92. A gain on the sale of long-term assets is added to net income to arrive at net cash flows
from operating activities under the indirect method.
93. Under the indirect method, a decrease in accounts receivable is added to net income to
arrive at net cash flows from operating activities.
94. Under the indirect method, an increase in prepaid rent is added to net income to arrive at
net cash flows from operating activities.
95. Under the indirect method, an increase in inventory is added to net income and a decrease
in inventory is subtracted from net income to arrive at net cash flows from operating
activities.
96. When preparing a statement of cash flows using the indirect method, a decrease in
accounts payable is subtracted from net income.
97. Under the indirect method, an increase in accounts payable is added to net income to
arrive at net cash flows from operating activities.
98. Under the indirect method, a decrease in accounts payable is added to net income to arrive
at net cash flows from operating activities.
99. The long-term assets section of the balance sheet is the place to look for investing
activities.
100. The sale of land is reported in the operating section of the statement of cash flows.
101. We report the purchase of stock in another corporation as a cash outflow from investing
activities.
102. We report the actual amount of cash proceeds received from the sale of land as a cash
inflow from investing activities.
103. If no cash was exchanged in the purchase of equipment financed entirely with a note
payable, we represent this as both an investing activity and a financing activity in the
statement of cash flows.
104. We can find most financing activities by examining changes in long-term liabilities and
stockholders’ equity accounts.
105. The inflow of cash received from issuing common stock is reported as an investing
activity.
106. The balance in Retained Earnings is increased by net income and is decreased by
dividends.
107. We report the payment of cash dividends as a cash outflow from investing activities.
108. The total of the cash flows from operating, investing, and financing activities equals the
net increase or decrease in cash for the year.
109. We calculate cash return on assets as the change in cash divided by average total assets.
110. Cash return on assets indicates the amount of operating cash flow generated for each
dollar invested in assets.
111. To maximize cash flow from operations, a company strives to increase both cash flows
per dollar of sales and sales per dollar of assets invested.
112. Cash return on assets can be separated to examine two important business strategies:
cash flow to sales and asset turnover.
113. Income statement items that have no cash effect are still reported under the direct
method.
114. Using the direct method, we examine each account in the income statement and convert
it from an accrual amount to a cash amount.
115. If accounts receivable decreases, this indicates that revenues exceed cash receipts from
customers.
116. When accounts payable decrease, cash paid to suppliers must have been more than
purchases.
117. If there are no current assets or liabilities associated with operating expenses, the
amounts we report for these expenses in the income statement must equal the amount of cash
we paid for these items.
118. Depreciation expense is not reported on the statement of cash flows under the direct
method.
119. We add an increase in interest payable to interest expense in arriving at cash paid for
interest under the direct method.
120. We add a decrease in income tax payable to income tax expense to calculate cash paid
for income taxes.
121. The indirect method begins with net income, while the direct method considers each of
the individual accounts that make up net income.
122. Place the following items in the correct order as they would appear in the statement of
cash flows:
1. Beginning cash balance
2. Net increase (decrease) in cash
3. Financing activities
4. Operating activities
5. Ending cash balance
6. Investing activities
(A) Operating activities
(B) Investing activities
(C) Financing activities
(D) Net increase (decrease) in cash
(E) Beginning cash balance
(F) Ending cash balance
1(A); 2(E); 3(D); 4(F); 5(B); 6(C)
123. Listed below are ten terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Investing
activities
2. Noncash
activities
3. Financing
activities
4. Indirect
method
5. Cash flow to
sales
6. Cash return on
assets
7. Operating
activities
8. Direct method
9. Asset turnover
10. Statement of
cash flows
(A)Begins with net income and then list adjustments to
net income in order to arrive at operating cash flows.
(B)Significant investing and financing activities that do
not affect cash.
(C)Sales revenue divided by average total assets;
measures the sales revenue generated per dollar of assets.
(D)Includes cash receipts and cash payments for
transactions relating to revenue and expense activities.
(E)Net cash flows from operating activities divided by
average total assets; measures the operating cash flow
generated per dollar of assets.
(F) summary of cash inflows and cash outflows during
the reporting period sorted by operating, investing, and
financing activities.
(G)Net cash flows from operating activities divided by
sales revenue; measures the operating cash flow generated
per dollar of sales.
(H)Includes cash transactions resulting from the external
financing of a business.
(I)Includes cash transactions involving the purchase and
sale of long-term assets and current investments.
(J) Adjusts the items on the income statement to show
items such as cash received from customers, and cash paid
for inventory, salaries, rent, interest and taxes.
124. Identify and briefly describe the three categories of cash flows reported in the statement
of cash flows.
125. Distinguish between the indirect method and the direct method for reporting net cash
flows from operating activities. Which method is more common in practice? Which method
provides a more logical presentation of cash flows?
126. Classify each of the following items as an operating, investing, or financing activity.
1. Dividends paid.
2. Sale of goods or services for cash.
3. Sale of equipment.
4. Purchase of inventory.
5. Repayment of notes payable.
127. Classify each of the following items as an operating, investing, or financing activity.
1. Payment of income taxes.
2. Sale of investments.
3. Receipt of interest.
4. Issuance of common stock.
5. Purchase of intangibles.
128. The following selected transactions occur during the first year of operations. Determine
how each should be reported in the statement of cash flows. State whether it is a cash inflow
or a cash outflow and whether it is an operating, investing, or financing activity.
1. Issued a million shares of common stock at $20 per share.
2. Purchased land and a building for $3 million.
3. Received $200,000 from a cash sale of merchandise to customers.
4. Paid a dividend of $1 per share to common stockholders.
5. Loaned $50,000 to an employee and accepted a note receivable.
129. Analysis of an income statement, balance sheets, and additional information from the
accounting records of Gaming Strategies reveal the following items:
1. Collection of notes receivable.
2. Purchase of equipment.
3. Exchange of long-term assets.
4. Decrease in accounts payable.
5. Payment of dividends.
6. Purchase of a patent.
7. Depreciation expense.
8. Decrease in accounts receivable.
9. Issuance of note payable.
10. Increase in inventory.
Indicate in which section of the statement of cash flows each of these items would be
reported: operating activities (indirect method), investing activities, financing activities, or
noncash activities.
130. For each of the following five transactions, indicate by letter whether the cash effect of
each transaction is reported in a statement of cash flows as an operating (O), investing (I),
financing (F), or noncash (NC) activity.
131. For each of the following five transactions, indicate by letter whether the cash effect of
each transaction is reported in a statement of cash flows as an operating (O), investing (I),
financing (F), or noncash (NC) activity.