32) The direct method starts with net income and adjusts it to net cash provided by operating activities.
33) The direct method restates the income statement in terms of cash.
34) IFRS requires the use of the indirect method for the operating activities section of the statement of
cash flows.
35) Which of the following statements is true of the direct and indirect methods of preparing the
statement of cash flows?
A) The indirect method and the direct method will produce the same amount of net cash provided by
operating activities.
B) The investing activities section is the only section that differs between the direct and indirect methods.
C) The indirect method shows three types of cash flows, but the direct method does not.
D) There is no difference in the way the operating activities section is presented.
36) Regarding the direct and indirect methods of preparing the statement of cash flows, which of the
following statements is true?
A) The indirect method and the direct method will produce a different amount of net cash provided by
investing activities.
B) The indirect method starts with net income and adjusts it to net cash provided by (used for) operating
activities.
C) The direct and indirect methods include different types of cash flows in the investing activities section.
D) The indirect method includes all non-cash activities, whereas the direct method includes only the cash
activities.
37) Which of the following sections of the statement of cash flows is presented differently between the
direct method and indirect method?
A) investing activities
B) financing activities
C) operating activities
D) non-cash investing and financing activities
1) The cash flows from investing activities is completed by reviewing the long-term liabilities section of
the balance sheet.
2) When preparing the statement of cash flows by the indirect method, it is necessary to adjust for non–
cash expenses such as depreciation expense.
3) The change in cash is the key reconciling figure for the statement of cash flows and must match the
change in cash reported on the comparative income statements.
4) Which of the following is the typical order of the sections on a statement of cash flows?
A) operating, financing, investing
B) financing, investing, operating
C) investing, operating, financing
D) operating, investing, financing
5) The three major categories included on the statement of cash flows are ________.
A) investing, operating, and financing activities
B) investing, capital, and financing activities
C) investing, operating, and contracting activities
D) financial, operating, and internal control activities
14
6) Dependable Tires Company uses the indirect method to prepare the statement of cash flows. Refer to
the following comparative balance sheet for Dependable Tires Company and complete the third column
to show the increases or decreases.
Dependable Tires Company
Comparative Balance Sheet
December 31, 2018 and 2017
Increase/
2018 2017 (Decrease)
Cash $39,600 $19,800
Accounts Receivable 26,400 38,500
Merchandise Inventory 204,000 126,500
Total Assets 270,000 184,800
Accounts Payable 4,800 6,600
Accrued Liabilities 2,400 1,100
Long-term Notes Payable 100,800 99,000
Total Liabilities 108,000 106,700
Common Stock 36,000 2,200
Retained Earnings 135,600 81,400
Treasury Stock (9,600) (5,500)
Total Stockholders‘ Equity 162,000 78,100
Total Liabilities and Stockholders’ Equity $270,000 $184,800
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Copyright © 2018 Pearson Education, Inc.
Answer:
Dependable Tires Company
Comparative Balance Sheet
December 31, 2018 and 2017
Increase/
2018 2017 (Decrease)
Cash $39,600 $19,800 $19,800
Accounts Receivable 26,400 38,500 (12,100)
Merchandise Inventory 204,000 126,500 77,500
Total Assets 270,000 184,800 85,200
Accounts Payable 4,800 6,600 (1,800)
Accrued Liabilities 2,400 1,100 1,300
Long-term Notes Payable 100,800 99,000 1,800
Total Liabilities 108,000 106,700 1,300
Common Stock 36,000 2,200 33,800
Retained Earnings
135,600 81,400 54,200
Treasury Stock (9,600) (5,500) (4,100)
Total Stockholders’ Equity 162,000 78,100 83,900
Total Liabilities and Stockholders’ Equity $270,000 $184,800 $85,200
Diff: 2
LO: 14-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Is the Statement of Cash Flows Prepared Using the Indirect Method? (H1)
7) List (in the correct order) and briefly discuss the five steps that are followed when preparing the
statement of cash flows by the indirect method.
8) When preparing the statement of cash flows using the indirect method, depreciation expense is
subtracted from net income under operating activities.
9) When preparing the statement of cash flows using the indirect method, a loss on the sale of plant assets
must be shown as a subtraction from the investing activities section.
10) When preparing the statement of cash flows using the indirect method, a decrease in current liabilities
is added to the net income to arrive at net cash provided by operating activities.
11) While preparing a statement of cash flows using the indirect method, an increase in current assets is
added to net income to arrive at net cash provided by operating activities.
12) Shell, Inc. uses the indirect method to prepare the statement of cash flows. Refer to the following
section of the comparative balance sheet:
Shell, Inc.
Comparative Balance Sheet
December 31, 2018 and 2017
2018
2017
Increase/(Decrease)
Cash
$42,000
$25,000
$17,000
Accounts Receivable
32,000
55,000
(23,000)
Merchandise Inventory
180,000
123,000
57,000
Total Assets
$254,000
$203,000
$51,000
The change in Accounts Receivable is shown as a negative cash flow in the adjustments to net income.
13) Wesley, Inc. uses the indirect method to prepare the statement of cash flows. Refer to the following
section of the comparative balance sheet:
Wesley, Inc.
Comparative Balance Sheet
December 31, 2019 and 2018
2019
2018
Increase/(Decrease)
Cash
$42,000
$25,000
$17,000
Accounts Receivable
32,000
55,000
(23,000)
Merchandise Inventory
180,000
123,000
57,000
Total Assets
$254,000
$203,000
$51,000
The change in Merchandise Inventory is shown as a negative cash flow in the adjustments to net income.
14) Texas Corp. uses the indirect method to prepare the statement of cash flows. Refer to the following
section of the comparative balance sheet:
Texas Corp.
Comparative Balance Sheet
December 31, 2018 and 2017
2018
2017
Increase/(Decrease)
Accounts Payable
$8,000
$9,000
$(1,000)
Accrued Liabilities
3,000
1,500
1,500
Long-term Notes Payable
56,000
60,000
(4,000)
Total Liabilities
$67,000
$70,500
$(3,500)
The change in Accounts Payable is reported as a negative cash flow in the adjustments to net income.
15) California Corp. uses the indirect method to prepare the statement of cash flows. Refer to the
following section of the comparative balance sheet:
California Corp.
Comparative Balance Sheet
December 31, 2018 and 2017
2018
2017
Increase/(Decrease)
Accounts Payable
$8,000
$9,000
$(1,000)
Accrued Liabilities
3,000
1,500
1,500
Long-term Notes Payable
56,000
60,000
(4,000)
Total Liabilities
$67,000
$70,500
$(3,500)
The change in Accrued Liabilities is shown as a negative cash flow in the adjustments to net income.
16) The activities that are included in the operating activities section of the statement of cash flows are
________.
A) activities that involve stockholders’ equity
B) activities that create revenue or expenses
C) activities that increase or decrease long-term assets
D) activities that pertain to construction of new facilities
17) Which of the following sections of the statement of cash flows include activities that create revenue
and expenses of the business?
A) the investing activities section
B) the financing activities section
C) the operating activities section
D) the non-cash investing and financing section
18) Which of the following sections of the statement of cash flows include activities that affect net income
on the income statement?
A) the financing activities section
B) the operating activities section
C) the investing activities section
D) the non-cash investing and financing section
19) Which of the following sections of the statement of cash flows include activities that affect current
assets and current liabilities on the balance sheet? (Assume the indirect method is used.)
A) the investing activities section
B) the financing activities section
C) the operating activities section
D) the non-cash investing and financing section
20) Which of the following will be shown under the investing activities section of the statement of cash
flows?
A) purchased treasury stock for cash
B) issued notes payable to purchase equipment
C) paid cash dividends to stockholders
D) loaned money to a third party