Managerial Accounting, 16e (Garrison)
Ch 14A: The Direct Method of Determining the Net Cash Provided by Operating Activities
1) Under the direct method of determining the net cash provided by (used in) 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 (used in) 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 (used in) 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:
A) subtract the $6,000 from the sales revenue reported on the income statement.
B) add the $6,000 to the sales revenue reported on the income statement.
C) subtract the $6,000 from the cost of goods sold reported on the income statement.
D) add the $6,000 to the cost of goods sold reported on the income statement.
6) Evita Corporation prepares its statement of cash flows using the indirect method. Evita’s
statement showed “Net cash provided by (used in) operating activities” of $46,000. Under the
direct method, this number would have been:
A) $0.
B) $46,000.
C) greater than $46,000.
D) less than $46,000 but greater than $0.
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:
A) subtract the $6,000 from the selling and administrative expenses reported on the income
statement.
B) add the $6,000 to the selling and administrative expenses reported on the income statement.
C) subtract the $6,000 from the cost of goods sold reported on the income statement.
D) add the $6,000 to the cost of goods sold reported on the income statement.
4
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
$
Accounts receivable
38
Inventory
68
Total current assets
153
Property, plant, and equipment
600
Less accumulated depreciation
397
Net property, plant, and equipment
203
Total assets
$
356
$
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable
$
59
$
Total current liabilities
59
Bonds payable
219
Total liabilities
278
Stockholders’ equity:
Common stock
71
Retained earnings
7
)
Total stockholders’ equity
78
)
Total liabilities and stockholders’ equity
$
356
$
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:
A) $185
B) $51
C) $83
D) $191
Sales (as reported)
Adjustments to a cash basis:
Increase in accounts receivable ($38 – $35)
Cost of goods sold (as reported)
Adjustments to a cash basis:
Increase in inventory ($68 – $61)
Decrease in accounts payable
Selling and administrative expense (as reported)
Adjustments to a cash basis:
Depreciation ($397 – $332)
Income tax expense
Net cash provided by (used in) 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 (used in) operating
activities on the statement of cash flows. The sales revenue adjusted to a cash basis for the year
would be:
A) $125,000
B) $90,000
C) $140,000
D) $100,000
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)?
A) $29,000
B) $21,000
C) $25,000
D) $4,000
8
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
$
Accounts receivable
49
Inventory
52
Total current assets
143
Property, plant, and equipment
456
Less accumulated depreciation
203
Net property, plant, and equipment
253
Total assets
$
396
$
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable
$
27
$
Accrued liabilities
16
Income taxes payable
42
Total current liabilities
85
Bonds payable
76
Total liabilities
161
Stockholders’ equity:
Common stock
45
Retained earnings
190
Total stockholders’ equity
235
Total liabilities and stockholders’ equity
$
396
$
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:
A) $34
B) $35
C) $50
D) $41
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:
A) $93,000
B) $24,000
C) $94,000
D) $45,000
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 and cash equivalents
$
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)?
A) $100,000
B) $96,000
C) $102,000
D) $116,000
Cost of goods sold (as reported)
$
106,000
Adjustments to a cash basis:
Decrease in inventory ($42,000 – $36,000)
Increase in accounts payable ($18,000 – $14,000)
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 (used in) operating activities on the
statement of cash flows, sales adjusted to a cash basis are:
A) $760,000
B) $740,000
C) $680,000
D) $830,000
15) Wister Corporation had sales of $462,000 for the just completed year. Shown below are the
beginning and ending balances of various Wister accounts:
Ending
Beginning
Cash and cash equivalents
$
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 sales adjusted to a cash basis (i.e., cash received
from sales)?
A) $488,000
B) $436,000
C) $462,000
D) $445,000
Sales (as reported)
$
462,000
Adjustments to a cash basis:
Increase in accounts receivable ($168,000 – $142,000)
Sales adjusted to a cash basis
$
436,000
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 (used in) 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:
A) $14,000
B) $16,000
C) $10,000
D) $15,000
Balance
Inventory
$
33,000
$
30,000
$
+3,000
Accounts Payable
$
23,000
$
21,000
$
+2,000
Cost of goods sold (as reported)
Adjustments to a cash basis:
Increase in inventory
+3,000
Increase in accounts payable
Cost of goods sold adjusted to a cash basis
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:
A) $255,000
B) $315,000
C) $205,000
D) $265,000
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 (used in) operating activities on the
statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A) $135,000
B) $100,000
C) $155,000
D) $105,000
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:
A) $50,000
B) $40,000
C) $30,000
D) $20,000
Sales (as reported)
$
Adjustments to a cash basis:
Decrease in accounts receivable
Sales adjusted to a cash basis
$
18
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
$
Accounts receivable
50
Inventory
55
Total current assets
141
Property, plant and equipment
624
Less accumulated depreciation
304
Net property, plant and equipment
320
Total assets
$
461
$
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable
$
24
$
Accrued liabilities
16
Income taxes payable
30
Total current liabilities
70
Bonds payable
16
Total liabilities
86
Stockholders’ equity:
Common stock
43
Retained earnings
332
Total stockholders’ equity
375
Total liabilities and stockholders’ equity
$
461
$
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
Cash dividends were $12. 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:
A) $77
B) $68
C) $40
D) $14
21) Last year Anderson Corporation reported a cost of goods sold of $100,000. The company’s
inventory at the beginning of the year was $11,000, and its inventory at the end of the year was
$19,000. The prepaid expense account increased by $2,000 between the beginning and end of the
year, and the accounts payable account decreased by $4,000. Cost of goods sold adjusted to the
cash basis under the direct method would be:
A) $94,000
B) $106,000
C) $112,000
D) $110,000