Question 1

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

Accepted Answer

A)  depreciation is a direct source of cash.
B)  depreciation is an outflow of cash to a reserve account for the replacement of assets.
C)  depreciation reduces net income and involves an outflow of cash.
D)  depreciation reduces net income but does not involve an outflow of cash. D

Question 2

The financing section of the statement of cash flows (prepared in accordance with GAAP) contains all cash inflows and cash outflows, relating to the financing of a company.

Accepted Answer

A) True 
 B)False  False

Question 3

Depreciation expense decreases net income, but is not a use of cash.

Accepted Answer

A) True 
 B)False  True

Question 4

Over an extended period of time average cash flow from operations would be expected to be higher than average net income.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following would be considered a use of cash?

Accepted Answer

A)  Depreciation
B)  An increase in working capital
C)  Sale of bonds
D)  An increase in wages payable

Question 6

Identify whether each of the following is an operating, investing, or financing cash outflow or inflow or if it is a noncash flow, under GAAP.

Purchase marketable equity securities
Dividends on marketable equity securities
Wages to employees
Depreciation
Issuance of new stock
Interest paid
Goodwill amortization
Acquisition of company using purchase accounting
Sale of land
Tax paid on sale of land
Cash paid by customers

Accepted Answer

The answer of Identify whether each of the following is...

Question 7

Schwerin Corporation reports the following on its 2005 financial statements. $\begin{array}{lr}&2004&2005\
\text { From statement of cash flows: }\
\text { Cash proceeds from sale of equipment } && \$ 100 \text { million } \
\text { Cash outflow for purchase of equipment } && 170 \text { million } \
\text { Depreciation } && 50 \text { million } \
\text { Gain from sale of equipment } && 40 \text { million }
\end{array}$
-The net book value of equipment sold was:

Accepted Answer

A)  $120 million
B)  $100 million
C)  $80 million
D)  $60 million

Question 8

JEM Company's comparative balance sheets for 2004 and 2005 appear below.

$\begin{array}{c}\text {JEM Company}\
\text {Comparative Balance Sheets }\
\text {December 31, 2001 and 2005}\\begin{array}{lrr}
&\underline{2005}&\underline{2004}\
\text { Assets }\
\text { Cash and cash equivalents } & \$ 30,500 & \$ 10,000 \
\text { Accounts receivable (net) } & 64,500 & 51,000 \
\text { Inventory } & 100,000 & 115,000 \
\text { Equipment } & 55,000 & 30,000 \
\text { Accumulated depreciation-equipment } & \underline{(21,500) }&\underline{ (14,000)} \
\text { Total assets } & \$ 228,500 & \$ 192,000\
\
\text { Accounts payable } & \$ 52,500 & \$ 46,000 \
\text { Long-term notes payable } & 70,000 & 50,000 \
\text { Capital stock } & 60,000 & 60,000 \
\text { Retained earnings } &  \underline{46,000} &  \underline{36,000} \
\quad \text { Total liabilities and stockholder' equity } & \$ 228,500 & \$ 192,000
\end{array}\end{array}$ 
The following additional information is available: net income for the year 2005 (as reported on the income statement) was $50,000; dividends of $40,000 were declared and paid; and equipment that cost $8,000 and had a book value of $1,000 was sold during the year for $2,500.

Based on the information provided, answer the following:

a. What was cash provided by operations?
b. What was cash provided by investing activity?
c. How much was cash provided by financing activity?
d. What is the total change in cash for 2005?

Accepted Answer

The answer of JEM Company's comparative balance sheets for 2004...

Question 9

An increase in accounts receivable does not require adjusting net income, if preparing the statement of cash flows using the indirect method.

Accepted Answer

A) True 
 B)False

Question 10

The following information should be used according to the provisions of GAAP (Statement of Cash flows) and using the following data.
$\begin{array}{lr}
\text { Net income } & \$ 80,000 \
\text { Amortization of goodwill } & 2,000 \
\text { Decrease in accounts receivable } & 2,000 \
\text { Increase in inventory } & 3,000 \
\text { Purchase of marketable securities } & 13,000 \
\text { Sale of land for } \$ 10,000 \text { gain } & 11,000 \
\text { Depreciation expense } & 4,000 \
\text { Repayment of debt } & 8,000 \
\text { Payment of dividend } & 3,000 \
\text { Interest payment } & 2,000
\end{array}$

-What is change in cash?

Accepted Answer

A)  $81,000
B)  $72,000
C)  $71,000
D)  $62,000

Question 11

The following cash flow data of Signet Sales for the year ended December 31, 2005 are as follows:

$$\begin{array} { l r } 
\text { Cash payment of dividends } & \$ 70,000 \
\text { Purchase of land } & 28,000 \
\text { Cash payments for interest } & 20,000 \
\text { Cash payments for salaries } & 90,000 \
\text { Sale of equipment } & 76,000 \
\text { Retirement of common stock } & 50,000 \
\text { Purchase of equipment } & 60,000 \
\text { Cash payment to suppliers } & 170,000 \
\text { Cash collection from customers } & 500,000 \
\text { Cash at beginning of year } & 100,000
\end{array}$$
a. Prepare a statement of cash flows for Signet Sales in accordance using the direct method.

b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by GAAP

Accepted Answer

The answer of The following cash flow data of Signet...

Question 12

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable?

Accepted Answer

A)  $344,000
B)  $418,000
C)  $378,000
D)  $376,000

Question 13

Firms report payments for capital leases in the cash flow statement:

Accepted Answer

A)  only as financing cash flows.
B)  only as investing cash flows.
C)  partly as operating cash flows and partly as investing cash flows.
D)  partly as operating cash flows and partly as financing cash flows.

Question 14

Interest income is recorded as an operating inflow of cash.

Accepted Answer

A) True 
 B)False

Question 15

The following information should be used according to the provisions of GAAP (Statement of Cash flows) and using the following data.
$\begin{array}{lr}
\text { Net income } & \$ 80,000 \
\text { Amortization of goodwill } & 2,000 \
\text { Decrease in accounts receivable } & 2,000 \
\text { Increase in inventory } & 3,000 \
\text { Purchase of marketable securities } & 13,000 \
\text { Sale of land for } \$ 10,000 \text { gain } & 11,000 \
\text { Depreciation expense } & 4,000 \
\text { Repayment of debt } & 8,000 \
\text { Payment of dividend } & 3,000 \
\text { Interest payment } & 2,000
\end{array}$

-What is net cash flow from financing?

Accepted Answer

A)  ($5,000) 
B)  ($10,000) 
C)  ($11,000) 
D)  ($13,000)

Question 16

The following information is given for Building Inc.:
$$\begin{array} { l r r } 
\text { As of 12/31 } & { 2005 } & 2004 \
\text { PPE } & \$ 570,000 & \$ 530,000 \
\text { Accumulated depreciation } & 102,000 & 92,000 \
\text { Depreciation expense } & 30,000 & 32,000
\end{array}$$
During 2005 new assets were purchased for of $78,000, and plant assets were sold at a $10,000 loss. 
-What were the cash proceeds from the sale?

Accepted Answer

A)  $38,000
B)  $18,000
C)  $10,000
D)  $8,000

Question 17

A decrease in liabilities would usually show as an outflow in the statement of cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Under the accrual basis of accounting, which of the following statements is true?

I. Reported net income provides a measure of operating performance.
II. Revenue is recognized when cash is received, and expenses are recognized when payment is made.
III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made.

Accepted Answer

A)   I only
B)   III only
C)   I and III
D)   I, II, and III

Question 19

Use the following selected data about Tiles Ltd. and prepare the operating activities section of a statement of cash flows for the company for 2005 using the indirect method. $$\begin{array} { l r r } 
\underline {\text { Balance sheet data} } & \underline { 2005 } & \underline { 2004 } \
\text { Accounts receivable } & \$ 36,000 & \$ 42,000 \
\text { Inventories } & 28,000 & 25,000 \
\text { Accounts payable } & 31,000 & 35,000 \
\text { Salaries payable } & 2,000 & 1,000 \
\text { Equipment } & 60,000 & 40,000 \
\text { Accumulated depreciation } & 12,000 & 16,000 \
\text { Bonds payable } & 50,000 & 100,000 \
\text { Common stock } & 150,000 & 100,000 \
\text { Retained earnings } & 38,000 & 20,000
\end{array}$$ $$\begin{array} { l r } 
\underline {\text { Income statement data} } & \underline { 2005 } \
\text { Net sales } & \$ 420,000 \
\text { Cost of goods sold } & 300,000 \
\text { Operating expenses (excluding depreciation expense) } & 84,000 \
\text { Net income } & 30,000 \
\text { Gain on sale of equipment (included in net income above) } & 2,000
\end{array}$$

Accepted Answer

The answer of Use the following selected data about Tiles...

Question 20

Users sometimes compute net income plus depreciation and amortization (for example EBITDA) as a crude proxy for operating cash flows.

Accepted Answer

A) True 
 B)False

Exam 7: Cash Flow Analysis

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

The financing section of the statement of cash flows (prepared in accordance with GAAP) contains all cash inflows and cash outflows, relating to the financing of a company.

Depreciation expense decreases net income, but is not a use of cash.

Over an extended period of time average cash flow from operations would be expected to be higher than average net income.

Which of the following would be considered a use of cash?

An increase in accounts receivable does not require adjusting net income, if preparing the statement of cash flows using the indirect method.

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable?

Firms report payments for capital leases in the cash flow statement:

Interest income is recorded as an operating inflow of cash.

A decrease in liabilities would usually show as an outflow in the statement of cash flows.

Users sometimes compute net income plus depreciation and amortization (for example EBITDA) as a crude proxy for operating cash flows.