35) The Supplies balance has decreased during the year. How would this affect the Statement of
Cash Flows operations section under the indirect method?
A) It is already included in the net income.
B) It would be added back to net income.
C) It would be subtracted from net income.
D) It does not affect the cash flow from operations.
36) The Accounts Receivable balance has decreased during the year. How would this affect the
Statement of Cash Flows operations section under the indirect method?
A) It is already included in the net income.
B) It would be added back to net income.
C) It would be subtracted from net income.
D) It does not affect the cash flow from operations.
37) Of the following, which would be added back to net income in the operating section of a
cash flow statement using the indirect method?
A) Increase in inventory
B) Decrease in Accounts Payable
C) Increase in Accounts Receivable
D) Decrease in Prepaid Insurance
38) An increase in long-term Mortgage Payable would mean a(n):
A) increase in cash flow from investing activities.
B) decrease in cash flow from investing activities.
C) increase in cash flow from financing activities.
D) decrease in cash flow from financing activities.
39) Activities that increase and decrease as a result of selling a company’s stock are:
A) marketing activities.
B) operating activities.
C) investing activities.
D) financing activities.
40) Of the following, which is NOT classified as an investing activity on the Statement of Cash
Flows?
A) Sale of equipment for cash
B) Purchasing land
C) Collecting the principal on loans
D) Selling goods and services
41) A transaction involving the exchange of stock for equipment would be recorded as a(n):
A) operating activity.
B) investing activity.
C) financing activity.
D) noncash investing and financing activity.
42) A Statement of Cash Flows would NOT disclose:
A) stock dividends declared.
B) bonds payable issued.
C) purchase of treasury stock.
D) capital stock issued.
43) Caesario Company’s Accounts Receivable increased by $35,000 and their Accounts Payable
decreased by $18,000. What is the net effect on cash from operations under the indirect method?
A) +$53,000
B) -$17,000
C) -$53,000
D) +$17,000
44) Goldman Company’s Accounts Receivable decreased by $25,000 and its Accounts Payable
increased by $12,000. What is the net effect on cash from operations under the indirect method?
A) +$37,000
B) -$13,000
C) -$37,000
D) +$13,000
45) Enterprise Industries’ Accounts Receivable decreased by $30,000 and its Accounts Payable
decreased by $16,000. What is the net effect on cash from operations under the indirect method?
A) +$46,000
B) -$46,000
C) -$14,000
D) +$14,000
46) TLR Productions’ Accounts Receivable increased by $48,000 and its Accounts Payable
increased by $27,000. What is the net effect on cash from operations under the indirect method?
A) +$75,000
B) +$21,000
C) -$21,000
D) -$75,000
47) Sterling Sails reported net income of $35,000; depreciation expenses of $20,000; an increase
in Accounts Payable of $2,000; and an increase in current notes receivable of $3,000. Net Cash
Flows from operating activities under the indirect method is:
A) $56,000.
B) $55,000.
C) $54,000.
D) $50,000.
48) Green Timber reported net income of $52,000; depreciation expenses of $13,000; a gain on a
land sale of $3,000; and a decrease in Accounts Receivable of $1,500. Under the indirect
method, net Cash Flows from operations is:
A) $60,555.
B) $63,500.
C) $66,500.
D) $69,500.
49) The records of Eclectic Lighting showed a net loss of $30,000; depreciation expense of
$25,000; and an increase in supplies on hand of $5,000. The amount of net cash flow from
operating activities using the indirect method is:
A) ($15,000).
B) ($10,000).
C) $15,000.
D) $20,000.
50) S&C’s records show Accounts Receivable amounted to $215,000 at the beginning of the year
and $245,000 at the end of the year. Income reported on the Income Statement for the year was
$300,000. The cash flow from operating activities on the cash flow statement using the indirect
method is:
A) $330,000.
B) $270,000.
C) $300,000.
D) $315,000.
51) Records for Serenity Sounds show net income of $30,000; depreciation expense of $10,000;
and cash dividends paid of $5,000. The cash flow from operating activities on the cash flow
statement using the indirect method is:
A) $45,000.
B) $40,000.
C) $35,000.
D) $25,000.
52) The Vintage Boutique had net income of $50,000. Accounts Receivable increased by
$30,000; inventory decreased by $20,000; amounts payable increased by $4,000 and salaries
payable decreased by $1,000. The amount of cash flow from continuing operating activities
under the indirect method is:
A) $37,000.
B) $43,000.
C) $55,000.
D) $65,000.
53) If $10,000 was generated from operations (indirect method); $4,000 was used for investing
activities; and $6,000 was generated from financing activities, the cash balance:
A) increased by $6,000.
B) increased by $8,000.
C) increased by $12,000.
D) decreased by $20,000.
54) If $10,000 was generated from operations, $4,000 was used for investing activities and
$6,000 was generated from financing activities, the cash balance must have increased by:
A) $6,000.
B) $8,000.
C) $12,000.
D) $20,000.
11.4 Questions
1) Under the direct method, amortization expense is added to net income.
2) Under the direct method, gains and losses on the sale of a fixed asset are reported in the
investing section of the cash flow statement.
3) The FASB recommends use of the direct method, rather than the indirect method, of preparing
a cash flow statement.
4) Under the direct method, the only section that differs from the indirect method is the financing
activities section.
5) In the direct method, each line of the Income Statement is converted from the accrual basis to
cash basis.
6) Because depreciation is not cash-based, it is NOT reported in the direct method of the
Statement of Cash Flows.
7) Gains and losses on the sale of plant, property and equipment are ignored in the direct method
of preparing a Statement of Cash Flows.
8) One formula for determining cash collections from customers is to take Sales plus the increase
in Accounts Receivable.
9) In the direct method of preparing a cash flow statement, interest received and interest expense
are reported in the financing activities section.
10) Dividends received by a company appear in the operating activities section of a direct
method cash flow statement.
11) Payments to suppliers include items such as employee compensation, interest and income
taxes.
12) Cash payments for inventory are computed as– Total inventory purchased plus a decrease in
Accounts Payable OR minus an increase in Accounts Payable.
13) Some investing and financing activities involve no Cash Flows, so they:
A) represent no significant financial change.
B) should be included in the three main sections of the Statement of Cash Flows.
C) should be reported in a separate section of the cash flow statement.
D) must be converted to cash at the end of the accounting period.
14) Investing activities do NOT include:
A) the sale of common stock.
B) buying stock of other companies.
C) the cash purchases of equipment.
D) collecting the principal on loans.
15) The gains and losses on the sale of equipment under the direct method would be reported:
A) in the investing section of the cash flow statement.
B) in the operating section of the cash flow statement.
C) in the financing section of the cash flow statement.
D) they are not reported on the cash flow statement.
16) Exchanging stock for a building under the direct method would be reported:
A) in the investing section of the cash flow statement.
B) in the operating section of the cash flow statement.
C) in the financing section of the cash flow statement.
D) as a separate disclosure.
17) A purchase of new equipment on a note payable under the direct method would be reported:
A) as a separate disclosure as a non-cash transaction.
B) in the investing section of the cash flow statement.
C) in the operating section of the cash flow statement.
D) in the financing section of the cash flow statement.
18) Under the direct method, paying and collecting interest on loans are:
A) financing and investing activities.
B) operating and financing activities.
C) operating and investing activities.
D) operating activities.
19) When a corporation receives dividends, they are shown as a(n):
A) investing activity.
B) operating activity.
C) financing activity.
D) non-cash disclosure.
20) Depreciation of factory equipment under the direct method would be reported as a(n):
A) investing activity.
B) operating activity.
C) financing activity.
D) It is not reported.
21) Cost of goods sold for the year was $850,000. Inventory was $60,000 at the beginning of the
year and $90,000 at the end of the year. There were no changes in the amount in account payable
for the year. Cash payment for merchandise to be reported under the direct method is:
A) $850,000.
B) $910,000.
C) $940,000.
D) $880,000.
22) Cost of goods sold for the year was $700,000. Inventory was $80,000 at the beginning of the
year and $35,000 at the end of the year. There were no changes in the amount in account payable
for the year. Cash payment for merchandise to be reported under the direct method is:
A) $745,000.
B) $655,000.
C) $815,000.
D) $585,000.
23) Operating expenses–other than depreciation–for the year were $335,000. Prepaid expenses
decreased by $7,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $335,000.
B) $342,000.
C) $328,000.
D) $7,000.
24) Operating expenses–other than depreciation–for the year were $280,000. Prepaid expenses
increased by $16,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $296,000.
B) $16,000.
C) $264,000.
D) $280.000.
25) Operating expenses other than depreciation for the year were $400,000. Accrued expenses
increased by $35,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $435,000.
B) $400,000.
C) $365,000.
D) $35,000.
26) Operating expenses other than depreciation for the year were $563,000. Accrued expenses
decreased by $47,000. Cash payments for operating expenses to be reported on the cash flow
statement using the direct method would be:
A) $47,000.
B) $516,000.
C) $563,000.
D) $610,000.
27) From the Income Statement and Balance Sheet information listed below, what amount of
cash was paid for salaries and wages during 2012?
Salaries and wages expense
2012
$255,000
Salaries and wages payable
12/31/11
$8,200
Salaries and wages payable
12/31/12
$10,900
A) $252,300
B) $257,700
C) $255,000
D) $274,100
28) From the Income Statement and Balance Sheet information listed below, what amount of
cash was paid for salaries and wages during 2012?
Salaries and wages expense
2012
$187,000
Salaries and wages payable
12/31/11
$14,600
Salaries and wages payable
12/31/12
$11,300
A) $183,700
B) $161,100
C) $190,300
D) $212,900
29) The following information is available for Allsport Company. What amount was paid for
merchandise during the current year (2012)?
Cost of goods sold
$545,000
Merchandise inventory, 12/31/11
105,000
Merchandise inventory, 12/31/12
112,000
Accounts Payable 12/31/11
98,500
Accounts Payable 12/31/12
101,300
A) $545,000
B) $554,800
C) $540,800
D) $549,200
30) The following information is available for Bestway Company. What amount is paid for
merchandise for the current year (2012)?
Cost of goods sold
$872,000
Merchandise inventory, 12/31/11
123,000
Merchandise inventory, 12/31/12
114,000
Accounts Payable 12/31/11
104,000
Accounts Payable 12/31/12
97,000
A) $874,000
B) $870,000
C) $856,000
D) $888,000
31) A company settles a long-term note payable plus interest by paying $68,000 cash toward the
principal amount and $5,440 cash for the interest. Under the direct method of reporting interest,
the $5,440 would be listed as a(n):
A) operating activity.
B) financing activity.
C) investing activity.
D) separate disclosure only.
1) Over time, if the cash conversion cycle for a business grows longer, this is an indication that
they are holding cash too long.
2) Crazy Collectibles has average Accounts Payable of $5,000 and cost of goods sold of
$25,000; the Accounts Payable payment period for CC is 73 days.
3) Free cash flow is the anticipated amount of cash available from operations after paying for
planned financing of stock and paying dividends.
4) The formula for free cash flow is anticipated cash from operations minus cash payments for
investments in long-term assets.
5) The cash conversion cycle depends upon the time it takes to sell merchandise inventory, to
collect receivables and to pay payables.
6) Days -sales-in-inventory is calculated by dividing cost of goods sold by 365.
7) Generally, the higher the cash conversion cycle, the healthier the company is financially.
8) The cash conversion cycle represents the number of days the cash is “tied up” in the operating
activities of the business.
9) On its Statement of Cash Flows, Mike’s Motors reported cash flow from operating activities of
$107,000, cash flow from investing activities of $88,000, and cash flow from financing activities
of ($62,000). Mike’s Motors invested $54,000 cash in long-term assets. Mike’s Motors’ free cash
flow is:
A) $34,000.
B) $8,000.
C) $53,000.
D) $79,000.
10) On its Statement of Cash Flows, Aspen, Inc. reported cash flow from operating activities of
$98,000, cash flow from financing activities of ($127,000), and cash flow from investing
activities of $104,000. Aspen, Inc. invested $63,000 cash in long-term assets. Aspen, Inc.’s free
cash flow is:
A) $35,000.
B) $12,000.
C) $64,000.
D) $41,000.
11) The Bobblehead Company has an Accounts Receivable turnover of 36 days, an inventory
turnover of 77 days and an Accounts Payable turnover of 40 days. Bobblehead’s cash conversion
cycle is:
A) 153 days.
B) 81 days.
C) 73 days.
D) 1 day.
12) Twin Peaks Industries has an inventory turnover of 112 days, an Accounts Payable turnover
of 73 days and an Accounts Receivable turnover of 82 days. Twin Peaks’ cash conversion cycle
is:
A) 121 days.
B) 103 days.
C) 43 days.
D) 9 days.