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6) Because depreciation is not cash-based, it is NOT reported in the direct method of the
Statement of Cash Flows.
Question Type: Concept
7) Gains and losses on the sale of plant, property and equipment are ignored in the direct method
of preparing a Statement of Cash Flows.
Question Type: Concept
8) One formula for determining cash collections from customers is to take Sales plus the increase
in Accounts Receivable.
Question Type: Concept
9) In the direct method of preparing a cash flow statement, interest received and interest expense
are reported in the financing activities section.
Question Type: Concept
10) Dividends received by a company appear in the operating activities section of a direct
method cash flow statement.
Question Type: Concept
11) Payments to suppliers include items such as employee compensation, interest and income
taxes.
Question Type: Application
12) Cash payments for inventory are computed as– Total inventory purchased plus a decrease in
Accounts Payable OR minus an increase in Accounts Payable.
Question Type: Concept
21
13) The gains and losses on the sale of equipment under the direct method would be reported:
A) in the investing section of the cash flow statement.
B) in the operating section of the cash flow statement.
C) in the financing section of the cash flow statement.
D) they are not reported on the cash flow statement.
Question Type: Concept
14) Exchanging stock for a building under the direct method would be reported:
A) in the investing section of the cash flow statement.
B) in the operating section of the cash flow statement.
C) in the financing section of the cash flow statement.
D) as a separate disclosure.
Question Type: Concept
15) A purchase of new equipment on a note payable under the direct method would be reported:
A) as a separate disclosure as a non-cash transaction.
B) in the investing section of the cash flow statement.
C) in the operating section of the cash flow statement.
D) in the financing section of the cash flow statement.
Question Type: Concept
16) Under the direct method, paying and collecting interest on loans are:
A) financing and investing activities.
B) operating and financing activities.
C) operating and investing activities.
D) operating activities.
Question Type: Application
17) When a corporation receives dividends, they are shown as a(n) ______ when using the direct
method.
A) investing activity
B) operating activity
C) financing activity
D) non-cash disclosure
Question Type: Application
22
18) Under the direct method, depreciation on a building would be reported as a(n):
A) investing activity.
B) operating activity.
C) financing activity.
D) It is not reported.
Question Type: Concept
19) Which of the following statements is correct concerning the computation required to
determine cash collected from customers under the direct method?
A) An increase in Accounts Receivable is added to net income.
B) A decrease in Accounts Receivable is added to net income.
C) An increase in Accounts Receivable is added to Sales Revenue.
D) A decrease in Accounts Receivable is added to Sales Revenue.
Question Type: Concept
20) Payments to suppliers include payments for which of the following?
A) Inventory
B) Employee compensation
C) Income taxes
D) All of the above.
Question Type: Concept
21) Cost of goods sold for the year was $840,000. Inventory was $64,000 at the beginning of the
year and $89,000 at the end of the year. There were no changes in the amount in account payable
for the year. Cash payment for merchandise to be reported under the direct method is:
A) $840,000.
B) $904,000.
C) $929,000.
D) $865,000.
Question Type: Application
23
22) Cost of goods sold for the year was $660,000. Inventory was $83,000 at the beginning of the
year and $37,000 at the end of the year. There were no changes in the amount in account payable
for the year. Cash payment for merchandise to be reported under the direct method is:
A) $706,000.
B) $614,000.
C) $780,000.
D) $540,000.
Question Type: Application
23) Operating expenses (other than depreciation) for the year were $335,000. Prepaid expenses
decreased by $7,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $335,000.
B) $342,000.
C) $328,000.
D) $7,000.
Question Type: Application
24) Operating expenses (other than depreciation) for the year were $230,000. Prepaid expenses
increased by $13,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $243,000.
B) $13,000.
C) $217,000.
D) $230,000.
Question Type: Application
25) Operating expenses (other than depreciation) for the year were $360,000. Accrued expenses
increased by $37,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $397,000.
B) $360,000.
C) $323,000.
D) $37,000.
Question Type: Application
24
26) Operating expenses (other than depreciation) for the year were $533,000. Accrued expenses
decreased by $50,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $50,000.
B) $483,000.
C) $533,000.
D) $583,000.
Question Type: Application
27) From the Income Statement and Balance Sheet information listed below, what amount of
cash was paid for salaries and wages during 2016?
Salaries and wages expense
2016
$215,000
Salaries and wages payable
12/31/15
$7,900
Salaries and wages payable
12/31/16
$10,400
A) $212,500
B) $217,500
C) $215,000
D) $233,300
Question Type: Application
28) From the Income Statement and Balance Sheet information listed below, what amount of
cash was paid for salaries and wages during 2016?
Salaries and wages expense
2016
$157,000
Salaries and wages payable
12/31/15
$13,600
Salaries and wages payable
12/31/16
$10,300
A) $153,700
B) $143,400
C) $160,300
D) $180,900
Question Type: Application
25
29) The following information is available for Allsport Company. What amount was paid for
merchandise during the current year (2016)?
Cost of goods sold
$535,000
Merchandise inventory, 12/31/15
95,000
Merchandise inventory, 12/31/16
132,000
Accounts Payable, 12/31/15
98,500
Accounts Payable, 12/31/16
99,300
A) $535,000
B) $572,800
C) $498,800
D) $571,200
Question Type: Application
30) The following information is available for Bestway Company. What amount is paid for
merchandise for the current year (2016)?
Cost of goods sold
$902,000
Merchandise inventory, 12/31/15
133,000
Merchandise inventory, 12/31/16
134,000
Accounts Payable, 12/31/15
109,000
Accounts Payable, 12/31/16
96,000
A) $888,000
B) $916,000
C) $1,374,000
D) $914,000
Question Type: Application
31) A company settles a long-term note payable plus interest by paying $68,000 cash toward the
principal amount and $5,440 cash for the interest. Under the direct method of reporting interest,
the $5,440 would be listed as a(n):
A) operating activity.
B) financing activity.
C) investing activity.
D) separate disclosure only.
Answer: A
Diff: 1
Question Type: Application
26
Copyright © 2017 Pearson Education, Inc.
11.5 Evaluate a company’s performance with respect to cash
1) Over time, if the cash conversion cycle for a business grows longer, this is an indication that
they are holding cash too long.
Question Type: Concept
2) Danio Corp. has average Accounts Payable of $5,000 and cost of goods sold of $25,000; the
Accounts Payable payment period for Danio is 73 days.
Question Type: Application
3) Free cash flow is the anticipated amount of cash available from operations after paying for
planned financing of stock and paying dividends.
Question Type: Concept
4) Snow, Inc. has net cash from operations $125,000 for the year. They also purchased a new
snowplow for $75,000 and paid cash dividends of $25,000. Snow’s free cash flow is $25,000.
Question Type: Application
5) The cash conversion cycle depends upon the time it takes to sell merchandise inventory, to
collect receivables and to pay payables.
Question Type: Concept
6) Generally, the higher the cash conversion cycle, the healthier the company is financially.
Question Type: Concept
7) The cash conversion cycle represents the number of days the cash is “tied up” in the operating
activities of the business.
Question Type: Concept
27
8) The formula for the cash conversion cycle is days sales–in–inventory + free cash flow –
receivables collection period.
Question Type: Concept
9) On its Statement of Cash Flows, Mike‘s Motors reported cash flow from operating activities of
$108,000, cash flow from investing activities of $87,000, and cash flow from financing activities
of ($61,000). Mike‘s Motors invested $55,000 cash in long-term assets. Mike’s Motors’ free cash
flow is:
A) $32,000.
B) $6,000.
C) $53,000.
D) $79,000.
Question Type: Application
10) On its Statement of Cash Flows, Aspen, Inc. reported cash flow from operating activities of
$99,000, cash flow from financing activities of ($127,000), and cash flow from investing
activities of $103,000. Aspen, Inc. invested $65,000 cash in long-term assets. Aspen, Inc.‘s free
cash flow is:
A) $34,000.
B) $10,000.
C) $62,000.
D) $38,000.
Question Type: Application
11) The Bobblehead Company has an Accounts Receivable turnover of 33 days, an inventory
turnover of 77 days and an Accounts Payable turnover of 39 days. Bobblehead‘s cash conversion
cycle is:
A) 149 days.
B) 83 days.
C) 71 days.
D) 5 days.
Question Type: Application
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12) Twin Peaks Industries has an inventory turnover of 111 days, an Accounts Payable turnover
of 77 days and an Accounts Receivable turnover of 79 days. Twin Peaks‘ cash conversion cycle
is:
A) 113 days.
B) 109 days.
C) 45 days.
D) 2 days.
Question Type: Application
13) The following information is available for Renoir, Inc:
Cost of Goods Sold 12/31/16
$65,700
Accounts Receivable
12/31/15
$45,000
Accounts Receivable
12/31/16
$50,000
Accounts Payable 12/31/15
$22,000
Accounts Payable 12/31/16
$32,000
The Accounts Payable Payment Period is:
A) 90 days.
B) 150 days.
C) 180 days.
D) 1.8 days.
Question Type: Application