Appendix 12A The Direct Method of Determining the Net Cash
Provided by Operating Activities Answer Key
True / False Questions
1.
Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, a decrease in prepaid expenses would be added to selling
and administrative expenses to convert selling and administrative expenses to a cash
basis.
2.
Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, one step in adjusting selling and administrative expenses
from an accrual to a cash basis is to subtract any increase in prepaid expenses.
3.
If accounts receivable increase during a period, then the amount of cash collected from
customers will be less than the amount of sales reported on the income statement for the
period.
4.
Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, an increase in accounts receivable would be added to sales
revenue to convert revenue to a cash basis.
Multiple Choice Questions
5.
During the year the balance in the Accounts Receivable account increased by $6,000. In
order to adjust the company’s net income to a cash basis using the direct method on the
statement of cash flows, it would be necessary to:
6.
Evita Corporation prepares its statement of cash flows using the indirect method. Evita’s
statement showed “Net cash provided by operating activities” of $46,000. Under the direct
method, this number would have been:
7.
During the year the balance in the Prepaid Expenses account increased by $6,000. In order
to adjust the company’s net income to a cash basis using the direct method on the
statement of cash flows, it would be necessary to:
8.
Brew Corporation’s most recent comparative balance sheet and income statement appear
below:
Comparative Balance Sheet
Ending Balance
Beginning Balance
Assets
Current assets:
Cash and cash equivalents
$47
$39
Accounts receivable
38
35
Inventory
68
61
Total current assets
153
135
Property, plant, and equipment
600
500
Less accumulated depreciation
397
332
Net property, plant, and equipment
203
168
Total assets
$356
$303
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$59
$63
Total current liabilities
59
63
Bonds payable
219
260
Total liabilities
278
323
Stockholders’ equity:
Common stock
71
70
Retained earnings
7
(90)
Total stockholders’ equity
78
(20)
Total liabilities and stockholders’ equity
$356
$303
Income Statement
Sales
$975
Cost of goods sold
619
Gross margin
356
Selling and administrative expense
165
Net operating income
191
Income taxes
57
Net income
$134
Cash dividends were $37. The company did not retire or sell any property, plant, and
equipment during the year. The net cash provided by (used in) operating activities for the
year was:
Sales (as reported)
Cost of goods sold (as reported)
Increase in inventory ($68 – $61)
Decrease in accounts payable ($59 – $63)
Selling and administrative expense (as reported)
Income tax expense
Net cash provided by operating activities
9.
Last year Lawn Corporation reported sales of $115,000 on its income statement. During
the year, accounts receivable decreased by $10,000 and accounts payable increased by
$15,000. The company uses the direct method to determine the net cash provided by
operating activities on the statement of cash flows. The sales revenue adjusted to a cash
basis for the year would be:
10.
Reven Corporation prepares its statement of cash flows using the direct method. Last
year, Reven reported Income Tax Expense of $25,000. At the beginning of last year, Reven
had a $5,000 balance in the Income Taxes Payable account. At the end of last year, Reven
had a $9,000 balance in the account. On its statement of cash flows for last year, what
amount should Reven have shown for its Income Tax Expense adjusted to a cash basis
(i.e., income taxes paid)?
11.
Dorris Corporation’s balance sheet and income statement appear below:
Comparative Balance Sheet
Ending Balance
Beginning Balance
Assets
Current assets:
Cash and cash equivalents
$42
$40
Accounts receivable
49
57
Inventory
52
44
Total current assets
143
141
Property, plant, and equipment
456
410
Less accumulated depreciation
203
186
Net property, plant, and equipment
253
224
Total assets
$396
$365
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$27
$33
Accrued liabilities
16
19
Income taxes payable
42
42
Total current liabilities
85
94
Bonds payable
76
70
Total liabilities
161
164
Stockholders’ equity:
Common stock
45
40
Retained earnings
190
161
Total stockholders’ equity
235
201
Total liabilities and stockholders’ equity
$396
$365
Income Statement
Sales
$587
Cost of goods sold
385
Gross margin
202
Selling and administrative expense
167
Net operating income
35
Gain on sale of plant and equipment
16
Income before taxes
51
Income taxes
15
Net income
$36
Cash dividends were $7. The company sold equipment for $18 that was originally
purchased for $8 and that had accumulated depreciation of $6. The net cash provided by
(used in) operating activities for the year was:
Sales (as reported)
Cost of goods sold (as reported)
Increase in inventory ($52 – $44)
Decrease in accounts payable ($27 – $33)
Selling and administrative expense (as reported)
Decrease in accrued liabilities ($16 – $19)
Depreciation ($203 – $186 + $6)
Income tax expense (as reported)
No change in income taxes payable ($42 – $42)
12.
The ending balance of accounts receivable was $69,000. Sales, adjusted to a cash basis
using the direct method on the statement of cash flows, were $354,000. Sales reported on
the income statement were $378,000. Based on this information, the beginning balance in
accounts receivable was:
13.
Kuma, Inc. had cost of goods sold of $106,000 for the just completed year. Shown below
are the beginning and ending balances of various Kuma accounts:
Ending
Beginning
Cash
$59,000
$45,000
Accounts receivable
$75,000
$81,000
Inventory
$36,000
$42,000
Accounts payable
$18,000
$14,000
Retained earnings
$79,000
$64,000
Kuma prepares its statement of cash flows using the direct method. On its statement of
cash flows, what amount should Kuma show for its cost of goods sold adjusted to a cash
basis (i.e., cash paid to suppliers)?
Cost of goods sold (as reported)
Cost of goods sold adjusted to a cash basis
14.
Sales reported on the income statement totaled $750,000. The beginning balance in
accounts receivable was $70,000. The ending balance in accounts receivable was $80,000.
Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, sales adjusted to a cash basis are:
15.
Wister Corporation had net sales of $462,000 for the just completed year. Shown below
are the beginning and ending balances of various Wister accounts:
Ending
Beginning
Cash
$105,000
$132,000
Accounts receivable
$168,000
$142,000
Inventory
$472,000
$536,000
Accounts payable
$74,000
$91,000
Retained earnings
$364,000
$292,000
Wister prepares its statement of cash flows using the direct method. On its statement of
cash flows, what amount should Wister show for its net sales adjusted to a cash basis
(i.e., cash received from sales)?
Sales (as reported)
Sales adjusted to a cash basis
16.
LFM Corporation reported cost of goods sold on its income statement of $15,000. The
following account balances appeared on the company’s comparative balance sheet for the
same year:
Ending Balance
Beginning Balance
Inventory
$33,000
$30,000
Accounts Payable
$23,000
$21,000
The company uses the direct method to determine the net cash provided by operating
activities. The cost of goods sold, adjusted to a cash basis, on the company’s statement of
cash flows for the year would be:
17.
Cridberg Corporation’s selling and administrative expenses for last year totaled $260,000.
During the year the company’s prepaid expense account balance increased by $18,000 and
accrued liabilities decreased by $12,000. Depreciation for the year was $25,000. Based on
this information, selling and administrative expenses adjusted to a cash basis under the
direct method on the statement of cash flows would be:
18.
Last year Cumberland Corporation reported a cost of goods sold of $120,000. Inventories
increased by $35,000 during the year, and accounts payable increased by $20,000. The
company uses the direct method to determine the net cash provided by operating
activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis
would be:
19.
Crossland Corporation reported sales on its income statement of $435,000. On the
statement of cash flows, which used the direct method, sales adjusted to a cash basis
were $455,000. Crossland Corporation reported the following account balances on its
balance sheet for the year:
Ending
Balance
Beginning
Balance
Accounts
receivable
$30,000
?
Prepaid
expenses
$14,000
$11,000
Inventory
$18,000
$20,000
Based on this information, the beginning balance in accounts receivable was:
20.
The most recent balance sheet and income statement of Dallavalle Corporation appear
below:
Comparative Balance Sheet
Ending Balance
Beginning Balance
Assets
Current assets:
Cash and cash equivalents
$36
$35
Accounts receivable
50
51
Inventory
55
50
Total current assets
141
136
Property, plant, and equipment
624
570
Less accumulated depreciation
304
279
Net property, plant, and equipment
320
291
Total assets
$461
$427
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$24
$25
Accrued liabilities
16
15
Income taxes payable
30
37
Total current liabilities
70
77
Bonds payable
16
20
Total liabilities
86
97
Stockholders’ equity:
Common stock
43
40
Retained earnings
332
290
Total stockholders’ equity
375
330
Total liabilities and stockholders’ equity
$461
$427
Income Statement
Sales
$649
Cost of goods sold
414