods sold. Depreciation expense (400,000) is a noncash item included in net income. Hence, it is added to net income. The net accounts receivable balance increased by $300,000, implying that cash collections were less than sales. If sales, collections, write-offs, and recognition of bad debt expense were the only relevant transaction, $300,000 should be subtracted from net income. Use of the change in net accounts receivable as a reconciliation adjustment is a short cut method. It yields the same net adjustment to net income as separately including the effects of the change in gross accounts receivable, bad debt expense (a noncash item resulting in an addition), and bad debt write-offs (a subtraction to reflect that write-offs did not result in collections). The sale of securities is an investing activity. It also is subtracted from net income.
If the indirect method is used to present the statement of cash flows of a business, depreciation expense is
A. Not disclosed on the statement.
B. Presented as a deduction from net income in the operating section of the statement.
C. Reported as a cash outflow in the investing section of the statement.
D. Presented as an addition to net income in the operating section of the statement.
D. Presented as an addition to net income in the operating section of the statement.
In an indirect presentation of net cash flows from operating activities by a business, the statement of cash flows should begin with net income adjusted for certain items, including those recognized in the determination of net income that did not affect cash during the period. The recognition of depreciation expense reduces net income without directly affecting cash. Thus, depreciation must be added back to net income in the determination of cash flows from operating activities.
Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows?
A. The payment of cash for the purchase of additional equipment needed for current production.
B. A decrease in accounts payable during the year.
C. The payment of a cash dividend from money arising from current operations.
D. An increase in cash resulting from the issuance of previously authorized common stock.
B. A decrease in accounts payable during the year.
Operating activities are all transactions and other events that are not financing or investing activities. In general, operating activities involve the production and delivery of goods and the provision of services. Their effects normally are reported in earnings. A decrease in accounts payable indicates a cash outflow to the entity’s suppliers in payment for goods or services.
