978-0077826482 Chapter 12 Part 1

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Chapter 12 Statement of Cash Flows Answer Key

True / False Questions

1. The statement of cash flows explains the difference between the beginning and ending

balances of cash and cash equivalents.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

2. The payment of salaries and wages would be reported as an operating activity on the

statement of cash flows.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

3. Maya Company’s purchase of 100 shares of Labrador Inc. common stock would be reported

as a financing activity on its statement of cash flows.

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12-1

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Topic: Classifying Cash Flows

4. The receipts of dividends and interest are both reported as cash inflows from investing

activities on the statement of cash flows.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

5. The payment of interest on bonds is classified as a cash outflow from operating activities on

the statement of cash flows.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

6. Treasury stock purchases made with cash are classified as cash outflows from financing

activities on the statement of cash flows.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

12-2

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7. The approach to preparing the cash flow statement relies on the following rearrangement of

the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders’ Equity +

Noncash Assets).

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Relationship to Other Financial Statements

8. The reporting of financing activities is identical under the indirect and direct methods for the

statement of cash flows on the statement of cash flows.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Preparing the Statement of Cash Flows

9. Under the indirect method, changes in current assets are used in determining cash flows from

operating activities and changes in current liabilities are used in determining cash flows from

financing activities.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-3

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10. When preparing the operating activities section of the statement of cash flows using the

indirect method, accumulated depreciation is added to net income in the operating section.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

11. When preparing the operating activities section of the statement of cash flows using the

indirect method, a decrease in accounts receivable is subtracted from net income.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12. When preparing the operating activities section of the statement of cash flows using the

indirect method, an increase in Income Taxes Payable is added to net income.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-4

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13. When the net cash flows from operating, investing, and financing activities are combined to

arrive at the overall net change in cash, a net decrease in cash is subtracted from the

beginning cash balance to calculate the ending cash balance.

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Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

14. Major investing and financing activities that do not involve cash do not have to be reported as

part of the statement of cash flows.

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Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

15. In general, the cash flow from operating activities is considered by many to be the most

important component of the statement of cash flows.

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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

12-5

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16. A healthy company typically shows positive cash flows in the financing activities section of the

statement of cash flows.

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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

17. In the decline phase, the company continues to enjoy positive operating cash flows but stops

spending cash on investing activities and instead uses its cash for financing activities such as

repaying lenders and returning excess cash to shareholders.

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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

18. Depreciation Expense is not reported on the statement of cash flows when prepared using the

direct method.

12-6

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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

19. When preparing the operating activities section of the statement of cash flows using the direct

method, net income must be adjusted for gains or losses realized when property, plant, and

equipment is sold.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Operating Cash Flows Revisited (Direct Method)

20. When preparing the operating activities section of the statement of cash flows using the direct

method, a gain or loss from selling equipment is reported in the operating activities section of

the statement of cash flows.

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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Operating Cash Flows Revisited (Direct Method)

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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21. Investing activities include receiving cash from the sale of land and also the resulting gain or

loss on the sale.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Classifying Cash Flows

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

22. Using the T-account approach to preparing the statement of cash flows, an increase in

Accounts Payable would appear on the debit side of the Cash account.

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Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.

Topic: T-account Approach (Indirect Method)

Multiple Choice Questions

12-8

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23. The statement of cash flows cannot be used to determine:

A. changes in working capital.

B. expenditures on long-term assets.

D. reliance on external financing.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

24. Which of the following statements about the statement of cash flows is not correct?

A. It does not replace the income statement.

B. It provides details as to how cash changed during a period.

C. It provides information about cash receipts and cash payments over a period of time.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

12-9

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25. Suppose a company generally records revenues and expenses before receiving or making

cash payments. Which of the following statements is not correct?

A. If revenues are falling, a net loss could result even though the company reports a net cash

inflow from operating activities.

B. If revenues are rising, net income could result even though the company reports a net cash

outflow from operating activities.

D. The income statement doesn’t explain changes in cash because it focuses on just the

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

26. Which of the following statements about the statement of cash flows is not correct?

A. GAAP requires every company to report a statement of cash flows.

C. The statement of cash flows is needed because the income statement and balance sheet

do not provide adequate information about the changes in cash.

D. The statement of cash flows provides information about how each major type of business

activity causes a company’s cash to change.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

12-10

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27. Cash and cash equivalents include assets that:

A. have stable long-term value.

C. consistently grow in value over the long run.

D. are expected to be used up within a year.

Cash equivalents are short-term, highly liquid investments purchased within three months of

maturity. They are considered equivalent to cash because they are both (1) readily convertible

to known amounts of cash and (2) so near to maturity that their value is unlikely to change.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

28. Which of the following items is considered to be a cash equivalent?

A. An investment in a U. S. bond due in two years

B. A one-year certificate of deposit due in six weeks

D. A promissory note due from a customer in 7 months

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

12-11

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29. Which of the following would not be included in the cash and cash equivalents amount

reported on the balance sheet?

A. Money market funds

B. Checking accounts

C. Treasury bills

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

30. A company purchased money market funds with cash during the current year. Which of the

following statement is correct?

A. This transaction will result in a decrease in cash from operating activities.

B. This transaction will result in a decrease in cash from investing activities.

C. This transaction will result in a decrease in cash from financing activities.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

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31. Which of the following statements is correct?

B. Cash flows are easily manipulated because they are based on estimates.

C. Accrual-based net income is not easily manipulated because valuation for such items as

bad debts and inventory are precise and based on objectively verifiable information.

D. Cash flows are not easily manipulated because they are generated by internal transactions

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

32. Which of the following statements about the statement of cash flows is not correct?

A. The statement of cash flows can be used to assess the likelihood of a company paying

dividends.

C. A company can have positive net income but at the same time have negative cash flow.

D. The statement of cash flows is the only financial statement that reports business activities.

Accrual-based net income is the best measure of profitability in spite of the estimates made. A

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Topic: Business Activities and Cash Flows

12-13

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33. Which of the following is the best measure of a company’s profitability?

A. Cash-based net income

C. Accounts Receivable

D. Sales Revenue

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Business Activities and Cash Flows

34. Accrual-basis accounting is superior to cash-basis accounting in that:

B. a statement of cash flows is not needed.

C. the cash balance reported will be greater.

D. there is only one method of preparing the operating activities of the statement of cash

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

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Topic: Business Activities and Cash Flows

12-14

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35. What is the purpose of the statement of cash flows?

B. It illustrates the profitability of a company.

C. It reports the financial position of a company at a specific point in time.

D. It outlines the changes in stockholders’ equity accounts from the beginning of the period to

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36. Which of the following would be included in cash flows from operating activities?

B. Cash received from an issuance of bonds

C. Cash dividends paid to stockholders

D. Cash used for purchases of equipment

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

12-15

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37. Cash flows from operating activities include all of the following except:

B. collections from customers on account.

C. payments to employees for hours worked.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

38. Cash flows from operating activities include:

B. paying principal to lenders

C. purchases of equipment

D. proceeds from stock issuance

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

39. The Viviana Co. uses the indirect method to determine its cash flow from operations. Which of

the following items will be subtracted from net income to find its cash flow from operations?

A. Decrease in Supplies

B. Increase in Accounts Payable

C. Depreciation Expense

D. Increase in Accounts Receivable.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

40. Which of the following would be classified as an operating activity on the statement of cash

flows using the direct method?

A. Cash dividends paid

B. Cash received from selling equipment

C. Cash paid to retire bonds payable at maturity

In the direct method, sales would be converted to cash by adding a decrease in accounts

receivable or by subtracting an increase in accounts receivable. Paying cash dividends and

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

41. A company loaned $1,000,000 with interest at 7% to another company. The interest revenue

from this loan would be reported on the statement of cash flows as a:

B. cash inflow from investing activities.

C. cash inflow from financing activities.

D. noncash investing and/or financing activity.

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Topic: Classifying Cash Flows

12-17

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42. Which of the following journal entries has an effect on cash provided by (used in) operating

activities?

A. Bad debts expense

B. Depreciation expense

C. Sale of an investment

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

43. Which of the following statements about cash flows from investing activities is correct?

activities.

B. Cash flows from investing activities are calculated by making adjustments to net income.

C. Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities.

D. Cash received from issuing a long-term payable is reported as a cash inflow from investing

activities.

Cash flows from investing activities are the cash inflows and outflows related to the purchase

and disposal of investments and long-lived assets. Cash flows from operating (rather than

investing) activities are calculated by making adjustments to net income. Cash paid to acquire

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12-18

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44. Which of the following would be included in cash flows from investing activities?

A. Cash collected from customers

B. Cash received from an issuance of bonds

C. Cash dividends paid

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

45. Cash flows from investing activities include cash:

A. inflows and outflows reflecting revenues and expenses reported on the income statement.

B. inflows from the issuance of bonds.

D. inflows from the sale of a company’s own stock to its stockholders.

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Topic: Classifying Cash Flows

12-19

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46. Which of the following would be reported as a cash outflow from investing activities?

A. Donating an old piece of equipment to charity

B. Repaying the principal of a bond

D. Acquiring an investment security by issuing company stock

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

47. Cash flows from investing activities include all of the following except a(n):

A. purchase of an automobile.

B. sale of a trademark.

C. purchase of stock of another company.

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Topic: Classifying Cash Flows

12-20

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48. Which of the following would be classified as an investing activity on the statement of cash

flows?

B. Cash paid for interest

C. Cash received from stock issuance

D. Cash dividends paid

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-03 Report cash flows from investing activities.

Topic: Classifying Cash Flows

Topic: Under Armour’s Investing Cash Flow Calculations

49. A company’s cash flows from investing activities include cash transactions relating to the

purchase and disposal of which types of assets?

A. All of a company’s assets

B. All of a company’s assets except inventory

D. Property, plant and equipment

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12-21

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50. Cash flows from investing activities include:

A. changes in Accounts Receivable.

C. paying principal to lenders.

D. cash dividends paid.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

51. Which of the following would be included in cash flows from financing activities?

A. Cash proceeds from sales

B. Cash received from a sale of land

D. Cash used to purchases of equipment

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Topic: Classifying Cash Flows

12-22

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52. Cash flows from financing activities include all of the following except:

A. payment of long-term debt.

C. proceeds from stock issuance.

D. cash dividends paid.

GAAP requires the payment of interest to be classified as a cash outflow from operating

activities because it enters into the determination of net income. Cash flows from financing

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

53. Which of the following would be classified as a financing activity on the statement of cash

flows?

A. Cash receipts from accounts receivable collections

B. Cash receipts from sale of equipment

D. Cash paid for interest on notes payable

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12-23

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54. The repayment of the principal of a loan which had been used to finance the purchase of

equipment should be reported on the statement of cash flows as a:

A. cash outflow from investing activities.

B. cash outflow from operating activities.

D. noncash investing and financing activities in a supplemental disclosure.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

55. Which of the following statements about financing activities is not correct?

A. Cash dividends paid to a company’s stockholders are reported as cash outflows from

financing activities.

B. When a company issues stock for cash, it reports a cash inflow from financing activities.

C. When a company repurchases stock with cash, it reports a cash outflow for financing

activities.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

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12-24

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56. Which of the following statements about cash flows from financing activities is correct?

A. When a company borrows from lenders, a cash outflow from financing activities has

occurred.

B. When a company receives cash dividends, a cash inflow from financing activities has

occurred.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

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57. Which of the following is included in the financing activities on a statement of cash flows?

A. Changes in accounts payable

B. Purchases of equipment

C. Paying interest to lenders

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12-25

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58. Cash flows from financing activities can include:

A. selling goods on credit.

B. acquiring long-lived assets.

D. purchasing inventory on credit.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

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59. Which of the following items below will be subtracted in the financing cash flow portion of the

statement of cash flows?

A. Net income earned

B. Bank loans obtained

D. Disposal of equipment

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12-26

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60. Which of the following statements about classification choices is correct?

classified as either an operating or financing activity.

B. GAAP allows interest paid to be classified as either an operating or financing activity, but

IFRS requires that it be classified as a financing activity.

C. GAAP classifies cash dividends received as an investing activity, but IFRS allows them to

be classified as either an operating or investing activity.

D. GAAP classifies interest received as either an operating or investing activity, but IFRS

requires it to be classified as an investing activity.

GAAP classifies cash dividends paid as financing activities because they are transactions with

stockholders. IFRS allows cash dividends paid to also be classified as operating activities to

assist users in determining the company’s ability to pay dividends out of operating cash flows.

GAAP requires cash payments of interest and the cash receipts of dividends and interest to be

classified as operating activities because all three enter into the determination of net income.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

61. Cash provided by issuing stock to owners should be reported as cash:

B. outflows from financing activities.

C. inflows from investing activities.

D. outflows from investing activities.

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Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Classifying Cash Flows

12-27

McGraw-Hill Education.

62. Which of the following items would not be classified as a cash flow from financing activities?

A. Payments of amounts owed to owners

B. Borrowing from financial institutions

C. Issuing additional common stock

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Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Classifying Cash Flows

63. Which of the following classifications is not used on the statement of cash flows?

A. Operating

B. Investing

C. Financing

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Classifying Cash Flows

12-28

McGraw-Hill Education.

64. Which of the following is not needed to prepare a statement of cash flows?

B. Comparative balance sheets

C. Additional data concerning selected accounts that increase and decrease as a result of

investing and/or financing activities

D. A complete income statement

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Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Relationship to Other Financial Statements

65. Which of the following equations is correct?

A. Change in cash = Change in noncash assets

B. Change in cash = Change in liabilities + Change in stockholders’ equity

noncash assets

D. Change cash = Change in liabilities + Change in stockholders’ equity + Change in noncash

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Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Relationship to Other Financial Statements

12-29

McGraw-Hill Education.

66. The statement of cash flows may be viewed in terms of the balance sheet equation. Which of

the following expressions below is correct?

B. Change in Cash = Change in (Stockholders’ Equity – Liabilities + Noncash Assets)

C. Change in Cash = Change in (Liabilities – Noncash Assets)

D. Change in Cash = Change in (Stockholders’ Equity – Liabilities)

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Relationship to Other Financial Statements

67. Which of the statements below is correct when comparing the direct and indirect methods of

reporting operating cash flows?

A. The direct method starts with net income and makes adjustments to arrive at the net cash

provided by or used in operations.

B. The indirect method starts with cash collected from customers and details cash inflows and

outflows from operations.

cash provided by or used in operations.

D. The net cash provided by or used in operations will be different depending on whether the

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Preparing the Statement of Cash Flows

12-30

McGraw-Hill Education.

68. Which of the following variations of the accounting equation describes the preparation of the

statement of cash flows?

B. Change in cash = Change in (Liabilities – Stockholders’ equity + Noncash assets)

C. Change in cash = Change in (Liabilities + Stockholders’ equity + Noncash assets)

D. Change in cash = Change in (Liabilities – Stockholders’ equity – Noncash assets)

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Relationship to Other Financial Statements

69. If the calculation of cash flows from operating activities starts with net income, the company:

A. is using the net income method.

C. is using the direct method.

D. will add all noncash items not included in the calculation of net income.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-31

McGraw-Hill Education.

70. What is the starting point for calculating cash flows from operations when the indirect method

is used?

B. Calculate the net change in the cash account.

C. Add the change in accounts receivable to sales revenue.

D. Identify the balance sheet accounts that relate to operating activities.

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Difficulty: 1 Easy

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Preparing the Statement of Cash Flows

71. Which of the following statements is correct?

both operating and investing.

B. Inventory includes cash flows that may be categorized as both operating and investing.

C. Retained Earnings includes cash flows that may be categorized as both operating and

investing.

D. Bonds Payable includes cash flows that may be categorized as both operating and

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Preparing the Statement of Cash Flows

12-32

McGraw-Hill Education.

72. How is the change in cash classified on the statement of cash flows?

A. It is found in the investing activities section of the statement.

B. It is found in the operating activities section of the statement.

C. It is found in the financing activities section of the statement.

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Preparing the Statement of Cash Flows

73. Darnell, Inc.’s balance sheet indicated that the cash account increased by $5,400 during the

past year. Net cash provided by operating activities was $14,000 and net cash used in

investing activities was $6,100. What was the net cash flow effect of the company’s financing

activities?

A. Net cash provided of $2,500

C. Net cash used of $14,700

D. Net cash provided of $14,700

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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Source: LearnSmart

Topic: Preparing the Statement of Cash Flows

12-33

McGraw-Hill Education.

74. In calculating the net cash provided by or used in operations using the indirect method, which

of the following items would be subtracted from net income?

A. A decrease in Prepaid Rent

C. An increase in long-lived assets

D. An increase in Salaries and Wages Payable

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

75. If operating cash flows are calculated using the indirect method, which of the choices below

correctly states the direction of adjustments to convert net income into net cash provided by or

used in operations?

Account Deduct from

Net Income

Add to Net

Income

A) Inventory Increase Decrease

B) Accounts

Payable Increase Decrease

C) Accounts

Receivable Decrease Increase

D) Accrued

Liabilities Increase Decrease

B. Option B

C. Option C

D. Option D

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12-34

McGraw-Hill Education.

Difficulty: 1 Easy

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

76. Depreciation is added back to net income in a statement of cash flows prepared using the

indirect method because it:

B. is a cash inflow.

C. is a revenue.

D. is a valuation concept.

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Difficulty: 1 Easy

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

77. Depreciation Expense is $20,000 and the beginning and ending Accumulated Depreciation

balances are $150,000 and $155,000, respectively. What is the cash paid for depreciation?

A. $20,000

B. $5,000

D. $25,000

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-35

McGraw-Hill Education.

78. Which of the following statements about calculation of cash flows from operating activities

under the indirect method is correct?

A. When the indirect method is used, changes in current liabilities are subtracted while

changes in current assets are added to convert net income to net cash flow from operating

activities.

in the process of calculating net cash flow provided by operating activities.

C. When the indirect method is used, changes in long-term assets are added to convert net

income to net cash flow provided by operating activities.

D. When the indirect method is used, changes in long-term liabilities are subtracted to convert

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

79. When the indirect method is used, if accounts receivable increases during the accounting

period, the change in accounts receivable is:

A. added to the change in the cash account.

C. added to net income.

D. subtracted from the change in the cash account.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

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McGraw-Hill Education.

80. When the indirect method is used, if a prepaid expense account decreases during the

accounting period, the change in the prepaid expense account is:

A. added to the change in the cash account.

B. subtracted from net income.

D. subtracted from the change in the cash account.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

81. Assume a company uses the indirect method to prepare its statement of cash flows. If the

Supplies account increases and Salaries and Wages Payable decreases during an accounting

period, what does the company do with the changes in these accounts to calculate cash flows

from operating activities?

A. Both are added to net income.

B. The change in Salaries and Wages Payable is added to net income; the change in

Supplies is subtracted from net income.

D. The change in Supplies is added to net income; the change in Salaries and Wages

Payable is subtracted from net income.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

12-37

McGraw-Hill Education.

Topic: Determining Operating Cash Flows Using the Indirect Method

82. Brighton, Inc. uses the indirect method to determine its net cash flows from operating

activities. During the course of the year, the company’s Accounts Receivable increased by

$10,000 and its Accounts Payable decreased by $5,000. If these are the only two adjustments

required to convert net income to net cash provided by operating activities, the combined

effect will be a(n):

A. subtraction of $5,000.

B. addition of $5,000.

C. addition of $15,000.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

83. Using the indirect method, which of the following would be added to net income?

B. An increase in Prepaid Insurance

C. A decrease in Salaries and Wages Payable

D. An increase in Equipment

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-38

McGraw-Hill Education.

84. Assume a company uses the indirect method to prepare its statement of cash flows. If

Inventory decreases and Unearned Revenue increases during an accounting period, what

does the company do with the changes in these accounts to calculate cash flows from

operating activities?

B. The change in inventory is added to net income; the change in unearned revenue is

subtracted.

C. Both are subtracted from net income.

D. The change in unearned revenue is added to net income; the change in inventory is

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Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

85. Chino Company reported net income of $20,000 for the current year. During the year,

Inventory decreased by $7,000, Accounts Payable decreased by $8,000, Depreciation

Expense was $10,000, and Accounts Receivable increased by $6,500. If the indirect method is

used, what is the net cash provided by operating activities?

A. $10,500

C. $38,500

D. $51,500

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Blooms: Apply

12-39

McGraw-Hill Education.

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

86. Consider the following information:

Net income $20,000

Depreciation 3,000

Increase in accounts receivable 1,000

Decrease in prepaid rent (400)

Increase in accrued liabilities 900

Cash paid to purchase office equipment 4,000

What is the net cash provided by operating activities?

A. $17,500

B. $18,500

C. $21,500

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-40

McGraw-Hill Education.

87. The following additional information is available from the financial statements of Hitchens

Company:

Amortization Expense $18,000

Purchase of building for cash 135,000

Depreciation Expense 54,000

Increase in Accounts Receivable 15,000

Increase in Bonds Payable 250,000

Increase in Common Stock 60,000

Increase in Inventory 43,000

Decrease in Accounts Payable 68,000

Increase in Salaries and Wages Payable 25,000

Cash dividends paid 100,000

Net income 292,000

What is the net cash provided by operating activities?

B. $285,000

C. $396,000

D. $368,000

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-41

McGraw-Hill Education.

88. A company’s income statement for the year shows a net loss of $90,000. Additional

information for the year follows:

Depreciation Expense $40,000

Increase in Accounts Receivable 72,000

Decrease in Inventory 25,000

Decrease in Prepaid Rent 9,000

Decrease in Accounts Payable 11,000

What is the net cash provided by (used in) operating activities?

B. $27,000

C. $13,000

D. ($45,000)

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-42

McGraw-Hill Education.

89. Brighton, Inc. uses the indirect method to determine its cash flow from operations. During the

course of the year, Brighton, Inc.’s Accounts Receivable increased by $10,000 and its

Accounts Payable decreased by $5,000. As a result of these two items, the net addition (or

subtraction) to convert net income to cash flow from operations equals:

A. $5,000.

B. ($5,000).

C. $15,000.

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Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

12-43

McGraw-Hill Education.

12-44

McGraw-Hill Education.

90. The information below was obtained from the financial statements of Faraday Corp. Based on

this information, what was the amount of the net cash provided by operating activities during

the current year?

Prior

Year

Current

Year

Net Income $500,000 $655,000

Depreciation Expense 60,000 72,000

Accounts Receivable 89,000 78,000

Inventory 116,000 142,000

Accounts Payable 120,000 117,000

Salaries and Wages Payable 56,000 68,000

A. $713,000

C. $661,000

D. $637,000

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

91. The starting point for preparing the operating activities section using the indirect method is:

A. current assets.

B. current liabilities.

D. ending cash balance.

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Difficulty: 1 Easy

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

92. Which of the following statements best describes the reason Depreciation Expense is added to

net income when preparing the statement of cash flows?

A. Depreciation expense originally reduced net income, but it actually represents a cash

inflow for the company.

paying cash.

C. Depreciation expense originally reduced net income, but it actually represents a cash

outflow for the company.

D. Depreciation expense is not included in net income and, so, its cash effect must be

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

93. When preparing the statement of cash flow using the indirect method, Depreciation Expense

is:

B. subtracted from net income under the operating activities section.

C. subtracted net income under the financing activities section.

D. added back to net income under the financing activities section.

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Difficulty: 1 Easy

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

94. In arriving at cash from operating activities, adding a decrease in Supplies to net income

eliminates the effect of recording adjusts net income for transactions that:

A. increased net income, but has not been paid in cash this period.

B. decreased net income, but has not been paid in cash this period.

D. flow this period increased net income and increased cash flow this period.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

12-47

McGraw-Hill Education.

95. When the indirect method is used to determine net cash provided by (used in) operating

activities, subtracting an increase in Accounts Receivable from net income eliminates the

effect of recording revenue that:

B. decreased net income, but did not impact cash.

C. increased net income and increased cash flow.

D. decreased net income and decreased cash flow.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

96. Subtracting a decrease in Unearned Revenue from net income eliminates the effect of

recording revenue that:

B. decreased net income, but did not impact cash this period.

C. increased net income and increased cash flow this period.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

12-48

McGraw-Hill Education.

97. In arriving at cash from operating activities, subtracting a decrease in Salaries and Wages

Payable from net income includes the cash effects of transactions that:

A. increased cash, but did not affect net income.

B. increased cash and increased net income.

D. decreased cash and decreased net income.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

98. When the indirect method is used to determine net cash provided by (used in) operating

activities, adding an increase in Interest Payable to net income eliminates the effect of

recording expenses that:

A. increased net income, but did not impact cash.

C. increased net income and increased cash flow.

D. decreased net income and decreased cash flow.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

12-49

McGraw-Hill Education.

99. Assume that the indirect method is used to determine net cash provided by (used in) operating

activities and that Accounts Receivable balance decreased by $10 million during the year. That

$10 million should be:

B. subtracted from net income.

C. added to investing activities.

D. subtracted from investing activities.

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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

100. Assume that the indirect method is used to determine net cash provided by (used in) operating

activities and that Prepaid Insurance decreased during the year. That decrease is added to net

income because:

A. the company paid additional premiums this period in excess of the Insurance Expense

recorded on the income statement.

decrease in net income, but it does not involve cash so it is added back to net income.

C. it includes the impact of increasing cash and increasing net income.

D. it accounts for purchasing more insurance during the period than has been expensed.

The income statement reports expenses of the period, but cash flow from operating activities

must reflect the cash payments. Cash prepayments increase the balance in prepaid expenses,

and recording of expenses decreases the balance in prepaid expenses. A decrease in Prepaid

Expenses means that cash prepayments this period were less than expenses. These extra

cash prepayments must be added to net income.

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Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Source: LearnSmart

Topic: Determining Operating Cash Flows Using the Indirect Method

12-50

McGraw-Hill Education.

101. Two years ago, your company bought $40,000 in bonds from another company. This month, it

sold half of those bonds for $20,640 and purchased the common stock of another company for

$1,000. On the statement of cash flows for this accounting period, your company would report

a net cash:

A. outflow of $19,640 from investing activities.

C. inflow of $20,640 from investing activities.

D. outflow of $20,640 from investing activities.

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Learning Objective: 12-03 Report cash flows from investing activities.

Topic: Under Armour’s Investing Cash Flow Calculations

102. In determining cash flows related to investing activities, which accounts are analyzed?

A. Inventory and accounts receivable.

B. Loans payable and common stock.

C. Short-term investments and prepaid expenses.

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Learning Objective: 12-03 Report cash flows from investing activities.

Topic: Under Armour’s Investing Cash Flow Calculations

12-51

McGraw-Hill Education.

103. Braden and Sons, Inc. paid cash to purchase equipment costing $342,000 this year. Also this

year, the company sold for $70,000 cash, equipment that originally cost $230,000 five years

ago. How should these transactions be listed in the statement of cash flows?

A. Braden can combine the transactions and show a decrease to cash for $112,000.

B. Braden can combine the transactions and show a decrease to cash for $272,000.

C. The purchases and the sales of equipment must be shown separately as a decrease to

cash for $572,000 (purchase) and an increase of $70,000 (sale).

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Learning Objective: 12-03 Report cash flows from investing activities.

Source: LearnSmart

Topic: Under Armour’s Investing Cash Flow Calculations

104. Dover Co.’s comparative balance sheet indicated that the Equipment account increased by

$40,000. Upon further investigation of the account changes, it is determined that Dover

purchased equipment totaling $70,000 for the year. It also sold equipment with an original cost

of $30,000 for $8,000 cash. Assuming these are the only transactions affecting the investing

activities, Dover will report net cash flows provided by (used in) investing activities of:

A. ($40,000).

B. ($70,000).

C. ($32,000).

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Learning Objective: 12-03 Report cash flows from investing activities.

Source: LearnSmart

Topic: Under Armour’s Investing Cash Flow Calculations

12-52

McGraw-Hill Education.

105. To determine net cash provided by or used in financing activities, one must analyze the:

A. Notes Receivable and Bonds Payable accounts.

B. Cash account.

D. Interest Expense and Dividend Income accounts.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

106. Which of the following are used to determine cash flows from financing activities?

A. Short-term debt, Accrued Liabilities, Common Stock, and Notes Payable

C. Short-term debt, Accrued Liabilities, Retained Earnings, and Bonds Payable

D. Long-term debt, Notes Payable, Interest Expense, and Bonds Payable

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

12-53

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107. Which of the following represent cash outflows from financing activities?

A. Distributing a stock dividend

C. Issuing long-term bonds at a discount

D. Paying interest on promissory notes

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

108. Which of the following represents a cash inflow from financing activities?

A. Issuing stock in exchange for another company’s stock.

B. Paying a bond’s face value at maturity.

D. Receiving interest on promissory notes.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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109. A company took out $665,000 of new debt this year and repaid $1,000,000 of older debt in the

same year. The company also issued stock for $442,000 cash and paid dividends of $99,000

for the year. The company’s financing cash flows appearing the statement of cash flows will

show:

A. Net cash used in financing activities of $434,000

B. Net cash used in financing activities of $335,000

D. Net cash provided by financing activities of $107,000

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

110. A company reported that its bonds with a face value of $50,000 and a carrying value of

$53,000 are retired for $56,000 cash. The amount to be reported under cash flows from

financing activities is:

A. ($53,000).

B. ($3,000).

D. $0; this is an operating activity.

The cash outflow from financing activities is $56,000, the amount of cash paid to retire the

bonds payable.

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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111. When the indirect method is used, details from which of the following balance sheet accounts

are used in calculating both operating and financing cash flows?

A. Bonds Payable

B. Taxes Payable

D. Common Stock

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Under Armour’s Financing Cash Flow Calculations

112. The Retained Earnings account has a beginning balance of $321,975 and an ending balance

of $356,413. Net income is $40,251. Which of the following statements is correct?

B. $40,251 would be added when determining cash flows from financing activities.

C. $34,438 would be added when determining cash flows from financing activities.

D. $321,975 would be added when determining cash flows from operating activities.

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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113. A corporation had a net increase in Retained Earnings of $65,000 for the year. The corporation

also paid $20,000 of cash dividends that had been declared in the previous year. This year,

the corporation declared $18,000 of dividends but has not paid them as of year-end. Given this

information, the net income for the current year must have been:

A. $63,000

B. $85,000

C. $65,000

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

114. Cash flows from financing activities:

A. includes all cash inflows and outflows associated with a company’s lending activities.

C. are always negative because of the payments of cash dividends as well as interest and

principal on debt.

D. are always positive unless the company is experiencing serious financial trouble.

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Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-04 Report cash flows from financing activities.

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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115. A corporation prepared its statement of cash flows for the year. The following information is

taken from that statement:

Net cash provided by operating activities $14,500

Net cash provided by investing activities 4,200

Cash balance, beginning of year 5,800

Cash balance, end of year 9,100

What is the amount of net cash provided by (used in) financing activities?

A. $15,400

B. ($3,300)

D. $3,300

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

116. A company issues $1 million of new stock and pays $200,000 in cash dividends during the

year. In addition, the company took advantage of falling interest rates to borrow $1.5 million in

a new bond issue and paid off existing bonds with a face value of $2 million. The company

bought 500 of another company’s $1,000 bonds at a $100,000 premium. The net cash flow

provided by financing activities is:

A. An inflow of $500,000.

B. An outflow of $200,000.

C. An outflow of $100,000.

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McGraw-Hill Education.

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

117. Company X paid Company Y $1.35 million for a new plant. During the same accounting

period, Company X experienced the following changes in its balance sheet: Cash decreased

by $350,000, Accounts Receivable increased by $321,300, Inventory increased by $275,800,

Property, Plant, and Equipment increased by $752,900, and Bonds Payable increased by $1

million. The net cash flow provided by financing activities is:

A. An inflow of $1.35 million.

B. An outflow of $350,000.

D. An inflow of $752,900.

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

118. Net income $7,000

Cash dividends paid to stockholders 2,000

Cash proceeds from sale of land 3,000

Cash proceeds from bank loan 5,000

Cash payment (principal) on bank loan 1,000

Cash paid to purchase equipment 4,000

The company would report net cash provided by (used in) financing activities of:

A. ($2,500).

C. $5,000.

D. $6,000.

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McGraw-Hill Education.

AICPA: BB Critical Thinking

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Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

119. Net income $7,000

Cash dividends paid to stockholders 2,000

Cash proceeds from sale of land 3,000

Cash proceeds from bank loan 5,000

Cash payment (principal) on bank loan 1,000

Cash paid to purchase equipment 4,000

The company would report net cash provided by (used in) investing activities of:

B. ($2,000).

C. $5,000.

D. $7,000.

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-03 Report cash flows from investing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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120. Braden and Sons, Inc. borrowed $700,000 cash from Trenton Savings and Loan last year. In

addition, the company repaid a $450,000 note payable to First National Bank. How should

these transactions be listed in the Statement of Cash Flows?

A. Braden can combine the transactions and show an increase to cash of $250,000 in the

investing activities section of the statement.

B. Braden can combine the transactions and show an increase to cash of $250,000 in the

financing activities section of the statement.

C. A decrease to cash for $450,000 is listed in the investing activities section and an increase

of $700,000 is in the financing activities section.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Source: LearnSmart

Topic: Under Armour’s Financing Cash Flow Calculations

121. ABC Company issued 30,000 shares of common stock in January. In August, the company

repurchased 5,000 shares for the treasury. When reporting these transactions in the statement

of cash flows, ABC Company ______ combine them into one transaction in the ______

activities section.

A. can; financing

C. cannot; investing

D. can; investing

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Source: LearnSmart

Topic: Under Armour’s Financing Cash Flow Calculations

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122. Repayments of loans will be reported as a:

B. positive cash flow under financing activities.

C. negative cash flow under investing activities.

D. positive cash flow under investing activities.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Source: LearnSmart

Topic: Under Armour’s Financing Cash Flow Calculations

123. Material noncash investing and financing transactions are:

A. reported within the body of the statement of cash flows.

C. not reported in any part of the financial statement because cash flow is not affected.

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Difficulty: 1 Easy

Learning Objective: 12-04 Report cash flows from financing activities.

Source: LearnSmart

Topic: Under Armour’s Financing Cash Flow Calculations

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124. The net cash flow provided by operating activities is an inflow of $37,042, the net cash flow

used in investing activities is $16,831, and the net cash flow used in financing activities is

$26,397. If the beginning cash account balance is $11,283, what is the ending cash account

balance?

B. ($6,186)

C. $38,759

D. $27,476

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

125. A corporation prepared its statement of cash flows for the year. The following information is

taken from that statement:

Net cash provided by operating activities $14,500

Net cash provided by investing activities 4,200

Net cash flow used in financing activities (12,400)

Cash balance, end of year 9,100

What is the cash balance at the beginning of the year?

A. $5,600

C. $6,300

D. $15,400

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

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126. The direct exchange of debt for equipment would be shown:

A. on the statement of cash flows as an operating activity.

B. on the statement of cash flows as an investing activity.

C. on the statement of cash flows as a financing activity.

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Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

127. The purchase of $100,000 of equipment by issuing a note would be reported:

A. as a $100,000 investing inflow, and a $100,000 financing outflow.

B. as a$100,000 investing outflow, and a $100,000 financing inflow.

C. as a $100,000 operating inflow, and a $100,000 financing outflow.

D. in a supplementary schedule.

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

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128. A general rule for the relationship between operating, investing, and financing cash flows and

the financial statements is:

Operating

Cash Flows

Cause

Changes in:

Investing

Cash Flows

Affect:

Financing

Cash Flows

Affect:

Noncurrent

liabilities and

stockholder’s

equity

Current assets

and current

liabilities

Noncurrent

assets

Noncurrent

liabilities and

stockholder’s

equity

Noncurrent

liabilities and

stockholder’s

equity

Current assets

and current

liabilities

C) Noncurrent

assets

Current assets

and current

liabilities

Noncurrent

liabilities and

stockholder’s

equity

Current assets

and current

liabilities

Noncurrent

assets

Noncurrent

liabilities and

stockholder’s

equity

A. Option A

B. Option B

C. Option C

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

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129. A company purchases a $300,000 building, paying $200,000 in cash and signing a $100,000

promissory note. What will be reported on the statement of cash flows as a result of this

transaction?

A. A $300,000 cash outflow from investing activities

B. A $200,000 cash outflow from investing activities and a $100,000 cash inflow from

financing activities

D. A $300,000 cash outflow from investing activities and a $100,000 cash inflow from

AICPA: BB Critical Thinking

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

130. Supplemental disclosures required by companies using the indirect method include all of the

following except:

A. cash paid for interest.

B. cash paid for income tax.

D. noncash investing and financing activities.

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Statement of Cash Flows

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131. Free cash flow is a positive cash flow from operating activities:

dividends.

B. across all three activity components of the statement of cash flows.

C. beyond what has been allotted for future property, plant, and equipment replacement and

expansion.

D. across both financing and investing activities.

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

132. Free cash flow may be used for all of the following except:

A. expanding the business.

B. paying off debt.

C. building up the cash balance.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

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133. Negative operating cash flow may indicate all of the following except:

A. the company may not be able to replace property, plant and equipment.

B. stockholders may not receive a dividend.

C. the company may be in the introductory phase of its life cycle.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

134. All of the following might be used to evaluate cash flow performance, except:

A. the absolute amount of cash flow.

B. whether cash flow is positive or negative.

C. the relationship between net income and cash flow.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

135. A toy store with a calendar year-end is likely to have:

A. unpredictable fluctuations in cash flow from quarter to quarter.

B. the largest cash inflow from operating activities in the second and third quarters (April –

September).

C. a fairly stable cash flow across all four quarters.

March).

Seasonal variations in sales and inventory levels can cause net cash flows to fluctuate from

one quarter to the next, but this usually does not indicate trouble. This would be especially true

AICPA: BB Industry

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McGraw-Hill Education.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

136. An outdoor water park that has a calendar year-end and is located in an area of the country

that has warmer weather during April through September and colder weather during the rest of

the year is likely to have:

A. unpredictable fluctuations in cash flow from quarter to quarter.

through September).

C. a fairly stable cash flow across all four quarters.

D. the largest cash inflow from operating activities in the fourth and first quarters (October

AICPA: BB Industry

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

137. A company has positive cash flow from investing and financing activities, but negative cash

flow from operating activities. The likely result is:

B. investors will continue to buy stock since the company’s growth prospects are good.

C. Creditors will continue to lend money to the company.

D. Creditors will demand immediate repayment of all outstanding debt.

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Blooms: Evaluate

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

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138. The difference between net income and cash flow may be due to all of the following except:

B. the company being brand new.

C. fraudulent financial reporting.

D. seasonal variations in a company’s operating activities.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Evaluating Cash Flows

139. The cash flow statement should be evaluated by examining the cash flow pattern suggested

by the:

B. operating activities section since this section details the day to day operations of the

business.

C. change in cash regardless of which section had the biggest impact on the change.

D. financing section since this section details how much debt the company has incurred.

Unlike the income statement, which summarizes its detailed information in one number (net

income), the statement of cash flows does not provide a summary measure of cash flow

performance. Instead, it must be evaluated in terms of the cash flow pattern suggested by the

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Source: LearnSmart

Topic: Evaluating Cash Flows

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140. The introductory phase of a company’s life cycle will most likely have net cash:

A. provided by investing activities.

B. used in financing activities.

D. provided by operating activities.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Source: LearnSmart

Topic: Evaluating Cash Flows

141. Almost all U.S. companies have used the indirect method of preparing the statement of cash

flows:

A. because most users of the financial statements do not understand the direct method.

C. because it usually requires less space in the annual report.

D. so that stockholders cannot determine how much cash was spent on executives’ salaries.

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Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

Topic: Preparing the Statement of Cash Flows

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142. Which of the following statements about the reporting of operating cash flows using the direct

method is correct?

Standards Board (FASB) prefers the direct method of accounting for cash flows from

operating activities.

B. The FASB prefers the indirect method of calculating cash flows from operating activities

because it gives a more accurate calculation of cash provided by operating activities.

C. The direct method results in a larger amount of cash flow from operating activities than

does the indirect method.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

143. Which of the following statements about preparation of the statement of cash flows is correct?

A. GAAP allows the indirect method only.

B. GAAP allows the direct method only.

C. GAAP allows either the indirect or direct method.

AICPA: BB Global

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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144. Which phrase below best describes the direct method for reporting operating cash flows?

A. A method that incorporates financing and investing activities into cash flows from

operations.

B. A method employing accrual-based accounting to convert cash flows to GAAP Net Income.

D. A series of adjustments to Net Income to arrive at operating cash flows.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

145. The advantages of the direct method include all of the following except:

A. it allows for more detailed analysis of operating cash flows.

B. it provides more information than the indirect method to relate cash inflows and outflows.

C. it allows for more reliable prediction of future cash flows.

AICPA: BB Critical Thinking

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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146. When a company uses the direct method to determine the cash flows from operating activities,

cash flows from operating activities will:

B. be larger if there is a net cash inflow and smaller if there is a net cash outflow compared to

the amount reported using the indirect method.

C. always be larger than the amount reported using the indirect method.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

147. Which of the following statements about the calculation of cash flows from operating activities

under the direct method is correct?

statement is individually examined to calculate the cash flows from operating activities.

B. Noncash revenues and expenses must be included in cash flows from operating activities

when preparing a statement of cash flows using the direct method.

C. Depreciation is reported as a cash inflow in the cash flows from operating activities when

the direct method is used.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Operating Cash Flows Revisited (Direct Method)

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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148. Which of the following items would be reported on a statement of cash flows using the indirect

method, but not on a statement prepared using the direct method?

A. Cash paid for dividends

B. Cash received from stock issuances

D. Cash paid for purchase of treasury stock

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

149. Assume a company uses the direct method to prepare its statement of cash flows. If the

company’s Accounts Receivable increase during the accounting period, the change in

Accounts Receivable is:

A. added to the change in the Cash account to calculate cash collected from customers.

C. added to Sales Revenue to calculate the cash collected from customers.

D. subtracted from the change in the Cash account to calculate cash collected from

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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150. If a company’s Sales Revenue was $171,356 and cash collected from customers was

$167,803, which of the following would be consistent with this difference?

A. Accounts Receivable could have decreased.

B. Cash payments could have been larger than the related expense accounts.

C. Accounts Receivable could have increased.

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

151. Allison Co. uses the direct method to determine its cash flow from operations. During the year,

it had sales revenue of $300,000. Its beginning Accounts Receivable balance was $30,000,

and its ending Accounts Receivable balance was $40,000. Its cash collected from customers

for the year was:

A. $300,000.

C. $310,000.

D. $370,000.

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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152. During the current year, Todd Electronics had $610,000 in cash sales and $2,220,000 in credit

sales. The Accounts Receivable balance was $530,000 at the beginning of the year and

$425,000 at the end of the year. What was the total cash collected from customers during the

year?

B. $2,830,000

C. $2,725,000

D. $2,325,000

AICPA: BB Legal

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

153. If Sales are $850,000 and the beginning and ending balances of Accounts Receivable are

$43,000 and $48,000, respectively, the cash collected from customers is:

A. $850,000.

B. $802,000.

D. $855,000.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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154. If interest revenue for the period is $14,000 and the beginning and ending interest receivable

balances are $1,320 and $5,900, respectively, cash received for interest is:

A. $14,000.

C. $18,500.

D. $8,100.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

155. Assume a company uses the direct method to prepare its statement of cash flows. If the

company’s inventory and accounts payable both increase during the accounting period, how

would these changes affect cash flow calculations?

A. The changes in each account are both added to net income.

B. The change in inventory is subtracted from cost of goods sold and the change in accounts

payable is added to cost of goods sold to find the cash paid to suppliers.

C. The changes in each account are both subtracted from net income.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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156. If Cost of Goods Sold is $145,000 and the beginning and ending Inventory balances are

$18,000 and $13,000, respectively, inventory purchases equal:

A. $145,000.

C. $150,000.

D. $132,000.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

157. The accounting records for the Helen Co. show that its cost of goods sold for the year was

$600,000. In addition, it had an increase in inventory of $10,000 and a decrease in accounts

payable of $12,000. As a result under the direct method, the amount of cash paid to suppliers

for the year was:

A. $602,000.

B. $610,000.

C. $612,000.

AICPA: BB Legal

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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158. If a company’s Cost of Goods Sold is $158,000 for the period, beginning and ending Inventory

balances are $18,000 and $13,000, respectively, and the beginning and ending Accounts

Payable balances are $19,000 and $7,500, respectively, what is the amount of the cash paid

to suppliers?

A. $157,000

B. $163,500

D. $151,500

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

159. When the direct method is used to determine the cash flows from operating activities, other

operating expenses are converted into cash outflows by:

A. adding changes in prepaid expenses and accrued liabilities to other expenses.

B. subtracting increases in prepaid expenses and subtracting decreases in accrued liabilities

from other expenses.

expenses.

D. subtracting changes in prepaid expenses and accrued liabilities from other expenses.

AICPA: BB Critical Thinking

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Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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160. Ashley Co. uses the direct method in calculating its cash flow from operations. Which of the

following items will not have an effect on cash flow from operating activities?

A. Increase in inventory

C. Cash collections from customers

D. Payment of interest to lenders

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Classifying Cash Flows

Topic: Operating Cash Flows Revisited (Direct Method)

161. If Insurance Expense is $7,000 and the beginning and ending balances of Prepaid Insurance

are $1,500 and $2,000, respectively, the cash paid for insurance is:

A. $7,000.

B. $6,500.

C. $5,000.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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162. If Salaries and Wages Expense is $450,000 during the year and the beginning and ending

balances of Salaries and Wages Payable are $18,000 and $16,500, respectively, the cash

paid to employees is:

A. $450,000.

B. $433,500.

C. $448,500.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

163. When the direct method is used to determine the cash flows from operating activities, which of

the following adjustments must be made to interest expense to determine total interest

payments?

A. Add all changes in Interest Payable

C. Add increases in Interest Payable and subtract decreases in Interest Payable

D. Subtract all changes in Interest Payable

Interest Expense is directly converted to cash paid for interest by adding decreases in Interest

Payable or subtracting increases in Interest Payable.

AICPA: BB Critical Thinking

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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164. Which of the following would be reported on the statement of cash flows, using the direct

method, as a cash flow from operating activities?

B. Payment of cash dividends

C. Purchase of a building

D. Purchase of treasury stock

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

165. During the current year, a company paid $4,500 which it owed from its prior year income tax

liability and $30,000 for its current year tax liability. The company still owes $6,000 at the end

of the current year. How much should the company report as cash paid for income taxes on its

statement of cash flows for the current year?

B. $40,500

C. $30,000

D. $3,500

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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166. St. Pierre Enterprises reported the following information in its financial statements:

Amounts are as of

or for the year ended

Prior

Year

Current

Year

Inventory $55,000 $80,000

Accounts Receivable 68,000 103,000

Accounts Payable 34,500 40,000

Sales Revenue 305,000 375,000

Cost of Goods Sold 203,000 250,000

What is the amount of cash payments made to suppliers during the current year?

A. $280,500

C. $394,500

D. $230,500

AICPA: BB Legal

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

12-84

McGraw-Hill Education.

167. St. Pierre Enterprises reported the following information in its financial statements:

Amounts are as of

or for the year ended

Prior

Year

Current

Year

Inventory $55,000 $80,000

Accounts Receivable 68,000 103,000

Accounts Payable 34,500 40,000

Sales Revenue 305,000 375,000

Cost of Goods Sold 203,000 250,000

What is the amount of cash collected from customers during the current year?

A. $350,000

B. $380,500

D. $410,000

AICPA: BB Legal

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

168. Penman Corporation showed Salaries and Wages Expense of $488,000 on its income

statement. If the Salaries and Wages Payable account was $54,000 at the beginning of the

year and $37,000 at the end of the year, how much cash was paid to employees?

A. $434,000

B. $451,000

D. $471,000

Cash was paid to employees = Salaries and Wages Expense + decrease in Salaries and

Wages Payable.

AICPA: BB Legal

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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169. When the direct method is used to determine the cash flows from operating activities, which of

the following adjustments must be made to income tax expense to determine total income tax

payments?

A. Add all changes in income taxes and income taxes payable.

C. Add increases in income taxes payable and subtract decreases in income taxes payable.

D. Subtract all changes in income taxes payable.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

170. Which method of preparing the operating activities section of the statement of cash flows

consists of a summary of each component of operating transactions that result in either a debit

or a credit to cash?

B. Indirect

C. Accrual

D. Cash

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Source: LearnSmart

Topic: Operating Cash Flows Revisited (Direct Method)

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171. Assume that the direct method is used to prepare the operating activities section of the

statement of cash flows. Which related balance sheet account will explain the difference

between revenues on the income statement and cash collected from customers?

A. Inventory

B. Accounts Payable

C. Cost of Goods Sold

AICPA: BB Resource Management

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Source: LearnSmart

Topic: Operating Cash Flows Revisited (Direct Method)

172. Assume that the direct method is used to prepare the operating activities section of the

statement of cash flows. Why is a decrease in Accounts Receivable decrease added to sales

revenue when computing cash collected from customers?

A. There were more cash sales than credit sales during the year.

year.

C. There were more credit sales than cash sales during the year.

D. There were more sales on account than collections of Accounts Receivable during the

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Source: LearnSmart

Topic: Operating Cash Flows Revisited (Direct Method)

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173. Assume that the direct method is used to prepare the operating activities section of the

statement of cash flows. Which of the following statements is correct concerning a decrease in

Accounts Payable?

added to purchases to calculate cash payments to suppliers.

B. Since the cash payments were less than credit purchases, the decrease must be added to

purchases to calculate cash payments to suppliers.

C. Since the cash payments were more than credit purchases, the decrease must be

subtracted from purchases to cash payments to suppliers.

D. Since the cash payments were less than credit purchases, the decrease must be

subtracted from purchases to calculate cash payments to suppliers.

Typically, companies buy inventory on account from suppliers (as indicated by an Accounts

Payable balance on the balance sheet). Consequently, we need to consider more than just the

change in Inventory to convert Cost of Goods Sold to cash paid to suppliers. The credit

purchases and payments that are recorded in Accounts Payable must also be considered.

Credit purchases increase Accounts Payable and cash payments decrease it. In summary, to

convert Cost of Goods Sold to a cash basis, you must consider changes in both Inventory and

Accounts Payable. If Accounts Payable decreases, that means that the cash payments were

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Source: LearnSmart

Topic: Operating Cash Flows Revisited (Direct Method)

174. Assume that the direct method is used to prepare the operating activities section of the

statement of cash flows. When Accrued Liabilities increase, it means that the company:

A. paid more cash than it recorded as operating expenses.

C. prepaid the operating expenses before they were incurred or recorded.

AICPA: BB Industry

AICPA: FN Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

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Source: LearnSmart

Topic: Operating Cash Flows Revisited (Direct Method)

175. A company has a net cash inflow from operating activities of $789,000, a net cash outflow of

$50,000 from investing activities and a net cash inflow of $100,000 from financing activities.

The company paid $124,000 in interest, $186,500 in income taxes, and $200,000 in cash

dividends. Which of the following statements about the statement of cash flows is not correct?

from investing activities section.

B. Supplemental disclosures required for a company using the indirect method include the

amount of interest and the amount of income taxes paid.

C. The statement of cash flows will show a net increase in cash and cash equivalents of

$839,000.

D. If the direct method is used, the $124,000 of interest paid and the $186,500 of income

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

Topic: Preparing the Statement of Cash Flows

Topic: Under Armour’s Statement of Cash Flows

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176. Flynn Corporation had the following cash flows for the current year. The company uses the

direct method in preparing the statement of cash flows.

Cash receipts from issuance of stock $120,000

Bonds payable issued at face value 500,000

Cash dividends received from long-term

investments 9,000

Cash paid for wages 40,000

Cash paid for dividends 10,000

Cash received from customers 85,000

Cash paid for other operating expenses 39,000

Cash paid to purchase equipment 200,000

What is the net cash provided by (used in) operating activities?

B. $6,000

C. ($4,000)

D. ($75,000)

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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177. Flynn Corporation had the following cash flows for the current year. The company uses the

direct method in preparing the statement of cash flows.

Cash receipts from issuance of stock $120,000

Bonds payable issued at face value 500,000

Cash dividends received from long-term

investments 9,000

Cash paid for wages 40,000

Cash paid for dividends 10,000

Cash received from customers 85,000

Cash paid for other operating expenses 39,000

Cash paid to purchase equipment 200,000

What is the net cash provided by (used in) investing activities?

B. $420,000

C. $410,000

D. ($190,000)

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-03 Report cash flows from investing activities.

Topic: Under Armour’s Investing Cash Flow Calculations

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178. Flynn Corporation had the following cash flows for the current year. The company uses the

direct method in preparing the statement of cash flows.

Cash receipts from issuance of stock $120,000

Bonds payable issued at face value 500,000

Cash dividends received from long-term

investments 9,000

Cash paid for wages 40,000

Cash paid for dividends 10,000

Cash received from customers 85,000

Cash paid for other operating expenses 39,000

Cash paid to purchase equipment 200,000

What is the net cash flows provided by (used in) financing activities?

A. $620,000

B. $410,000

D. $490,000

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

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179. Flynn Corporation had the following cash flows for the current year. The company uses the

direct method in preparing the statement of cash flows.

Cash receipts from issuance of stock $120,000

Bonds payable issued at face value 500,000

Cash dividends received from long-term

investments 9,000

Cash paid for wages 40,000

Cash paid for dividends 10,000

Cash received from customers 85,000

Cash paid for other operating expenses 39,000

Cash paid to purchase equipment 200,000

If the cash balance at the beginning of the current year was $0, what is the amount of cash at

the end of the year?

A. $112,500

C. $737,500

D. $311,500

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Business Activities and Cash Flows

180. If a company uses the indirect method to determine cash flows from operating activities,

gains:

A. must be added to net income and losses subtracted from net income.

B. and losses must be added to net income.

D. and losses must be subtracted from net income.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

12-93

McGraw-Hill Education.

Difficulty: 2 Medium

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

181. Which of the following would not be added to net income in calculating cash flows from

operating activities on a statement of cash flows prepared using the indirect method?

A. Amortization Expense

B. A decrease in Accounts Receivable

C. An increase in Salaries and Wages Payable

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

182. A piece of equipment 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 cash inflow from investing

activities is:

B. $5,000.

C. $45,000.

D. $0; this transaction is a financing activity.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

Topic: Under Armour’s Investing Cash Flow Calculations

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183. Your company owned equipment with a book value of $120,000 that was sold during this

accounting period for $30,500 in cash, and purchased new equipment for cash of $148,000.

Your company would record a debit of:

A. $148,000 and a credit of $30,500 to the cash account for a net cash inflow of $117,500.

B. $148,000 and a credit of $89,500 to the cash account for a net cash inflow of $58,500.

D. $89,500 and a credit of $148,000 to the cash account for a net cash outflow of $58,500.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

184. A company bought $250,000 of equipment with an expected life of ten years and no residual

value. After six years the company sold the equipment for $94,000. If the company uses

straight-line depreciation and the indirect method is used to determine cash flows from

operating activities, which of the following reflects how the sale of the equipment would be

reported in the statement of cash flows?

A. $94,000 is recorded as a cash inflow from investing activities and no other sections of the

statement are affected.

convert net income to net cash flow provided by operating activities.

C. $94,000 is recorded as a cash inflow from investing activities and $6,000 is subtracted to

convert net income to net cash flow provided by operating activities.

D. $94,000 is recorded as a cash inflow from operating activities.

AICPA: BB Critical Thinking

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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185. Equipment, beginning of year $170,000

Equipment, end of year 210,000

Accumulated depreciation, beginning of

year 95,000

Accumulated depreciation, end of year 92,000

Equipment with a cost of $10,000 and a book value of $3,000 was sold during the year for

cash of $9,000. Additional equipment was purchased during the year for cash.

What was the amount of cash paid for purchases of equipment during the year?

A. $40,000

B. $43,000

D. $31,000

AICPA: BB Critical Thinking

AICPA: FN Measurement

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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186. Equipment, beginning of year $170,000

Equipment, end of year 210,000

Accumulated depreciation, beginning of

year 95,000

Accumulated depreciation, end of year 92,000

Equipment with a cost of $10,000 and a book value of $3,000 was sold during the year for

cash of $9,000. Additional equipment was purchased during the year for cash.

The company uses the indirect method in preparing the statement of cash flows. What is the

amount of depreciation expense that will be reported in the operating activities section of the

statement?

B. $11,000

C. $7,000

D. $10,000

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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187. The following information is taken from the income statement of Muir Company:

Depreciation Expense $30,000

Amortization Expense 5,000

Loss on Sale of Equipment 3,000

Gain on Sale of Building 9,000

Net Income 105,000

Based on this information, what is the amount of net cash flow provided by operating

activities?

A. $149,000

B. $140,000

C. $146,000

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

188. The T-account approach:

A. may be used with the direct method.

changes in the cash account.

C. shows cash provided as credits and cash used as debits.

D. does not determine the change in each balance sheet account.

AICPA: BB Critical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.

Topic: T-account Approach (Indirect Method)

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189. Using the T-account approach:

B. Payment of long-term debt appears on the debit side of the Cash account under financing

activities.

C. Purchase of equipment appears on the credit side of the Cash account under operating

activities.

D. An increase in Accounts Receivable appears on the debit side of the Cash account under

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.

Topic: T-account Approach (Indirect Method)

190. When using the T-account approach to preparing the indirect method of the statement of cash

flows, which of the following would be associated with amounts entered on the credit side of

the Cash T-account?

B. Decrease in Accounts Receivable

C. Decrease in Inventory

D. Increase in Accrued Liabilities

AICPA: BB Resource Management

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.

Source: LearnSmart

Topic: T-account Approach (Indirect Method)

12-99

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Essay Questions

191. Identify whether each of the following list of items is an operating activity cash flow (O), an

investing activity cash flow (I), a financing activity cash flow (F), or none of these (None).

_____ Proceeds from sale of equipment

_____ Cash collected from customers

_____ Payments to suppliers

_____ Stock repurchases

_____ Repayment of bond principal

_____ Payment of income tax

_____ Purchases of bonds from other companies

_____ Purchases of equipment financed with a note

_____ Interest and cash dividends received

_____ Payment of cash dividends

I, O, O, F, F, O, I, None, O, F

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Topic: Classifying Cash Flows

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192. Assume that a company chooses the indirect method to determine net cash flows from

operating activities.

Required:

Part a. Explain why net income is the starting point when the indirect method is used to

determine cash flows from operating activities.

Part b. Briefly explain why a company’s net income is most likely different in amount than its

cash flows from operating activities.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

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193. Complete the last two columns in the following table by indicating whether each transaction

would be reported:

Part a. In the operating (O), investing (I), or financing (F) activities section of the statement of

cash flows or if the transaction would be reported instead as a noncash investing and/or

financing transaction (Noncash).

Part b. As a cash inflow (+) or a cash outflow (-) on the statement of ash flows. (Leave this cell

blank if you entered “Noncash” for part a.)

Transaction

Part a –

Reporting

(O, I, F, or

Noncash)

Part b –

Type of

Cash

Flow

(+ or -)

Payment of salaries and

wages

Proceeds from sale of

bonds for cash

Purchase of equipment for

cash

Purchase of office supplies

for cash

Cash interest payments

made to bondholders

Prepayment of insurance

for first six months of year

Payment of principal

amount due to bondholders

upon maturity of bonds

Cash sales to customers

Purchase of long-term

investment for cash

Payment of cash dividends

Receipt of cash upon

signing long-term

note payable

Issuance of common stock

for cash

Payment of interest due on

note payable

Issuance of common stock

in exchange for land

Purchase of treasury stock

for cash

Payment of principal

amount due on a long-

term note payable

Acquisition of land in

exchange for a

note payable

Receipt of cash dividends

Proceeds from the sale of

long-term investment

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AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

194. Choose the appropriate letter to match the account balance change with the type of

adjustment made to net income when using the indirect method to determine net cash flow

provided by operating activities.

Account Balance Change

_____ Decrease in Property, Plant, and Equipment

_____ Increase in Accounts Receivable

_____ Decrease in Inventory

_____ Decrease in Prepaid Expenses

_____ Increase in Accounts Payable

_____ Decrease in Accrued Liabilities

_____ Decrease in Income Tax Payable

_____ Increase in Dividends Payable

_____ Gain on Sales of Property, Plant and Equipment

_____ Depreciation

Type of Adjustment

A – Add item to net income

S – Subtract item from net income

N – No adjustment necessary

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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195. Indicate whether each of the following would be added to or subtracted from net income when

using the indirect method to reconcile net income to cash flows from operating activities.

Item Required to Convert

Net Income to Cash Flows From

Operating Activities

Added to or

Subtracted

From

Increase in Accounts Receivable

Decrease in Accounts Payable

Decrease in Inventory

Increase in Accrued Expenses

Depreciation Expense

Increase in Prepaid Expenses

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

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196. Consider the following information:

Amortization Expense $12,000

Increase in Accounts Receivable 14,000

Increase in Accounts Payable 32,000

Decrease in Accrued Liabilities 16,000

Decrease in Inventory 35,000

Decrease in Prepaid Expenses 5,000

Net income 500,000

Required:

Use the indirect method to compute the amount of net cash flows provided by (used in)

operating activities.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

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197. Selected balance sheet information and the income statement for Fountainhead Corporation

for the current year are presented below.

Selected Balance Sheet Accounts

Prior

Year

Current

Year

Accounts Receivable $15,000 $10,000

Merchandise Inventory 20,000 22,000

Prepaid Rent 1,000 0

Accounts Payable 11,000 14,000

Salaries and Wages Payable 2,000 3,000

Income Statement

Sales Revenue $300,000

Expenses:

Cost of Goods Sold 180,000

Depreciation Expense 20,000

Salaries Expense 30,000

Rent Expense 12,000

Insurance Expense 12,000

Interest Expense 11,000

Utilities Expense 10,000

Net Income $25,000

Required:

Prepare the cash flows from operating activities section of the statement of cash flows using

the indirect method.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Topic: Determining Operating Cash Flows Using the Indirect Method

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198. Consider the following information:

Proceeds from sale of bonds for cash $1,000,000

Cash interest payments to bondholders 25,000

Conversion of bonds into preferred

stock 1,000,000

Purchase of long-term investment for

cash 300,000

Payment of cash dividends to

stockholders 75,000

Proceeds from long-term note payable 500,000

Issuance of common stock for cash 5,000,000

Payment of interest due on long-term

note payable 50,000

Issuance of common stock for land 250,000

Repurchase of common stock on open

market for cash 125,000

Payment of principal amount due on

long-term note payable 250,000

Acquisition of land in exchange for note

payable 900,000

Receipt of cash dividend income on

long-term investments 40,000

Proceeds from sale of building 525,000

Proceeds from sale of long-term

investment 2,500,000

Purchases of equipment 125,000

Required:

Part a. Compute the cash provided by (used in) investing activities.

Part b. Compute the cash provided by (used in) financing activities.

Part c. If you did not use any of the items listed in parts a or b, explain why, and indicate, if

appropriate, how each item would be reported on the statement of cash flows.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

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199. The management team of Wickersham Brothers Inc. is preparing its annual financial

statements. The statements are complete except for the statement of cash flows. The

completed comparative balance sheets and income statements are summarized.

Current

Year

Prior

Year

Balance Sheet

Assets

Cash $50,000 $72,000

Accounts Receivable 80,000 70,000

Merchandise Inventory 60,000 65,000

Property And Equipment 110,000 60,000

Less: Accumulated

Depreciation (30,000) (15,000)

Total Assets $270,000 $252,000

Liabilities:

Accounts Payable $10,000 $12,000

Salaries and Wages

Payable 2,000 1,000

Notes Payable, Long-Term 50,000 60,000

Stockholders’ Equity:

Common Stock 100,000 80,000

Retained Earnings 108,000 99,000

Total Liabilities and

Stockholders’ Equity $270,000 $252,000

Income Statement

Sales $200,000

Cost of Goods Sold 110,000

Depreciation Expense 15,000

Other Expenses 50,000

Net Income $25,000

Other information from the company’s records includes the following:

• Bought equipment for cash, $50,000.

• Paid $10,000 on long-term note payable.

• Issued new shares of common stock for $20,000 cash.

• Cash dividends of $16,000 were declared and paid to stockholders.

• Accounts Payable arose from inventory purchases on credit.

• Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of

both years and are included in Other Expenses.

Required:

Part a. Prepare the statement of cash flows using the indirect method. Include any

supplemental disclosures.

Part b. Interpret the statement of cash flows by explaining the main sources and uses of cash

during the year.

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AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Blooms: Apply

Blooms: Create

Difficulty: 2 Medium

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Evaluating Cash Flows

Topic: Preparing the Statement of Cash Flows

Topic: Relationship to Other Financial Statements

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

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200. Condensed financial data of Monopoly Corporation appear below:

Monopoly Corporation

Comparative Balance Sheet

December 31

Current

Year

Prior

Year

Assets

Cash $44,000 $28,000

Accounts receivable A 32,000

Inventories B 70,000

Prepaid rent 2,500 2,000

Property, plant, and

equipment 224,000 200,000

Accumulated depreciation (55,000) (40,000)

Total assets $341,500 $292,000

Liabilities and Stockholders’

Equity

Accounts payable $38,000 $34,000

Accrued liabilities 10,000 12,000

Notes payable (long-term) 130,000 150,000

Contributed capital 50,000 25,000

Retained earnings 113,500 71,000

Total liabilities and

stockholders’ equity $341,500 $292,000

Monopoly Corporation

Income Statement

Year Ended December 31

Sales $477,500

Expenses

Cost of goods sold $290,000

Selling, general, and

administrative expenses 94,000

Depreciation expense C

Interest expense 9,000

Income taxes D 425,000

Net income $52,500

Monopoly Corporation

Cash Flow Statement

Year End December 31

Cash Flows from Operating Activities

Net income $52,500

Adjustments to reconcile net income to

net cash provided by operating activities:

Depreciation 15,000

Changes in current assets and current

liabilities:

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Accounts Receivable (4,000)

Inventories (20,000)

Prepaid Expenses E

Accounts Payable 4,000

Accrued Liabilities F

Net cash provided by (used in) operating

activities G

Cash flows from investing activities

Purchase of property, plant, and

equipment (24,000)

Net cash provided by (used in) investing

activities (24,000)

Financing activities

Additional capital contributed by

stockholders H

Payments on long-term debt (20,000)

Payment of cash dividends I

Net cash provided by (used in) financing

activities J

Increase in cash and cash equivalents 16,000

Cash and cash equivalents, beginning of

period 28,000

Cash and cash equivalents, end of period $44,000

A cash dividend was declared and paid in full to stockholders during the year.

Required:

Solve for the missing numbers and summarize your answers in the table below. Be sure to

indicate in parentheses ( ) if the missing number is negative (that is, a cash outflow).

A C E G I

B D F H J

AICPA: BB Critical Thinking

AICPA: FN Risk Analysis

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

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Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Preparing the Statement of Cash Flows

Topic: Relationship to Other Financial Statements

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

201. Match each item with the correct letter below to indicate how each revenue or expense

account on the income statement is adjusted when using the direct method to determine net

cash flow provided by operating activities.

Account Balance Change

_____ Increase in Accrued Expenses

_____ Decrease in Accounts Receivable

_____ Decrease in Unearned Income

_____ Increase in Prepaid Expenses

_____ Decrease in Accounts Payable

_____ Increase in Long-Term Notes Payable

_____ Decrease in Prepaid Insurance

_____ Increase in Inventory

_____ Increase in Interest Payable

_____ Increase in Accumulated Depreciation

Type of Adjustment

A – Add item to related revenue or expense account balance

S – Subtract item from related revenue or expense account balance

N – No adjustment necessary

S, A, S, A, A, N, S, A, S, N

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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202. Consider the following information:

Income Statement

Information: Other Information:

Net Sales

Revenue $200,000

Increase in

Accounts

Receivable

$200

Cost of Goods

Sold 60,000 Decrease in

Inventory 600

Gross Margin 140,000 Increase in

Prepaid Expense 700

Salary

Expense 60,000

Decrease in

Accounts

Payable

2,200

Depreciation

Expense 30,000

Decrease in

Accrued

Liabilities

800

Other Expense 20,000

Increase in

Income Taxes

Payable

1,900

Net Income

Before Tax 30,000 Reduction of

Long-Term Debt 13,700

Income Tax

Expense 9,000 Purchases of

Equipment 29,000

Net Income $21,000

Required:

Use the direct method to compute the amount of net cash flows provided by (used in)

operating activities.

AICPA: BB Critical Thinking

AICPA: FN Risk Analysis

Blooms: Analyze

Difficulty: 3 Hard

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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Operating Cash Flows Revisited (Direct Method)

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203. The Extra Surplus Company’s Balance Sheet for December 31, 2015 and the Income

Statement for 2016 are shown below.

Extra Surplus Company

Balance Sheet

December 31, 2015

Assets

Cash $10,000

Accounts Receivable 5,000

Inventory 12,000

Property and Equipment, Net 20,000

$47,000

Liabilities and Stockholders’; Equity

Accounts Payable $10,000

Note Payable, Long-Term 5,000

Common Stock 20,000

Retained Earnings 12,000

$47,000

Extra Surplus Company

Income Statement

For the Year Ended December 31, 2016

Sales $13,000

Cost of Goods Sold 3,000

Salaries and Wage Expense 3,000

Interest Expense 1,000

Other Expenses 500

Net Income $5,500

Additional data:

• Sales were $13,000; $8,000 in cash was received from customers.

• Bought new land for cash, $10,000.

• Sold other land for its book value of $5,000.

• Paid $1,000 principal on the long-term note payable and $1,000 in interest.

• Issued new shares of stock for $10,000 cash.

• Cash dividends of $1,000 were declared and paid to stockholders.

• Paid $5,500 on accounts payable.

• No inventory purchases were made; other expenses were incurred on account.

• All wages were paid in cash.

• Other expenses were on account.

Required:

Part a. Prepare a balance sheet at December 31, 2016.

Part b. Prepare the statement of cash flows using the direct method.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Apply

Blooms: Create

Difficulty: 3 Hard

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Preparing the Statement of Cash Flows

Topic: Relationship to Other Financial Statements

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

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204. Equipment with a cost of $80,000 and accumulated depreciation of $75,000 is sold for $12,000

cash.

Required:

Part a. Prepare the journal entry to record this transaction.

Part b. Explain how this transaction would be reported on the statement of cash flows

prepared using the indirect method.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: BB Industry

AICPA: FN Measurement

AICPA: FN Reporting

Blooms: Taxonomy Apply

Difficulty: 3 Hard

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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205. A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for

$35,000 cash.

Required:

Part a. Prepare the journal entry to record this transaction.

Part b. Explain how this transaction would be reported on the statement of cash flows

prepared using the indirect method.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: BB Industry

AICPA: FN Measurement

AICPA: FN Reporting

Blooms: Taxonomy Apply

Difficulty: 3 Hard

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

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206. The management team of Wickersham Brothers Inc. is preparing its annual financial

statements. The statements are complete except for the statement of cash flows. The

completed comparative balance sheets and income statements are summarized.

Current

Year

Prior

Year

Balance Sheet

Assets

Cash $50,000 $72,000

Accounts Receivable 80,000 70,000

Merchandise Inventory 60,000 65,000

Property and Equipment 110,000 60,000

Less: Accumulated

Depreciation (30,000) (15,000)

Total Assets $270,000 $252,000

Liabilities:

Accounts Payable $10,000 $12,000

Salaries and Wages

Payable 2,000 1,000

Notes Payable, Long-Term 50,000 60,000

Stockholders’ Equity:

Common Stock 100,000 80,000

Retained Earnings 108,000 99,000

Total Liabilities and

Stockholders’ Equity $270,000 $252,000

Income Statement

Sales $200,000

Cost of Goods Sold 110,000

Depreciation Expense 15,000

Other Expenses 50,000

Net Income $25,000

• Other information from the company’s records includes the following:

• Bought equipment for cash, $50,000.

• Paid $10,000 on long-term note payable.

• Issued new shares of common stock for $20,000 cash.

• Cash dividends of $16,000 were declared and paid to stockholders.

• Accounts Payable arose from inventory purchases on credit.

• Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of

both years and are included in Other Expenses.

Required:

Prepare a schedule summarizing operating, investing, and financing cash flows using the T–

account approach

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AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.

Topic: T-account Approach (Indirect Method)

207. Choose the appropriate letter to match the term and the definition. Not all definitions will be

used.

Term

_____ Operating Activities

_____ Indirect Method

_____ Working Capital

_____ Cash Equivalents

_____ Investing Activities

_____ Supplemental Disclosures

_____ Direct Method

_____ Financing Activities

Definition

Cash inflows and outflows related to components of net income.

Include assets that are very liquid and are purchased by the entity within three months of

maturity.

These activities include only purchases made with borrowed funds.

Reports the components of cash flows from operating activities as gross receipts and gross

payments.

This ratio uses net income instead of operating cash flow to analyze a company’s ability to

finance the cost of its debt.

Measures the ability of a company to finance its interest payments with its operating cash flow

before taxes and interest.

A measure of the amount by which current assets exceed current liabilities.

These activities include money lent by a company as well as money borrowed by a company.

Must include cash paid for interest and income tax in a separate schedule.

Cash inflows and outflows related to the sale or purchase of investments and long-lived

assets.

Cash inflows and outflows related to financing sources external to the company (owners and

lenders).

Presents the operating activities section of the cash flow statement by adjusting net income to

compute cash flows from operating activities.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-03 Report cash flows from investing activities.

Learning Objective: 12-04 Report cash flows from financing activities.

Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.

Topic: Business Activities and Cash Flows

Topic: Classifying Cash Flows

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Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Operating Cash Flows Revisited (Direct Method)

Topic: Under Armour’s Financing Cash Flow Calculations

Topic: Under Armour’s Investing Cash Flow Calculations

Topic: Under Armour’s Statement of Cash Flows

208. Choose the appropriate letter to match the term and the definition. Not all definitions will be

used.

Term

_____ Cash Inflow

_____ Property, Plant, and Equipment

_____ Comparative Balance Sheet

_____ Free Cash Flow

_____ Noncash Investing and Financing Activities

_____ Net Income

_____ Statement of Cash Flows

_____ Cash Outflow

Definition

A financial statement that tracks the flow of cash into and out of a company according to the

three types of activities that generate the flows.

Cash flows in excess of net income.

Reported as supplement disclosures or in the notes section to the financial statements rather

than within the body of the statement of cash flows.

Results from activities such as sales of goods and assets, receipt of cash dividends, and

receipts of interest.

Cash a company receives that is not subject to income tax.

Purchases and sales of this are classified as investing activities.

The starting point for calculating operating cash flows with the direct method.

Cash flows from operations in excess of amount paid to replace property, plant and equipment

and to pay cash dividends to stockholders.

The percent of a company’s net cash flow that comes from investing and financing activities.

An adjustment made when using the indirect method of calculating cash flows from operating

activities.

The starting point for calculating operating cash flows with the indirect method.

Purchases and sales of this are classified as operating activities.

A balance sheet that shows the starting and ending balance of the different accounts; it is used

to calculate the net cash flow provided by operating activities.

Results from activities such as purchases of goods and assets, payment of debt, payment of

cash dividends, and payment of taxes.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.

Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.

Learning Objective: 12-04 Report cash flows from financing activities.

Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.

Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.

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Topic: Business Activities and Cash Flows

Topic: Classifying Cash Flows

Topic: Determining Operating Cash Flows Using the Indirect Method

Topic: Evaluating Cash Flows

Topic: Relationship to Other Financial Statements

Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)

Topic: Under Armour’s Statement of Cash Flows

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