6) Investing and financing activities for the statement of cash flows may be prepared using the direct
method.
7) The FASB and IASB prefer the direct method of reporting operating cash flows.
8) Free cash flow is the amount of cash available from investing activities after paying for planned
investments in plant assets.
9) On a statement of cash flows prepared by using the direct method, cash receipts from interest and
dividends are classified as:
A) operating activities.
B) investing activities.
C) financing activities.
D) noncash activities.
10) Where would income taxes paid appear on the statement of cash flows prepared by using the direct
method?
A) operating activities
B) investing activities
C) financing activities
D) noncash activities
11) Interest paid on debt would be reported on a statement of cash flows, prepared by using the direct
method, under:
A) financing activities.
B) investing activities.
C) operating activities.
D) noncash activities.
12) The receipt of interest on loans would be reported on a statement of cash flows, prepared by the direct
method, under:
A) operating activities.
B) investing activities.
C) financing activities.
D) noncash activities.
13) The direct method of preparing the statement of cash flows:
A) has an identical operating activities section as the indirect method.
B) is used by a vast majority of companies.
C) is preferred by FASB.
D) is much easier for companies to compute.
14) Under the direct method of preparing the statement of cash flows, all of the following would be
reported under operating activities EXCEPT:
A) collections from customers.
B) interest received on notes receivable.
C) dividends received on investments in stock.
D) cash proceeds on sale of long-term investments.
15) Under the direct method of preparing the statement of cash flows, cash receipts from operating
activities do NOT include:
A) collection of long-term note receivable.
B) collections from customers.
C) receipt of interest on investments.
D) receipt of dividends on investments.
16) Northwest Builders, Inc. reported Cost of Goods Sold for the current year of $340,000. During the
same period, the Inventory account decreased $15,000 and the Accounts Payable account increased
$24,000. The amount of cash paid to suppliers for inventory is:
A) $301,000.
B) $316,000.
C) $325,000.
D) $355,000.
17) Under the direct method of preparing the statement of cash flows, cash payments from operating
activities do NOT include:
A) payments to suppliers.
B) payments to employees.
C) payment of dividends.
D) payment of interest.
18) Zimbalist Corporation reports a decrease in salaries payable of $6000. If salaries expense totaled
$182,000 for the year, the cash paid to employees is:
A) $6000.
B) $176,000.
C) $182,000.
D) $188,000.
19) Sweeten Corporation had sales of $930,000. The beginning accounts receivable balance was $68,000
and the ending accounts receivable balance was $240,000. The cash collected from customers for this
reporting period is:
A) $690,000.
B) $758,000.
C) $998,000.
D) $1,102,000.
20) Under the direct method of preparing the statement of cash flows, which statement is CORRECT
regarding the method of computing cash payments to suppliers for inventory?
A) Cost of goods sold less a decrease in inventory plus an increase in accounts payable.
B) Cost of goods sold plus an increase in inventory less an increase in accounts payable.
C) Cost of goods sold plus an increase in inventory plus an increase in accounts payable.
D) Cost of goods sold plus a decrease in inventory plus an increase in accounts payable.
21) Early Years Corporation reports a $14,000 increase in Inventory and a $26,000 increase in accounts
payable for the year. If the cost of goods sold is $400,000 for the year, the cash paid to Early Years’
suppliers for inventory is:
A) $360,000.
B) $374,000.
C) $388,000.
D) $440,000.
22) Under the direct method of preparing the statement of cash flows, which statement is CORRECT
regarding the calculation of cash collected from interest revenue?
A) Sales plus a decrease in interest receivable.
B) Interest revenue plus a decrease in interest receivable.
C) Interest revenue plus an increase in interest receivable.
D) Interest revenue less a decrease in interest receivable.
23) During the year, Chappel Engineering Corporation has operating expenses of $51,000. There was an
increase in prepaid expenses of $5000 and an increase in accrued liabilities of $7000. What were Chappel’s
cash payments for operating expenses?
A) $44,000
B) $49,000
C) $56,000
D) $58,000
24) The direct method of preparing the statement of cash flows is preferred by the Financial Accounting
Standards Board primarily because of the way it reports:
A) operating activities.
B) investing activities.
C) financing activities.
D) noncash activities.
25) Which of the following would NOT be reported in the operating activities section of a statement of
cash flows using the direct method?
A) cash paid for income taxes
B) interest received on notes receivable
C) loss on sale of equipment
D) payments to suppliers
26) Newsome Corporation had accounts receivable of $100,000 at the beginning of the year and $145,000
at the end of the year. Sales for the year amounted to $575,000. Cash collections from customers are:
A) $45,000.
B) $475,000.
C) $530,000.
D) $575,000.
27) Newton Corporation reported an increase in inventory of $75,000. The cost of goods sold for the year
was $200,000. There was also a $5000 decrease in accounts payable from the beginning of the year to the
end of the year. What is Newton’s cash payment to suppliers for inventory?
A) $205,000
B) $270,000
C) $275,000
D) $280,000
28) Einstein Corporation reported a decrease in inventory of $12,000. The cost of goods sold for the year
was $150,000. There was also a $4000 decrease in accounts payable from the beginning of the year to the
end of the year. What is Einstein’s cash payment to suppliers for inventory?
A) $134,000
B) $142,000
C) $158,000
D) $166,000
29) Jerome Smith, Inc. began the year with $299,000 in accounts receivable and ended the year with
$232,700 in accounts receivable. Sales for the year were $4,170,000. The cash collected from customers
during the year amounted to:
A) $4,103,700.
B) $4,236,300.
C) $4,402,700.
D) $4,701,700.
30) Income tax expense for 2018 is $43,000. Income tax payable increased $5000 during the year. Interest
payable increased $4000 during the year. What is the cash paid for income taxes?
A) $38,000
B) $43,000
C) $48,000
D) $47,000
31) Interest expense for 2018 is $270,000. Interest payable increased $52,000 during the year. Interest
receivable increased $12,000 during the year. Interest expense includes $47,000 for the amortization of
discount. What is the cash paid for interest?
A) $171,000
B) $183,000
C) $270,000
D) $223,000
32) Interest revenue for 2015 is $120,000. Interest payable increased $43,000 during the year and Interest
receivable increased $50,000 during the year. No discount or premium was amortized. What is the cash
received for interest revenue?
A) $70,000
B) $77,000
C) $120,000
D) $170,000
33) Under the direct method of preparing the statement of cash flows, the computation of payments to
suppliers includes:
A) payments for inventory only.
B) payments for operating expenses only.
C) payments for inventory and operating expenses (excluding employee’s wages).
D) payments for inventory, operating expenses, interest expense and income taxes.
34) Free cash flow equals:
A) net cash provided by investing activities minus cash payments earmarked for investments in plant
assets.
B) net cash provided by financing activities minus cash payments earmarked for investments in plant
assets.
C) net cash provided by operating activities minus cash payments earmarked for investments in plant
assets.
D) net change in cash minus cash payments earmarked for investments in plant assets.
35) Net cash provided by operating activities is $3.1 million. Planned capital expenditures are $2.5
million. Depreciation expense is $1.3 million per year. What is free cash flow?
A) ($700,000)
B) $600,000
C) $1,200,000
D) $1,800,000
36) A company purchased a parcel of land using a long-term note payable. Using the direct method,
where is this transaction reported on the statement of cash flows?
A) operating activities
B) investing activities
C) financing activities
D) noncash investing and financing activities
44
37) Matthauson Company has the following comparative balance sheet data available:
12/31/2017
12/31/2016
Cash
$30,000
$80,000
Accounts receivable, net
160,000
100,000
Inventory
100,000
70,000
Prepaid rent
20,000
10,000
Total current assets
$310,000
$260,000
Equipment
$400,000
$200,000
Accumulated depreciation
(60,000)
(50,000)
Total Assets
$650,000
$410,000
Accounts payable
$50,000
$40,000
Salaries payable
40,000
40,000
Bonds payable
0
50,000
Common stock, $10 par
300,000
100,000
Additional paid-in capital
50,000
0
Retained earnings
210,000
180,000
Total liabilities & stockholders’ equity
$650,000
$410,000
Additional information:
1. The company reports net income of $100,000 and depreciation expense of $20,000 for the year ending
December 31, 2017.
2. Dividends declared and paid in 2017, $70,000.
3. Equipment with a cost of $20,000 and accumulated depreciation of $10,000 was sold for $3,000.
4. New equipment was purchased for cash.
5. No common stock was retired during 2017.
The company also reports the following income statement for the year ending December 31, 2017:
Sales
$1,000,000
Expenses:
Cost of goods sold
600,000
Salaries expense
200,000
Rent expense
40,000
Depreciation expense
20,000
Interest expense
3,000
Loss on sale of equipment
7,000
Income tax expense
30,000
900,000
Net income
$100,000
Using the direct method, prepare the statement of cash flows for the year ending December 31, 2017.
38) The income statement and other data for Davidson Carpet Town, Inc., follow:
Davidson Carpet Town, Inc.
Income Statement
Year Ended December 31, 2017
Sales
$460,000
Cost of goods sold
190,000
Gross margin
270,000
Operating expenses
$70,000
Depreciation expense
20,000
90,000
Income before taxes
180,000
Income tax expense
10,000
Net income
$170,000
The changes in the current assets and current liabilities for the year ending December 31, 2017 were:
Accounts Receivable
Decrease $10,000
Inventory
Increase $8,000
Prepaid Insurance
Increase $4,000
Accounts Payable
Increase $14,000
Accrued Expenses Payable
Increase $2,000
Income Tax Payable
Increase $1,000
Using the direct method, prepare the operating activities section of the statement of cash flows for the
year ending December 31, 2017. Please show calculations.
Cash flows from operating activities:
Receivable $10,000)
Cash paid to suppliers (inventory)*
Cash paid to suppliers (operating expenses)**
income tax payable $1,000)
Net cash provided by operating activities
Payable $14,000
$4,000- Increase Accrued Expenses Payable $2,000