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—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
62. 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.
Decrease in Prepaid Expenses
c.
Decrease in Accounts Payable
d.
Increase in Accounts Receivable
63. 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
64. 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.
deducting a decrease in Prepaid Expenses.
b.
adding an increase in Salaries Payable.
c.
deducting an increase in Accounts Receivable.
d.
adding a decrease in Inventory.
65. 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.
66. In preparing a statement of cash flows using the indirect method, an increase 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.
67. Use this information to answer the following question.
Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $9,000 cash.
2. Purchased a building for $80,000 cash.
3. Issued $70,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $100,000 worth of stock.
5. Declared and paid a $10,000 cash dividend.
Transaction 1 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
noncash investing and financing transactions section.
d.
cash flows from investing activities section.
68. Use this information to answer the following question.
Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $9,000 cash.
2. Purchased a building for $80,000 cash.
3. Issued $70,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $100,000 worth of stock.
5. Declared and paid a $10,000 cash dividend.
Transaction 2 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
cash flows from investing activities section.
d.
noncash investing and financing transactions section.
69. Use this information to answer the following question.
Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $9,000 cash.
2. Purchased a building for $80,000 cash.
3. Issued $70,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $100,000 worth of stock.
5. Declared and paid a $10,000 cash dividend.
Transaction 3 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
noncash investing and financing transactions section.
d.
cash flows from investing activities section.
70. Use this information to answer the following question.
Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $9,000 cash.
2. Purchased a building for $80,000 cash.
3. Issued $70,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $100,000 worth of stock.
5. Declared and paid a $10,000 cash dividend.
Transaction 4 would be found on the statement of cash flows in the
a.
cash flows from investing activities section.
b.
cash flows from operating activities section.
c.
cash flows from financing activities section.
d.
noncash investing and financing transactions section.
71. Use this information to answer the following question.
Northbrook Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $9,000 cash.
2. Purchased a building for $80,000 cash.
3. Issued $70,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $100,000 worth of stock.
5. Declared and paid a $10,000 cash dividend.
Transaction 5 would be found on the statement of cash flows in the
a.
noncash investing and financing transactions section.
b.
cash flows from financing activities section.
c.
cash flows from operating activities section.
d.
cash flows from investing activities section.
72. On a statement of cash flows prepared using the indirect method, the amount representing cash paid
for interest would
a.
be included in the net cash flows from financing activities section.
b.
not be shown.
c.
be included in the net cash flows from investing activities section.
d.
be included in the net cash flows from operating activities section.
73. 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.
cash paid for dividends 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.
74. 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.
75. Which of the following items would not be included in a statement of cash flows prepared using the
indirect method?
a.
Net income
b.
Cash paid for dividends
c.
Sale of a plant asset
d.
Cash paid for wages
76. 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.
77. 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
78. 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
79. Meggie’s Corporation purchased investments for $80,000 cash. The journal entry to record the outflow
of cash is:
a.
Investments 80,000
Cash 80,000
b.
Cash 80,000
Investments 80,000
c.
Investments 80,000
Purchases 80,000
d.
Purchases 80,000
Investments 80,000
80. 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
81. 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
82. Laguna’s Corporation sold for $10,000 plant assets that cost $20,000 and that had an accumulated
depreciation of $4,000. The journal entry to record the transaction is:
a.
Cash 10,000
Plant Assets 10,000
b.
Plant Assets 16,000
Cash 16,000
c.
Cash 10,000
Accumulated Depreciation 4,000
Loss on Sale of Plant Assets 6,000
Plant Assets 20,000
d.
Cash 10,000
Loss on Sale of Plant Assets 6,000
Plant Assets 16,000
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 $50,000. The journal entry to record the transaction
is:
a.
Cash 50,000
Treasury Stock 50,000
b.
Treasury Stock 50,000
Common Stock 50,000
c.
Treasury Stock 50,000
Cash 50,000
d.
Common Stock 50,000
Treasury Stock 50,000
SHORT ANSWER
1. Indicate on the blanks below the letter of the type of activity (O = operating activity, F = financing
activity, I = investing activity, N = noncash transaction) each of the following transactions represents.
_____ 1. Firm sold 8,000 shares of its own common stock for cash.
_____ 2. Sold $200,000 worth of products for cash.
_____ 3. Paid $120,000 dividend.
_____ 4. Received $1,500 in interest income.
_____ 5. Exchanged 6,000 shares of stock for 15-year bonds.
_____ 6. Paid $121,000 to the U.S. Treasury for income taxes.
ANS:
2. Why does the acquisition of land in exchange for common stock qualify as a noncash investing and
financing transaction?
3. During the year, Ollie’s Outdoor Outfitters issued 20,000 shares of common stock in exchange for a
prime piece of land. Two employees of the accounting department, Audrey and Neil, disagree as to the
appearance of this particular transaction on the statement of cash flows. Audrey believes it to be a
significant noncash transaction, and it therefore should be presented as such at the bottom of the
statement. Neil contends that because this transaction did not cause any cash to flow in or out of the
company, it has no place on the statement of cash flows. Who is correct and why?
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
5. On the lines below, provide the components for the calculation of free cash flow.
6. Using the indirect method, calculate the amount of net cash flows from operating activities from the
following data. Show your work.
Net Income
$112,000
Beginning Accounts Payable
$ 6,000
Beginning Accounts
Ending Accounts Payable
5,600
Receivable
10,000
Depreciation Expense
20,400
Ending Accounts Receivable
8,800
Amortization of Intangible
Beginning Prepaid Expenses
2,000
Assets
1,600
Ending Prepaid Expenses
2,800
Dividends Declared and Paid
4,400
Net Income
+
Decrease in Accounts Receivable
Increase in Prepaid Expenses
Decrease in Accounts Payable
+
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
$63,000
Beginning Accounts Payable
$ 3,000
Beginning Accounts
Ending Accounts Payable
2,800
Receivable
5,000
Depreciation Expense
10,200
Ending Accounts Receivable
4,400
Amortization of Intangible
Beginning Prepaid Expenses
1,000
Assets
800
Ending Prepaid Expenses
1,400
Dividends Declared and Paid
2,200
8. When preparing a statement of cash flows using the indirect method, why is depreciation added back
to net income within the operating activities section?
9. How is it possible for a company to show a net loss for a given year, yet produce positive net cash
flows from operating activities?
10. 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.
_____ 1. Decrease in Inventory
_____ 2. Decrease in Accounts Payable
_____ 3. Depreciation Expense
_____ 4. Loss on Disposal of Truck
_____ 5. Increase in Accounts Receivable
_____ 6. Increase in Wages Payable
_____ 7. Amortization Expense
_____ 8. Increase in Prepaid Rent
_____ 9. Gain on Sale of Land
_____ 10. Increase in Income Taxes Payable
11. A company sells equipment with a carrying value of $10,000 for $7,000. Where, and for what
amounts, would this transaction appear on a statement of cash flows using the indirect method?
12. Following are the income statement and other information for Knox Corporation.
Knox Corporation
Income Statement
For the Year Ended December 31, 20xx
Sales
$3,000
Cost of goods sold
1,500
Gross margin
$1,500
Operating expenses
$600
Depreciation expense
300
900
Income before income taxes
$ 600
Income taxes expense
150
Net income
$ 450
Accounts receivable (net) decreased by $750 during the year. Inventory increased by $450, and
Accounts Payable decreased by $600 during the year. Income Taxes Payable increased by $150 during
the year.
Prepare a schedule of cash flows from operating activities using the indirect method.
Knox Corporation
Schedule of Cash Flows from Operating Activities
For the Year Ended December 31, 20xx