Smartbook Chapter 12

Rent-a-wreck, Inc.'s property, plant and equipment balance, net of depreciation, at the beginning of the year was $100,000 and at the end was $150,000. During the year, depreciation expense was $10,000 and $80,000 of new equipment was purchased for cash. What is the amount of proceeds from the disposal of property, plant and equipment shown on the statement of cash flows for the year?

$20,000 Reason: $20,000=$100,000+80,000-$15,000-$10,000

Cashews, Inc. had a $10,000 beginning Common Stock and $90,000 Additional Paid-in Capital and $30,000 ending Common Stock and $270,000 Additional Paid-in Capital. During the year, Cashews' net income was $30,000, and it paid a $10,000 cash dividend. If the change in Common Stock and Additional Paid-in Capital is due to new shares being issued, what is the amount of net proceeds from the stock issuance on the statement of cash flows?

$200,000 Reason: Net proceeds from stock issuances was $200,000, given $100,000 + stock issuances = $300,000. Net income and dividends are not affected by the issuance of common stock.

Beginning accounts receivable is $20,000, and ending accounts receivable is $15,000. As a result, cash collected from customers is ______ than sales on account.

$5,000 greater

Beginning inventory is $20,000, and ending inventory is $15,000. As a result, purchases are ______ than cost of goods sold.

$5,000 less

Beginning prepaid expenses is $20,000, and ending prepaid expenses is $15,000. As a result, cash payments are _______ than the related expense and thus ______ net income in the operating section of the statement of cash flows.

$5,000 less; this decrease is added to

Which of the following cash transactions are classified as cash inflows from investing activities? (Check all that apply.)

-sale of held-to-maturity investments -sale of equipment -sale of building

Two common ways to assess a company's ability to internally finance expansion needs are ______

-the capital acquisition ratio -free cash flow.

During the year, Cashews, Inc. borrowed $100,000 cash from a bank, received $700,000 of from issuing bonds, repaid $300,000 note payable from a bank, and sold $200,000 of short-term investments. The net cash inflow (outflow) from financing activities (assuming no other financing activities) equals ______.

$500,000

Beginning inventory is $15,000, and ending inventory is $20,000. As a result, purchases are ______ than cost of goods sold.

$5000 greater

When preparing the statement of cash flows, changes in current assets and current liabilities are added to or subtracted from net income. Match the adjustment to net income on the left with the reason for the adjustment listed on the right. -Adding increases in current liabilities such as Income Tax Payable -Subtracting decreases in current liabilities such as Salaries Payable -Subtracting increases in current assets such as Accounts Receivable

-Allows the inclusion of transactions that decreased net income but not cash -Allows the inclusion of transactions that decreased cash but not net income -Allows the inclusion of transactions that increased net income but not cash

Cashews, Inc.'s financing activities section of the statement of cash flows reported a significant cash inflow from the issuance of bonds and cash outflow from the repurchase of treasury stock; all other financing activities were insignificant. As a result, which of the following may be expected to occur in the near future? (Check all that apply.)

-An increase in interest expense -A decrease in the number of shares outstanding

Which of the following are cash outflows from investing activities? (Select all that apply)

-Purchase of land -Purchase of building -Purchase of long-term investments.

Which of the following will result in a cash outflow from financing activities? (Check all that apply.)

-Repayment of a note payable -Early retirement of debt

Identify which of the following are properly reported in a statement of cash flows. (Check all that apply.)

-Repayment of loan principal: cash outflow under financing activities -Net proceeds from stock issuance: cash inflow under financing activities -Cash paid for interest: cash outflow under operating activities

The two types of adjustments to net income for the indirect method are adjustments for ______. (Check the two that apply.)

-changes in operating assets and liabilities during the period that affected cash and were not in net income. -components of net income that do not affect cash

The complete list of items needed to prepare a statement of cash flows includes ______.

-comparative balance sheets -complete income statement -and additional data concerning accounts in investing and financing activities

A decrease in accounts payable will result in a(n) _______to net cash flow from operating activities.

-decrease -outflow -subtraction -reduction -deduction

Select the categories found on a statement of cash flows. (Check all that apply.) operating activities accrual activities investing activities capital activities financing activities

-operating -investing -financing -combine

Quality, Inc.'s net income is $100,000. Its net cash flow from operating activities is $150,000, from investing activities is $(200,000), and financing is $100,000. Quality's quality of income ratio equals

1.50

Argus, Inc. spent $4 million on PPE during the past year. The company earned $1.5 million in net income and generated $3 million in net cash flow from operations. Argus, Inc. has a capital acquisitions ratio of ______.

75% (75)

Renfro, Inc. generated a net income of $88,000 and a net cash flow from operating activities of $75,680. Renfro's quality of income ratio equals percent. (Round to the nearest whole percent.)

86.2% (86%)

Which account on the balance sheet would explain why cash collected on the statement of cash flows differs from revenue on the income statement. Multiple choice question.

Accounts receivable

Which of the following is the best measure of a company's profitability?

Accrual-based net income

Expenses that are paid after they are incurred are referred to as_______ and affect the _________ section of the statement of cash flows

Accrued expenses; operating

When cash from operating activities is presented using the indirect method, net income must be adjusted for increases and decreases in balance sheet accounts that relate to ______.

Amounts presented in the income statment

The ratio that determines the extent to which purchases of property, plant and equipment were financed from operating activities without need for outside debt, equity financing, or sale of long term ________assets is the acquisitions ratio. (Enter one word per blank.)

Capital

Which ratio determines the extent to which purchases of property, plant and equipment were financed from operating activities without need for outside debt, equity financing, or sale of long term assets?

Capital acquisitions ratio

The direct method presents a summary of all operating transactions that result in either a debit or credit to ______. (Enter one word per blank.) Multiple choice question. Cash Net Income Retained Earnings Noncurrent assets

Cash

Credits in the accounts receivable account during a period represent the ______.

Cash collected

The capital acquisitions ratio is calculated as______.

Cash flow from operating activities divided by Cash paid for property, plant and equipment.

Which of the following statements best describes the reason depreciation expense is added to net income when preparing the statement of cash flows?

Depreciation Expense originally reduced net income, but the expense does not involve paying cash.

When there is no change in accrued expenses or prepaids, the related expense on the income statement is ______ the actual cash paid out during the period.

Equal to

True or false: The company's cash outflows for operating expenses can be taken directly from the income statement because the expenses reflect the actual cash paid during the period.

False Accrual accounting provides for recording expenses when they are incurred. Cash outflows can take place before (prepayments) or after (accruals) the expense has been recorded. So, expenses on the income statement do not equal the cash outflows.

True or false: Changes in cash are classified as either operating activities, direct activities or indirect activities.

False The change in cash is the sum of the operating, investing, and financing activities sections and is found at the bottom of the statement.

Repayments of formal, long-term debt contracts are classified as ______ activities.

Financing

A(n) ____________ in accounts payable indicates that cash payments were less than credit purchases and must be subtracted from purchases to calculate cash payments to suppliers.

Increase

When Accounts Receivable decrease, cash from customer collections will _____ . (Enter one word per blank.)

Increase

When using the _______ method to prepare the operating activities section of the statement of cash flows, the first amount listed is Net income (Enter only one word per blank.)

Indirect

Companies are required to report material noncash transactions from _____ and _____ activities in either a supplementary schedule to the statement of cash flows or as a disclosure in the notes to the financial statements. (Enter one word per blank.)

Investing; financing

Which of the following will be reported as a cash inflow from financing activities on the statement of cash flows?

Issuance of stock

When Prepaid Expenses increase, it indicates the company has paid ______ cash than it recorded as operating expenses.

More

True or false: When preparing the statement of cash flows using the direct method, Cost of Goods Sold must be adjusted to a cash number because the cost of merchandise sold may be more or less than the amount of cash paid to suppliers during the period.

True

The ______ activities section is very important, since ______ are the only continuing, internal source of cash for the business.

Operating; operations

When accrued expenses increase, it means that the company _____________.

Paid less cash than it recorded as operating expenses.

Which of the following is necessary for a company to remain in business for the long run?

Positive cash flows from operating activities

When the _____________ account decreases, it means the company paid less cash for insurance than it recorded as insurance expense.

Prepaid Expense

If the Inventory account decreases during the year, the company ______.

Sold more inventory than it purchased.

When presenting the operating activities section of the statement of cash flows, the indirect method

Starts with net income and adjusts it by eliminating the effects of noncash items

The_______ reports three broad categories: operating, investing, and financing activities.

Statement of cash flows

An increase in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities.

Subtracted from

Beginning accounts receivable is $20,000, and ending accounts receivable is $30,000. The change in accounts receivable should be ______ net income in preparing the operating activities section of the statement of cash flows.

Subtracted from

Braden and Sons, Inc., paid cash to purchase equipment costing $342,000 this year. Also this year, the company sold for $70,000 cash equipment that originally cost $230,000 5 years ago. How should these transactions be listed in the statement of cash flows?

The purchases and the sales of equipment must be shown separately as a decrease to cash for $342,000 (purchase) and an increase of $70,000 (sale).

When using the direct method, why is a decrease in Accounts Receivable added to Sales Revenue when computing cash collected from customers?

There were more collections of accounts receivable than there were sales on account during the year.

True or false: Two common ways to assess a company's ability to internally finance expansion needs are the capital acquisition ratio and free cash flow.

True

A decrease in Prepaid Insurance is added to net income because ______.

a decrease in Prepaid Insurance causes an increase in Insurance Expense and a decrease in net income, but it does not involve cash

A decrease in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities.

added to

When calculating net cash flow provided by operating activities, an increase in accounts payable is ______ net income because payments to suppliers are ______ than new purchases.

added to; less

When calculating net cash flow provided by operating activities using the indirect method, a decrease in Accrued Liabilities, such as Wages and Salaries Payable, is subtracted from net income to include the effects of transactions that______ cash, but ______ net income.

decrease; do not affect

A purchase of an intangible asset results in a(n) _____ (increase/decrease) to net cash flow provided by _____ activities. (Enter one word per blank.)

decrease; investing

In arriving at cash from operating activities using the indirect method, subtracting a decrease in Accounts Payable from net income adjusts net income for transactions that ______ net income.

decreased cash, but did not affect

When using the indirect method, adding a decrease in Prepaid Insurance to net income eliminates the effect of recording Insurance Expense that ______.

decreased net income, but did not impact cash. When assets such as Prepaid Insurance are decreased, a corresponding expense account is increased. In this case, the expense decreases net income, but does not represent a cash outflow this period because it was paid in a prior period.

When calculating net cash flow provided by operating activities, an increase in Accounts Payable is ______ net income because payments to suppliers are ______ than new purchases.

deducted from; more

The _______ method reports the components of cash flows from operating activities as gross receipts and gross payments.

direct

Cashews, Inc. reported net change in its short-term and long-term debt. As a result, Cashews will also report a net change in ______ activities on the statement of cash flows (given no non-cash exchanges).

financing

Issuing stock to owners is classified as a(n) _____ activity. (Enter one word per blank.)

financing

A $5,000 decrease in accounts payable means that cash payments were ______ (greater/less) than purchases on account and thus the decrease is ______ (added to/subtracted from) net income in the operating activities section of the statement of cash flows.

greater; subtracted from

A quality of income ratio near 1.0 indicates a

high likelihood that revenues are realized in cash and expenses are associated with cash outflows

A(n) _______ in accrued liabilities, such as interest payable, will be added to net income when determining net cash flow from operating activities.

increase

When preparing the operating activities section of the statement of cash flows using the indirect method, adding a decrease in Accounts Receivable to net income allows the inclusion of transactions that ______.

increased cash, but did not affect net income

Purchases of stock in other corporations is a(n) ______ activity.

investing

A $5,000 decrease in prepaid expenses means that cash payments were ______ (greater/less) than the amount used (expenses) and thus the decrease is ______ (added to/subtracted from) net income in the operating activities section of the statement of cash flows.

less; added to

A $5,000 increase in accounts payable means that cash payments were ______ (greater/less) than purchases on account and thus the increase is ______ (added to/subtracted from) net income in the operating activities section of the statement of cash flows.

less; added to

If the Inventory account increases during the year, the company bought ______ merchandise inventory than it sold.

more

The Starting point for preparing the operating activities section using the indirect method is

net income

Depreciation Expense is added back to net income when preparing the cash flow from operating activities section because depreciation represents a(n) ______ reduction to net income.

noncash

The_____ activities section of the statement of cash flows indicates how well a company is able to generate cash through its normal business activities and management of working capital. (Enter one word per blank.)

operating

The quality of income ratio measures the______.

portion of income that was generated in cash

A company that reports a significant negative cash flows from investing activities will most likely report a ______.

positive cash flow from financing activities

Material noncash investing and financing transactions are ______.

reported in a supplementary schedule to the statement of cash flows

When using the indirect method, subtracting an increase in Accounts Receivable from net income eliminates the effect of recording credit sales ______.

that increased net income, but did not impact cash