5.5-16) Referring to Table 5–2, what was the cash flow from financing activities for Hanover Company in
20X9?
A) $15,850
B) $(3,950)
C) $(1,500)
D) $11,300
E) $(9,500)
5.5-17) Which of the following items will not appear in the cash flow from operations section when using
the direct method?
A) Payments to employees
B) Collections from customers
C) Net income
D) Payments to suppliers
E) Income tax payments
5.5-18) Which of the following items will not appear in the cash flow from operations section when using
the direct method?
A) Collections from customers
B) Depreciation expense
C) Cash paid for income taxes
D) Payments to employees
E) Payments to suppliers
5.5-19) When preparing the statement of cash flows under the direct method, all of the following would
be an inappropriate procedure except
A) add depreciation expense to net income under the operating activities.
B) subtract depreciation expense from net income under the operating activities.
C) add depreciation expense to net income under the financing activities.
D) subtract depreciation expense from net income under the financing activities.
E) ignore depreciation expense.
5.5-20) When preparing the statement of cash flows under the direct method, an appropriate procedure
would be to
A) subtract a gain from the sale of a fixed asset to net income.
B) subtract an increase in accounts receivable from sales when calculating cash received from customers.
C) subtract depreciation expense from net income.
D) add a loss from the sale of a fixed asset to net income.
E) add depreciation expense to net income.
5.5-21) Under the direct method, a gain from the sale of a fixed asset is added to net income when
calculating cash flows from operations.
5.5-22) Under the direct method, depreciation is ignored when calculating cash flows from operations.
5.5-23) Under the direct method, dividends from investments are included when calculating cash flows
from operations.
5.5-24) Hartman, Inc., has the following selected balance sheet and income statement information:
For the Year Ended
Income Statement Accounts December 31, 20X9
Income Tax Expense $ 15,000
Cost of Goods Sold 164,000
Sales 523,000
Wage Expense 88,000
Balance Sheet Accounts At December 31, 20X9 At December 31, 20X8
Accounts Payable $19,000 $17,000
Cash 19,000 12,000
Income Taxes Payable 21,000 9,000
Accounts Receivable 41,000 36,000
Inventory 12,000 23,000
Wages Payable 5,000 12,000
Determine the following items for Hartman, Inc., for the year ended December 31, 20X9:
a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid for wages
d. Cash paid for income taxes
5.5-25) The following data pertains to the Grissom Landscaping for the year of 20X9:
a. Salaries and wages: accrued, $175,000; paid in cash $200,000.
b. Depreciation, $50,000.
c. Interest expense, all paid in cash, $12,500.
d. Other expenses, all paid in cash, $112,000.
e. Income taxes accrued, $35,000; income taxes paid in cash, $33,000.
f. Bought plant and facilities for $365,000 cash.
g. Sales of $1,500,000, all on credit. Cash collections from customers, $1,250,000.
h. The cost of items sold was $750,000. Purchases of inventory totaled $825,000; inventory and accounts
payable were affected accordingly.
i. Cash payments on trade accounts payable were $700,000.
j. Issued long–term debt for $110,000 cash.
k. Paid cash dividends of $45,000.
Prepare a statement of cash flows using the direct method for reporting cash flows from operating
activities. Omit supporting schedules.
Table 5–5
Dodson Fun N’ Games
Income Statement
For the Year Ended December 31, 20X9
Sales $624,000
Less Expenses:
Cost of Goods Sold $332,000
Wage Expense 211,000
Depreciation Expense 20,000
Rent Expense 18,000
Income Tax Expense 16,000 597,000
Net Income $ 27,000
Dodson Fun N’ Games
Balance Sheet
December 31, 20X8 and 20X9
12/31/X9 12/31/X8 12/31/X9 12/31/X8
Current Assets: Current Liabilities:
Cash $ 8,100 $ 10,600 Accounts Payable $ 57,200 $59,900
Accts. Rec. 66,100 53,400 Wages Payable 17,500 11,300
Inventory 27,700 35,900 Taxes Payable 7,100 8,200
Prepaid Rent 3,000 4,500 81,800 79,400
104,900 104,400 Owners’ Equity:
Long–term Assets: Common Stock 75,000 74,000
Fixed Assets 165,500 147,700 Retained Earnings 44,800 43,500
Acc. Depre. (68,800) (55,200) 119,800 117,500
96,700 92,500 Total Liabilities
Total Assets $201,600 $196,900 & Owners’ Equity $201,600 $196,900
5.5-26) Refer to Table 5–5. Determine the cash flows from operations for Dodson Fun N’ Games, assuming
the company uses the direct method.
Learning Objective 5.6 Questions
5.6-1) The indirect method
A) is seldom used by companies because of the extra effort required to gather cash flow information.
B) calculates only the cash effect of each operating activity.
C) is the method preferred by the FASB.
D) begins with net income, adds back non cash expenses, and adjusts for changes in the current asset and
current liability accounts.
E) can be used to determine cash flows from operating, investing, and financing activities.
5.6-2) When preparing the statement of cash flows under the indirect method, an appropriate procedure
would be to
A) add a loss from the sale of a fixed asset.
B) add an increase in accounts receivable.
C) subtract depreciation expense.
D) subtract an increase in accounts payable.
E) determine cash received from customers.
5.6-3) When preparing the statement of cash flows under the indirect method, an appropriate procedure
would be to
A) subtract an increase in wages payable.
B) subtract an increase in accounts receivable.
C) subtract amortization expense.
D) determine cash paid to suppliers.
E) add a gain from the sale of a fixed asset.
5.6-4) When preparing the statement of cash flows under the indirect method, all of the following would
be an appropriate procedure except
A) adding depreciation expense.
B) subtracting a decrease in accounts payable.
C) subtracting a decrease in prepaid expenses.
D) adding a decrease in inventories.
E) subtracting a gain from the sale of a fixed asset.
5.6-5) The following selected information is for Faluski Skydiving at, and for the year ended, December
31, 20X9, and 20X8:
Selected Balance Sheet Accounts 12/31/X9 12/31/X8
Accounts Payable $19,000 $13,000
Inventory 26,000 30,000
Prepaid Expense 7,000 5,000
Retained Earnings 23,000 19,000
Wages Payable 2,000 7,000
Accounts Receivable 29,000 22,000
Accumulated Depreciation 43,000 35,000
Cash 19,000 14,000
Fixed Assets 94,000 79,000
Selected Income Statement Accounts
Depreciation Expense $14,000
Gain on Sale of Fixed Asset 3,000
Net Income 23,000
Sales 91,000
Wages Expense 34,000
Using the indirect method, what is the cash flow from operations for Faluski Skydiving for the year
ended December 31, 20X9?
A) $30,000
B) $33,000
C) $36,000
D) $43,000
E) $44,000
5.6-6) Which of the following transactions do not affect cash?
1. Convert debt to common stock
2. Credit sales
3. Purchase a fixed asset by issuing debt
4. Accept rental deposit
5. Write–off of prepaid expenses
A) 1 and 2
B) 4 and 5
C) 1, 2, and 3
D) 3, 4, and 5
E) 1, 2, 3, and 5
5.6-7) Which of the following transactions do not affect cash?
1. Purchase inventory on credit
2. Accrue operating expenses
3. Collection of accounts receivable
4. Accrue taxes and interest
5. Reclassify long–term debt to short–term debt
A) 1 and 2
B) 1, 2, and 4
C) 1, 2, 3, and 5
D) 1, 2, 4, and 5
E) 1, 2, 3, 4, and 5
5.6-8) Which of the following transactions decrease cash?
1. Purchase inventory from cash
2. Pay trade accounts payable
3. Accruing operating expenses
4. Purchase stock in R&D partner
5. Charging depreciation
A) 1, 2, and 5
B) 1, 2, and 4
C) 1, 2, 3, and 5
D) 1, 2, 3, and 4
E) 1, 2, 4, and 5
5.6-9) Which of the following transactions decrease cash?
1. Reduce prepaid expenses
2. Increase treasury stock
3. Make a loan
4. Recognize cost of goods sold
5. Reduce long–term or short–term debt
A) 1 and 4
B) 3 and 5
C) 1, 3, and 5
D) 2, 3, and 5
E) 1, 2, 3, 4, and 5
5.6-10) Which of the following transactions increase cash?
1. Convert debt to common stock
2. Credit sales
3. Increase long–term debt
4. Issue common stock
A) 1 and 3
B) 2 and 4
C) 3 and 4
D) 1, 2, and 4
E) 1, 2, 3, and 4
5.6-11) Which of the following transactions increase cash?
1. Sales of goods and services for cash
2. Receiving cash dividends
3. Collection of accounts receivable
4. Reclassifying long–term debt to short–term debt
5. Accruing interest revenue
A) 1 and 2
B) 1 and 3
C) 1, 2, and 3
D) 1, 2, 3, and 4
E) 1, 2, 3, and 5
5.6-12) The following selected information is for Anspach Learning Center at, and for the year ended,
December 31, 20X9, and 20X8:
Selected Balance Sheet Accounts 12/31/X9 12/31/X8
Fixed Assets $ 188,000 $ 158,000
Inventory 52,000 60,000
Prepaid Expense 14,000 10,000
Retained Earnings 46,000 38,000
Accounts Payable 38,000 25,000
Accounts Receivable 58,000 44,000
Accumulated Depreciation 86,000 70,000
Cash 38,000 28,000
Wages Payable 4,000 14,000
Selected Income Statement Accounts
Depreciation Expense $ 28,000
Gain on Sale of Fixed Asset 6,000
Net Income 43,000
Sales 182,000
Wages Expense 68,000
Using the indirect method, what is the cash flow from operations for Anspach Learning Center for the
year ended December 31, 20X9?
A) $63,000
B) $57,000
C) $83,000
D) $58,000
E) $87,000
5.6-13) West and Walsh Company reported net income for the current year of $250,000, but cash from
operating activities was $280,000. Which transaction could have caused this difference to occur?
A) Equipment was purchased for cash
B) An accounts receivable customer account was written off as uncollectible
C) Depreciation expense was recorded
D) West and Walsh Company stock was sold for a gain
E) A long term note was signed by West and Walsh Company
5.6-14) An increase in accounts payable will be added to net income when preparing the operating
activities section under the direct method.
5.6-15) A decrease in inventory will be added to net income when preparing the operating activities
section under the indirect method.
5.6-16) Under the indirect method, a loss from the sale of a fixed asset is subtracted from net income.
5.6-17) Under the indirect method, a gain from early extinguishment of debt is subtracted from net
income.
5.6-18) A decrease in accounts receivable is added to the financing activities when preparing a statement
of cash flows using the indirect method.
5.6-19) In 20X9, Cassey Pet Obedience Training had net income of $575,000. Cassey also recorded $215,000
in depreciation. The company also had the following changes in its balance sheet accounts.
Accounts Receivable $26,000 increase
Inventories 11,000 decrease
Accounts Payable 19,000 decrease
Compute the net cash provided by operating activities using the indirect method.
Table 5–5
Dodson Fun N’ Games
Income Statement
For the Year Ended December 31, 20X9
Sales $624,000
Less Expenses:
Cost of Goods Sold $332,000
Wage Expense 211,000
Depreciation Expense 20,000
Rent Expense 18,000
Income Tax Expense 16,000 597,000
Net Income $ 27,000
Dodson Fun N’ Games
Balance Sheet
December 31, 20X8 and 20X9
12/31/X9 12/31/X8 12/31/X9 12/31/X8
Current Assets: Current Liabilities:
Cash $ 8,100 $ 10,600 Accounts Payable $ 57,200 $59,900
Accts. Rec. 66,100 53,400 Wages Payable 17,500 11,300
Inventory 27,700 35,900 Taxes Payable 7,100 8,200
Prepaid Rent 3,000 4,500 81,800 79,400
104,900 104,400 Owners’ Equity:
Long–term Assets: Common Stock 75,000 74,000
Fixed Assets 165,500 147,700 Retained Earnings 44,800 43,500
Acc. Depre. (68,800) (55,200) 119,800 117,500
96,700 92,500 Total Liabilities
Total Assets $201,600 $196,900 & Owners’ Equity $201,600 $196,900
5.6-20) Refer to Table 5–5. Determine the cash flows from operations for Dodson Fun N’ Games, assuming
the company uses the indirect method.
5.6-21) After analyzing the following statement of cash flows
1. state the method Bailey, Inc., uses to prepare its operating section of the statement of cash flows
explaining how you arrived at your answer.
2. explain why depreciation expense is added back to net income in the operating section of the statement
of cash flows.
Bailey, Inc.
Cash Flows from Operating Activities
For the Month of January, 20X9
Net Income $80,000
Adjustments to reconcile net income to cash
Provided (used) by operating activities
Depreciation 1,000
Increase in accounts receivable (20,000)
Increase in accounts payable 10,000
Net cash provided by (used for) operating activities 71,000
Learning Objective 5.7 Questions
5.7-1) Which of the following statements is incorrect, regarding the effect of depreciation on a statement
of cash flows using the indirect method?
A) Depreciation expense is not an outflow of cash.
B) Ignoring income tax effects, increasing depreciation expense will increase cash flows from operations.
C) Depreciation expense is added in the cash flow from operations section.
D) Depreciation expense is not a source of cash.
E) Depreciation expense will reduce the net income used in determining cash flows from operations.
5.7-2) Falcon Industries prepares its statement of cash flows using the direct method. Falcon Industries
must also
A) include earnings per share in the financing section.
B) reconcile the financing and investing sections to the operating section.
C) trace operating section amounts to the balance sheet and provide a reconciling schedule.
D) include a supplementary schedule reconciling net income to net cash provided by operations.
E) omit any supplemental schedule since the direct method is already providing this information.
5.7-3) Depreciation expense is not a source of cash; however, it is added to net income when determining
cash flows from operations under the indirect method.
5.7-4) Depreciation expense is not a source of cash; however, it is subtracted from net income when
determining cash flows from operations under the direct method.
5.7-5) Cash received from customers is equal to sales plus the increase in accounts receivable.
5.7-6) Purchases of inventory on account minus the increase in accounts payable equals cash paid for
inventory.
5.7-7) Cost of goods sold plus the increase in inventory equals cash paid for inventory.
5.7-8) Calico Fabrics had sales of $450,000, all received in cash. Total operating expenses were $350,000.
All expenses except depreciation were paid in cash. Depreciation of $60,000 was included in the operating
expenses. Ignore income taxes.
a. Calculate net income and net cash provided by operating activities using the direct method.
b. Assume that depreciation is doubled. Compute net income and net cash provided by operating
activities using the direct method.
c. Compare the results under both part (a) and part (b) and comment on the effect depreciation has on
both net income and net cash provided by operating activities.
Learning Objective 5.8 Questions
5.8-1) The balance sheet equation provides the conceptual basis for all financial statements and can be
rearranged to incorporate the statement of cash flows as follows:
A) Cash + Noncash assets = Liabilities + Stockholders’ equity
B) Cash – Noncash assets = Liabilities + Stockholders’ equity
C) Assets = Liabilities – Noncash assets + Stockholders’ equity
D) Assets = Liabilities + Noncash assets + Stockholders‘ equity
E) Liabilities – Noncash assets = Cash + Stockholders‘ equity
5.8-2) Increases in cash stem from
1. increases in liabilities.
2. increases in stockholders‘ equity.
3. increases in noncash assets.
4. decreases in liabilities.
5. decreases in stockholders’ equity.
6. decreases in noncash assets.
A) 1, 2, and 3
B) 2, 3, and 4
C) 1, 2, and 6
D) 2, 3, and 5
E) 3, 4, and 5
5.8-3) An increase in stockholders’ equity can be calculated as
A) new issuance of stock plus net income plus cash dividends.
B) new issuance of stock plus net income less cash dividends.
C) new issuance of stock less net income less cash dividends.
D) new issuance of stock less net income plus cash dividends.
E) Cannot be determined from the information provided
5.8-4) The indirect method and the direct method of preparing the statement of cash flows
A) always produce the same totals.
B) produce the same totals when cash inflows from operating activities equals cash outflows from
financing activities.
C) both show reasons for the changes in the cash account.
D) lists all changes in cash.
E) rearranges the total columns, but otherwise the format is the same.
5.8-5) Increases in liabilities, owners’ equity, and noncash assets increase cash.
5.8-6) Even though assets must always equal the sum of liabilities and owners’ equity, cash flow from
operations does not have to equal the sum of the cash flow from investing and the cash flow from
financing activities.
5.8-7) Net cash provided by operating activities is always equal to net income.
5.8-8) Losses and gains on the disposal of assets are essentially nonoperating items that are adjustments
to net income under the direct method.
Learning Objective 5.9 Questions
5.9-1) Gaming, Inc., had net cash provided by operating activities of $(150,000), had proceeds of an initial
investment of $100,000, and purchased capital expenditures of $50,000. What is Gaming, Inc.’s free cash
flow?
A) $100,000
B) $(50,000)
C) $(200,000)
D) $0
E) $50,000
5.9-2) Boing, Inc., has a negative free cash flow. What is Boing, Inc., most likely going to do assuming they
are not able to obtain financing?
A) Sell its assets
B) Increase sales with promotions
C) Refrain paying accounts payable balances for 15 days
D) Buy additional inventory
E) Pay dividends
5.9-3) Since both the income statement and the statement of cash flows report on company changes,
A) an income statement is not necessary if a statement of cash flows is prepared.
B) a statement of cash flows is not necessary if an income statement is prepared.
C) a statement of cash flows and an income statement are prepared regardless.
D) a balance sheet is not necessary if an income statement and a statement of cash flows is prepared.
E) a balance sheet is not necessary if either an income statement or a statement of cash flows is prepared.
5.9-4) What does a positive free cash flow tell investors about a company’s ability to produce cash flows
from operations and make necessary investments?