MSC: ACBSP-APC-24-Statement of Cash Flows
54. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Interest Income (assume that cash received is equal to
amount reported)—indicate the effect on net income in arriving at net cash flows from operating
activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
55. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Rent Income (assume that cash received is equal to amount
reported)—indicate the effect on net income in arriving at net cash flows from operating activities by
choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
56. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Inventory—indicate the effect on net income in
arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
57. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Prepaid Expenses—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
58. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Decrease in Accounts Payable—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
59. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Decrease in Accrued Liabilities—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
60. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Interest Expense (assume that cash payments are equal to
amount reported)—indicate the effect on net income in arriving at net cash flows from operating
activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
61. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Decrease in Income Taxes Payable—indicate the effect on
net income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
62. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Depreciation Expense—indicate the effect on net income in
arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
63. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Gain on Sale of Investment—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
64. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Gain on Disposal of Equipment—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
65. If the indirect method is used, which of the following would be added to net income to arrive at net
cash flows from operating activities?
a.
Increase in Inventory
b.
Depreciation expense
c.
Decrease in Accounts Payable
d.
Increase in Prepaid Insurance
66. If the indirect method is used, which of the following would be subtracted from net income to arrive at
net cash flows from operating activities?
a.
Increase in Notes Payable
b.
Decrease in Inventory
c.
Decrease in Accounts Payable
d.
Depreciation Expense
67. If the indirect method is used, each of the following is a proper adjustment to net income to arrive at
net cash flows from operating activities except
a.
adding a decrease in Prepaid Expenses.
b.
deducting an increase in Salaries Payable.
c.
deducting an increase in Accounts Receivable.
d.
adding a decrease in Inventory.
68. In preparing a statement of cash flows using the indirect method, a decrease in an unearned revenue
account should
a.
be shown as a financing activity.
b.
be shown as a deduction from net income in computing net cash flows from operating
activities.
c.
not be shown on the statement of cash flows.
d.
be shown as an addition to net income in computing net cash flows from operating
activities.
69. When a statement of cash flows is prepared using the indirect method,
a.
net income is the starting point in determining cash flows from operations.
b.
dividend expense is not included.
c.
the increase in cash is different than when the direct method is used.
d.
the amount of cash collected from customers is calculated.
70. The indirect method of preparing a statement of cash flows
a.
eliminates the need for a schedule of noncash investing and financing transactions.
b.
provides a different result than the direct method.
c.
adjusts net income for changes in current accounts.
d.
shows collections from customers rather than the change in Accounts Receivable.
71. Which of the following items would not be included in a statement of cash flows prepared using the
indirect method?
a.
Net income
b.
Depreciation expense
c.
Sale of a plant asset
d.
Cash paid for wages
72. To determine whether a company’s operations are covering its dividend payments, it is best to focus on
which of the following sections of the statement of cash flows?
a.
Operating activities
b.
Financing activities
c.
Investing activities and financing activities
d.
Operating activities and investing activities
73. Assume that the balance of accounts payable does not change during a period. When preparing a
statement of cash flows, an increase in ending inventory over beginning inventory will result in an
adjustment to net income under the indirect approach because
a.
the amount of cost of goods sold is equal to the amount of cash paid for purchases.
b.
consumed inventory is an expense but not a use of funds.
c.
the amount of cost of goods sold on an accrual basis is less than the amount of cash paid
for purchases of inventory.
d.
the amount of cash paid for purchases of inventory is less than the amount of cost of goods
sold on an accrual basis.
74. Laguna’s Corporation sold investments for $102,000 cash that cost $90,000. The journal entry to
record the increase in cash flow is:
a.
Cash 102,000
Investments 90,000
Gain on Sale of Investments 12,000
b.
Cash 90,000
Loss on Sale of Investments 12,000
Investments 102,000
c.
Investments 102,000
Cash 102,000
d.
Cash 90,000
Investments 90,000
75. Dillon Corporation purchased investments for $240,000 cash. The journal entry to record the outflow
of cash is:
a.
Investments 240,000
Cash 240,000
b.
Cash 240,000
Investments 240,000
c.
Investments 240,000
Purchases 240,000
d.
Purchases 240,000
Investments 240,000
76. Heckart Corporation purchased plant assets for $120,000 cash. The journal entry to record the outflow
of cash is:
a.
Investments 120,000
Cash 120,000
b.
Plant Assets 120,000
Cash 120,000
c.
Plant Assets 120,000
Purchases 120,000
d.
Purchases 120,000
Plant Assets 120,000
77. Florence Corporation sold for $20,000 plant assets that cost $40,000 and that had an accumulated
depreciation of $8,000. The journal entry to record the transaction is:
a.
Cash 20,000
Plant Assets 20,000
b.
Plant Assets 32,000
Cash 32,000
c.
Cash 20,000
Accumulated Depreciation 8,000
Loss on Sale of Plant Assets 12,000
Plant Assets 40,000
d.
Cash 20,000
Loss on Sale of Plant Assets 12,000
Plant Assets 32,000
78. Investments that Edgefield Corporation sold for $500,000, which cost $425,000, would appear under
investing activities as a
a.
$425,000 cash outflow.
b.
$425,000 cash inflow.
c.
$500,000 cash inflow.
d.
$500,000 cash outflow.
79. Harry Company purchased land for $500,000 by issuing bonds for $400,000 and paying the remaining
$100,000 in cash. Harry also sold a building that cost $980,000 and had accumulated depreciation of
$434,000 for $640,000. Net cash flows from investing activities totaled
a.
($406,000)
b.
$540,000
c.
($94,000)
d.
$0
80. Kershaw Company sold an asset that cost $240,000 and had a book value of $144,000 for $180,000.
The amount recorded in the investing activities section for this transaction would be a
a.
$180,000 inflow.
b.
$180,000 outflow.
c.
$36,000 inflow.
d.
$36,000 outflow.
81. Analysis of the financing activities section of the statement of cash flows will disclose
a.
the extent of investments in plant and equipment.
b.
net income for the period.
c.
any sales or repurchases of stock.
d.
the amount of money loaned to others.
82. Northbrook Corporation issued $60,000 bonds payable to acquire Machinery. The journal entry to
record the transaction is:
a.
Machinery 60,000
Cash 60,000
b.
Machinery 60,000
Bonds Payable 60,000
c.
Bonds Payable 60,000
Machinery 60,000
d.
Cash 60,000
Bonds Payable 60,000
83. Laguna’s Corporation issued 30,000 shares of $5 par value common stock for $300,000. The journal
entry to record the transaction is:
a.
Cash 300,000
Common Stock 300,000
b.
Cash 150,000
Common Stock 150,000
c.
Cash 300,000
Common Stock 150,000
Additional Paid-In Capital 150,000
d.
Cash 150,000
Additional Paid-In Capital 150,000
84. Laguna’s Corporation purchased treasury stock for $100,000. The journal entry to record the
transaction is:
a.
Cash 100,000
Treasury Stock 100,000
b.
Treasury Stock 100,000
Common Stock 100,000
c.
Treasury Stock 100,000
Cash 100,000
d.
Common Stock 100,000
Treasury Stock 100,000
85. Union Corporation issued 40,000 shares of $10 par value common stock for $600,000, purchased
10,000 shares of treasury stock with a par value of $20 for $150,000, and paid $20,000 in cash
dividends. Net cash flows from financing activities totaled
a.
$0.
b.
$430,000.
c.
$280,000.
d.
($470,000).
SHORT ANSWER
1. Indicate on the blanks below the type of activity (operating activity, financing activity, investing
activity, noncash transaction) each of the following transactions represents.
_____ a. Firm sold 16,000 shares of its own common stock for cash.
_____ b. Sold $400,000 worth of products for cash.
_____ c. Paid $240,000 dividend.
_____ d. Received $3,000 in interest income.
_____ e. Exchanged 12,000 shares of stock for 15-year bonds.
_____ f. Paid $242,000 to the U.S. Treasury for income taxes.
2. Indicate on the blanks below the type of activity (operating activity, financing activity, investing
activity, noncash transaction) each of the following transactions represents.
_____ a. Company sold shares of its own stock for cash.
_____ b. Acquired land and buildings by issuance of long-term mortgage payable.
_____ c. Declared and paid cash dividends.
_____ d. Received interest income.
_____ e. Exchanged shares of stock for 15-year bonds.
_____ f. Paid the U.S. Treasury for income taxes.
_____ g. Collected proceeds from the sale of a long-term investment at cost.
_____ h. Declared stock dividends.
_____ i. Paid off long-term debt with cash.
_____ j. Purchased equipment with cash.
3. Provide the components for the calculation of free cash flow.
4. Use the following information to obtain the ratios below. Round amounts to one decimal place.
Net cash flows from operating activities
$837 million
Net income
465 million
Sales
6,750 million
Average total assets
7,150 million
Dividends
105 million
Purchases of plant assets
170 million
Sales of plant assets
380 million
a. Cash flow yield = _______________ times
b. Cash flows to sales = _______________ %
c. Cash flows to assets = _______________ %
d. Free cash flow = $ ________________
5. When preparing a statement of cash flows using the indirect method, why is depreciation added back
to net income within the operating activities section?
6. Using the indirect method, calculate the amount of net cash flows from operating activities from the
following data. Show your work.
Net Income
Beginning Accounts Payable
$ 6,000
Beginning Accounts
Ending Accounts Payable
5,600
Receivable
Depreciation Expense
20,400
Ending Accounts Receivable
Amortization of Intangible
Beginning Prepaid Expenses
Assets
1,600
Ending Prepaid Expenses
Dividends Declared and Paid
4,400
Net Income
+
Decrease in Accounts Receivable ($10,000 – $8,800)
Increase in Prepaid Expenses ($2,000 – $2,800)
Decrease in Accounts Payable ($6,000 – $5,600)
+
Depreciation
+
Amortization
Net Cash Flows from Operating Activities
7. Using the indirect method, calculate the amount of net cash flows from operating activities from the
following data. Show your work.
Net Income
Beginning Accounts Payable
$ 3,000
Beginning Accounts
Ending Accounts Payable
2,800
Receivable
Depreciation Expense
10,200
Ending Accounts Receivable
Amortization of Intangible
Beginning Prepaid Expenses
Assets
800
Ending Prepaid Expenses
Dividends Declared and Paid
2,200
8. Platt Company prepares its statement of cash flows using the indirect method. Indicate whether each of
the items below would be added to or deducted from net income to determine net cash flows from
operating activities.
a. Decrease in Inventory
b. Decrease in Accounts Payable
c. Depreciation Expense
d. Loss on Disposal of Truck
e. Increase in Accounts Receivable
f. Increase in Wages Payable
g. Amortization Expense
h. Increase in Prepaid Rent
i. Gain on Sale of Land
j. Increase in Income Taxes Payable
9. The activity from the Long-Term Investments account for Newberry Corporation appears below. In
addition, the income statement shows a loss on the sale of investments of $64,000.
Long-Term Investments
Beginning balance, 2013
$368,000
Purchases
556,000
Sales
(404,000)
Ending balance, 2013
$520,000
Based on the information given, compute the amounts to be shown and indicate how they would
appear on the statement of cash flows. Assume that the indirect method is being used and that the
investments were purchased for cash.
Cash flows from investing activities:
Purchases of long-term investments
Sales of long-term investments
Net cash flows from investing activities
10. The activity from the Long-Term Investments account for Rice Corporation appears below. In
addition, the income statement shows a loss on the sale of investments of $16,000.
Long-Term Investments
Beginning balance, 2013
$ 92,000
Purchases
139,000
Sales
(101,000)
Ending balance, 2013
$130,000
Based on the information given, compute the amounts to be shown and indicate how they would
appear on the statement of cash flows. Assume that the indirect method is being used and that the
investments were purchased for cash.
Cash flows from investing activities:
Purchases of long-term investments
Sales of long-term investments
Net cash flows from investing activities