Smartbook Ch 21

Abner Corp. prepares its statement of cash flows utilizing the direct method. During the current period, its cash from operating activities was $15.5 million. If the company had utilized the indirect method, its cash from operating activities would have been

$15.5 million

In addition to the primary activities, what other required information must be presented in a statement of cash flows?

-a reconciliation of the net increase or decrease in cash with the change in the cash balance -noncash investing and financing activities

Add to net income

Decreases in assets related to income statement components

Add to net income

Deductions from net income that did not have a cash effect

Which of the following is critically important with respect to the ultimate potential of a firm to provide cash flows to investors and creditors?

The firm's ability to generate cash flows for itself.

Under the indirect method of preparing the statement of cash flows, gains reported in the income statement are deducted from net income because they

did not result in additional cash inflows. were added in deriving net income.

Under the indirect method of preparing the statement of cash flows, depreciation expense and losses are added back to net income because they

do not require an outflow of cash. were subtracted in deriving net income.

Financing activities are inflows and outflows of cash resulting from the

external financing of a business.

Inflows and outflows of cash resulting from the external funding of a business are cash flows from _________ activities.

financing

Mark wishes to evaluate Jones Company's current operating performance. Mark will find the most pertinent information in Jones Company's

income statement

Which of the following financial statements tends to provide the best indication of current operating performance?

income statement

Deduct from net income

Additions to net income that did not have a cash effect

Under which method(s) will a reconciliation of net income to cash from operating activities be presented?

Both the direct and the indirect method

Which sections are identical under the direct and indirect method of the statement of cash flows?

Cash from investing activities Cash from financing activities

Interest expense

Cash paid to creditors

Cost of goods sold

Cash paid to suppliers of inventory

Identify reasons why the FASB encourages the direct method of presenting the statement of cash flows over the indirect method.

The direct method is consistent with the primary objective of the statement of cash flows. Investors gain additional insights into specific sources and uses of cash.

Under which method of preparing a statement of cash flows will a reconciliation between net income and cash from operating activities be shown on a separate schedule?

The direct method only

Which method of preparing the statement of cash flows lists net income or net loss as the first item?

The indirect method

Which of the following concepts governs recognition of revenue and expense?

accrual accounting

Sales and service revenue

cash collected from customers

Short-term, highly liquid investments that can be readily converted to cash, with little risk of loss, are referred to as

cash equivalents

Which of the following are not valid categories in the statement of cash flows?

cash flows from discontinued operations cash flows from continuing operations

Hagar Company prepares a statement of cash flows under the indirect method. Which of the following cash flows must be specifically reported under that method either on the face of the statement or in the accompanying disclosure notes?

cash paid for interest cash paid for taxes

Investment revenue

cash received from dividends and interest

When presented using the indirect method, cash from operating activities is adjusted for changes in balance sheet accounts that relate to

components of net income.

The _________ method of reporting cash flows from operating activities reports the cash effect of each operating activity.

direct

The method that reports the cash effect of each operating activity explicitly on the statement of cash flows is referred to as the _____ method.

direct

Cash received from the sale of common and preferred stock and the issuance of bonds and other debt securities are reported on the statement of cash flows as _________ activities.

financing

Net cash from operating activities reported in a statement of cash flows prepared using the indirect method is _____ the amount reported in a statement of cash flows prepared using the direct method.

identical to

Which of the following represent objectives of preparing a statement of cash flows?

identifying all operating, investing, and financing events and transactions adhering to a proper statement format classifying the transactions and events correctly

Cash flows from operating activities are both inflows and outflows of cash that result from activities reported in the

income statement

The ________ method of reporting cash flows from operating activities begins with net income and works backward to derive cash from operating activities.

indirect

Which of the following are required characteristics of cash equivalents?

low risk short-term high liquidity

The first item listed in the statement of cash flows - indirect method is:

net income or loss

The purchase and sale of cash equivalents typically are _____ on a statement of cash flows

not reported

Cash flows from _______ activities are both inflows and outflows of cash that result from activities reported in the income statement.

operating

When preparing the statement of cash flows using the indirect method, components of net income that increase cash by an amount exactly the same as that reported in the income statement,

require no adjustment to net income.

Which of the following transactions that involve cash flows typically is (are) not reported on a SCF?

sale of cash equivalents

Common types of cash inflows from investing activities include

sale of property, plant, and equipment. sale of investment securities. collection of nontrade receivables.

The amount of net cash from operating activities shown when the indirect method is used is

the same as under the direct method.

During the current period, Kunze Corp. disposed of old equipment and received $2,000 cash; purchased new equipment for $20,000 cash; collected an accounts receivable balance of $2,500; and purchased an investment for $3,000. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow)

$21,000 net outflow. Reason: 2,000 - 20,000 - 3,000

During the current period, Schmidt Corp. disposed of old equipment and received $1,000 cash; purchased new equipment for $10,000 cash; paid an accounts payable balance of $2,500; and sold an investment costing $2,000 for $2,800. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow)

$6,200 net outflow eason: 1,000 - 10,000 + 2,800

Which of the following transactions/events commonly give rise to cash outflows of business entities?

Fire insurance is purchased. Employees are paid.

Depreciation expense

Not reported

Net income (or loss) is the result of netting together the ___________ recognized and the _________ incurred during the current reporting period.

Revenues - Expenses

Which of the following methods of presenting the statement of cash flows is preferred by the Financial Accounting Standards Board?

The direct method

Kunzen Company shows salaries expense of $15,000 in its income statement. During the current year, the balance of its salaries payable account increased by $2,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $2,000 should be

added to net income

Under the indirect method of deriving net cash flows from operating activities, decreases in assets relating to operating activities must be

added to net income

When cash from operating activities is presented using the indirect method, net income must be adjusted for the components that increase and decrease in balance sheet accounts that relate to:

amounts presented in the income statement.

Which of the following are valid categories in the statement of cash flows?

cash flows from financing activities cash flows from operating activities cash flows from investing activities

Which of the following are included in the statement of cash flows?

cash flows from investing activities cash flows from operating activities noncash investing and financing activities cash flows from financing activities

The method of presenting the statement of cash flows that begins with a presentation of net income or net loss is referred to as the ____ method.

indirect

Deduct from net income

Increases in assets related to income statement components

Which of the following transactions/events commonly give rise to cash outflows of business entities?

Inventory is purchased. Treasury stock is purchased.

Which of the following statements regarding reporting of cash from investing and cash from financing activities is correct under the direct and the indirect method?

They are the same

Under the indirect method of deriving net cash flows from operating activities, increases in liabilities relating to operating activities must be

added to net income

When preparing the statement of cash flows using the indirect method, depreciation expense and losses are

added to net income

Cash flows from _________ activities are both outflows and inflows of cash caused by the acquisition and disposal of long-term assets.

investing

Carmen Company shows salaries expense of $25,000 in its income statement. During the current year, the balance of its salaries payable account decreased by $3,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $3,000 should be

subtracted from net income

Halon Company's net income was reduced by income tax expense of $5,000. The company's income tax payable shows both a beginning and ending balance of $500. Related to income tax expense, Halon should ______ in its statement of cash flows - direct method.

not adjust net income

When preparing the statement of cash flows—indirect method, gains reported in the income statement are ______.

subtracted from net income

Which of the following methods of preparing the statement of cash flows is (are) acceptable under U.S. GAAP?

Both the direct and the indirect method

Salaries expense

Cash paid to employees

Why is inventory treated differently than property, plant, and equipment when classifying their cash effects on the statement of cash flows?

Property, plant, and equipment benefit the business over a relatively long period of time. Inventory is purchased and sold as part of the firm's current operations.

Which of the following would result in a cash inflow from investing activities?

Sale of a machine for cash.

The objective in preparing the statement of cash flows is to identify all transactions and events that represent _________, _________ and ___________ activities and to classify and list them in the proper format.

operating, investing, financing

Which of the following transactions would be classified as financing activities in the statement of cash flows?

payment of cash dividends repayment of a long-term loan

Common types of cash outflows from investing activities include

payments to acquire nontrade receivables. purchases of investment securities. purchases of property, plant, and equipment.

Which of the following statements is correct regarding the direct and indirect methods of preparing the operating activities section of the statement of cash flows?

Cash from operating activities is the same under either method.

Which of the following statements best describes the importance of cash flow information?

Investors and creditors rely heavily on cash flow information. Investors and creditors consider the risk associated with cash flow forecasts.

Greer Company prepares its statement of cash flows using the direct method. Greer should present the reconciliation between net income and cash from operating activities

in a supplemental or separate schedule.

Huger Company prepares its statement of cash flows using the indirect method. Huger should present the reconciliation between net income and cash from operating activities:

in the first section of the statement of cash flows.

Which of the following is true regarding classification on the statement of cash flows?

Cash flows from inventory are classified as operating while cash flows from property, plant, and equipment are classified as investing.

Tax expense

Cash paid to governments