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.
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:
12-5
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:
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)?
12-9
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:
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)?
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)?
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 BalanceBeginning 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:
12–20
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
Gross margin 235
Selling and administrative expense 158
Net operating income 77
Income taxes 23
Net income $54