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Chapter 23

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hefabalu's version from 2015-05-02 23:24

Section 1

Question Answer
The primary purpose of the statement of cash flows is to provide cash-basis information about the company’s operating, investing, and financing activities.False
The statement of cash flows provides information to help investors and creditors assess the cash and noncash investing and financing transactions during the period.True
Companies classify some cash flows relating to investing or financing activities as operating activities.True
The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating activities.False
The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending cash balances reported in the comparative balance sheets.True
Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities. False
A company can convert net income to net cash flow from operating activities through either the direct method or the indirect method. True
The direct method, also called the reconciliation method, reports cash receipts and cash disbursements from operating activities.False
The indirect method adjusts net income for items that affected reported net income but did not affect cash.True
The FASB encourages the use of the indirect method over the direct method.False
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Section 2

Question Answer
When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported on an accrual basis.True
When prepaid expenses decrease during a period, expenses on the accrual-basis are lower than they are on a cash-basis.False
Income from an investment in common stock using the equity method is added to net income in computing net cash provided from operating activities.False
Cash receipts from customers are computed by adding a decrease in accounts receivable to revenue from sales.True
Cash payments for operating expenses are computed by subtracting an increase in prepaid expenses and a decrease in accrued expenses payable from operating expensesFalse
A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.False
Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.True
Noncash investing and financing activities are disclosed either in a separate schedule or in a separate note to the financial statements.True
When numerous adjustments are necessary, companies often use a cash flow worksheet instead of preparing a statement of cash flows.False
The issuance of stock dividends is entered on the cash flow worksheet, but is not reported in the statement of cash flows.True
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Section 3

Question Answer
It is an objective of the statement of cash flows toprovide information about the operating, investing, and financing activities of an entity during a period.
The primary purpose of the statement of cash flows is to provide informationabout the cash receipts and cash payments of an entity during a period.
Of the following questions, which one would not be answered by the statement of cash flows?Were all the cash expenditures of benefit to the company during the period?
The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements?Balance sheets
Cash equivalents aretreasury bills, commercial paper, and money market funds purchased with excess cash, investments with original maturities of three months or less, and readily convertible into known amounts of cash.
A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n)cash inflow from financing activities.
To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done byeliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash
An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)deduction from net income in arriving at net cash flow from operating activities.
A statement of cash flows typically would not disclose the effects ofstock dividends declared.
When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities?A change in dividends payable
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Section 4

Question Answer
Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows:Direct Method: No effect. Indirect Method: No effect.
In a statement of cash flows, the cash flows from investing activities section should reporta major repair to machinery charged to accumulated depreciation.
Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? Three items
Which of the following would be classified as a financing activity on a statement of cash flows?Deposit to a bond sinking fund
The amortization of bond premium on long-term debt should be presented in a statement deduction from net income.
Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the past year. The company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expenses for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expenses to the cash basis?Depreciation: Deducted form. Increase in prepaid expenses: Added too.
When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings becausecost of goods sold on an accrual basis is lower than on a cash basis.
When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in determining cash flow from operating activities?Direct Method: Increase. Indirect Method: Increase.
In determining net cash flow from operating activities, a decrease in accounts payable during a periodrequires an increase adjustment to cost of goods sold under the direct method.
When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities?Indirect Method: Increase. Direct Method: Decrease.
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Section 5

Question Answer
When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities?Indirect Method: Increase. Direct Method: Decrease.
When preparing a statement of cash flows, the following are used for which method in determining cash flows from operating activities?Gross Accounts Receivable: Direct. Net Accounts Receivable: Indirect.
Which of the following statements is correct?The direct method is more consistent with the primary purpose of the statement of cash flows.
When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net income to compute cash provided by/used by operating activities?Amortization of patent.
When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is deducted from net income to compute cash provided by/used by operating activities?Gain on sale of land.
Which of the following is false concerning the statement of cash flows?The FASB requires companies to classify all income taxes paid as operating cash outflows.
Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows (indirect method), the $25,000 shouldbe shown as a deduction from net income in the cash flows from operating activities section.
In reporting extraordinary transactions on a statement of cash flows (indirect method), thegross amount of an extraordinary gain should be deducted from net income.
Which of the following is shown on a statement of cash flows?A stock divident, a stock split, an appropriation of retained earnings. None of these.
How should significant noncash transactions be reported in the statement of cash flows according to FASB Statement No. 95?These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials.
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