Unit 17 questions Flashcards
Under IFRS, bank overdrafts may be classified as cash and cash equivalents if they are what?
1) Repayable on demand and
2) part of an entity’s cash management
Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?
Statement of cash flows.
Under IFRS: Interest and dividends RECEIVED may be reported in what sections of the cash flows?
Operating or investing
Under IFRS: Interest and dividends PAID may be reported in what sections of the cash flows?
Operating and Financing
How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?
In operating activities as a deduction of income.
With respect to the content and form of the statement of cash flows, use of ___________ method if encourages?
Direct Method
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
Indirect method.
The FASB has expressed a preference for the direct method. However, if the direct method is used, a separate reconciliation based on the indirect method must be provided in a separate schedule. For this reason, most entities use the indirect method. The same net operating cash flow is reported under both methods.
When using the indirect method to prepare a statement of cash flows, which one of the following should be subtracted from net income when determining net cash flows from operating activities?
A. An increase in accrued liabilities.
B. Depreciation expense.
C. A loss on the sale of plant assets.
D. Amortization of premiums on bonds payable.
Answer (D) is correct.
The indirect method reconciles the net income of a business with the net operating cash flow. The indirect method removes the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of estimated future operating cash receipts and payments, and (3) all items not affecting operating cash flows to arrive at the net cash flow from operating activities. Hence, the amortization of the premium on bonds payable is subtracted from net income in the reconciliation because it represents a noncash decrease in interest expense (an increase in net income).
Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule?
A. A reconciliation of ending retained earnings to net cash flow from operations.
B. The major classes of gross cash receipts and gross cash payments.
C. The amount of income taxes paid.
D. A reconciliation of net income to net cash flow from operations.
A reconciliation of ending retained earnings to net cash flow from operations.
Answer (A) is correct.
A reconciliation of net income, not ending retained earnings, to net cash flow from operations is reported in a separate schedule if the direct method is used. This reconciliation may be reported within the statement or provided in a separate schedule if the indirect method is used.
How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method?
In operating activities as an addition to income.
When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity?
Operating.
If the direct method is used, a reconciliation of net income and net cash flows from operating activities is required to be provided in a separate schedule.
The presentation of the major classes of operating cash receipts (such as receipts from customers) minus the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the
Direct method of calculating net cash provided or used by operating activities.
The direct method converts the accrual-basis amounts in the income statement to the cash basis. It then reports the separate categories of gross cash receipts and disbursements. Net cash flow from operating activities is the difference between total cash receipts and total cash disbursements.
Reed Co.’s Year 1 statement of cash flows reported cash provided from operating activities of $400,000. For Year 1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s Year 1 statement of cash flows, what amount was reported as net income? A. $595,000 B. $205,000 C. $305,000 D. $105,000
Answer (B) is correct.
Depreciation expense and the loss from goodwill impairment are noncash items that are added to net income to arrive at net cash provided by operating activities. Hence, they are subtracted from net cash provided by operating activities to arrive at net income. The payment of cash dividends is not a reconciling item because it is a financing cash flow that does not affect net income. Net income was therefore $205,000 ($400,000 net cash provided by operating activities – $190,000 depreciation – $5,000 goodwill impairment).
What is included in the supplemental disclosure for the indirect method?
Cash paid for interest and cash paid for taxes.
