ACT 210 Chapter 11

Which of the following accounts results in adjustments to net income under the indirect method of preparing the statement of cash flows if their balances change during the year?

1. Inventory 2. Accounts receivable 3. Accounts payable

Which of the following are cash inflows from financing activities?

1. Issuing stock to investors for cash 2. Issuance of bonds 3. borrowing from bank

Which of the following are nonoperating items that require adjustments under the indirect method?

1. Losses on the sale of long-term assets 2. Gains on the sale of long-term assets

Adjustments to net income in calculating operating cash flows include:

1. Nonoperating items 2. Changes in current assets and current liabilities 3. Noncash items

Which of the following are cash outflows from investing activities?

1. Purchase of building 2. purchase of land 3. purchase of long-term investments

Which of the following are classified as cash outflows from investing activities?

1. Purchase of land 2. Purchase of an investment

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 it is a noncash expense. Reason: Depreciation is a noncash expense that reduces net income. It is added back to net income.

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

Purchase of a machine for cash.

Which is a significant noncash activity?

Signing a note payable in exchange for land.

Which of the following ratios measures the revenue generated per dollar of assets?

asset turnover

Transactions reported on the statement of cash flows that do not increase or decrease cash, but that result in significant investing and financing activities are referred to as ______________ activities.

noncash

Gains and losses on the sale of long-term assets represent common _____________ items needing adjustment under the indirect method.

nonoperating

The payment of dividends is classified as a:

operating activity

Neue Inc. reports sales revenue of $200,000; in addition, its accounts receivable balance decreased by $15,000. Neue's cash flows from sales were:

$215,000 Reason: $200,000 + $15,000

The two types of adjustments to net income for the indirect method are adjustments for:

1. changes in operating assets and liabilities during the period that affected cash and were not in net income. 2. components of net income that do not affect cash.

Joann is preparing a statement of cash flows as part of a homework assignment. She hopes to find a check figure that will help her assess the accuracy of her results. What should Joann do to quickly find a check figure?

Calculate the change in the beginning and ending balance of cash

Cash return on assets can be calculated as cash flows to sales multiplied by:

asset turnover

The two generally accepted formats for reporting cash flows from operating activities using U.S. GAAP are the:

direct and indirect method.

A _______________ in accrued liabilities, such as interest payable, will be added to net income when determining net cash flow from operating activities using the indirect method.

increase

The difference between cash ________ and cash _____________ is called net cash flows and represents the change in cash during the period.

inflow; outflow

In order to determine cash flows from financing activities, we need to examine changes to:

long-term liability and stockholders' equity accounts

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

net income

The return on assets is calculated by dividing ____ by _______.

net income; average total assets

The basic purpose of the statement of cash flows is to:

report the activities that changed the cash balance during the year

Which of the following are significant noncash activities?

1. Acquiring equipment by issuing a long-term note. 2. Acquiring land by issuing common stock.

Operating cash flows divided by average total assets will calculate the:

cash return on assets

Cash flows from _______________ activities are both outflows and inflows of cash related to the acquisition and disposal of long-term assets.

investing

In a statement of cash flows, the sum of cash inflows and outflows is equal to:

the change in the cash balance.

Select the items that would be subtracted from net income in order to prepare the operating activities section of a statement of cash flows - indirect method.

1. Gain on sale of land 2. Decrease in current liability

Which of the following are common noncash items requiring adjustment to net income under the indirect method?

1. amortization expense 2. depreciation expense

The statement of cash flows provides summary information about cash _______________ and _______________ during the year.

outflows; inflows

Cash return on assets can be calculated by multiplying cash flow to __________________ and the asset. turnover.

sales

Select the items that would be added to net income in order to prepare the operating activities section of a statement of cash flows - indirect method.

1. depreciation expense 2. loss on sale of land 3. decrease in current asset

Wiese reports net income of $100,000 for the year ended 12/31/18. Total assets were $800,000 on 12/31/17 and $900,000 on 12/31/18. The company earned a return on assets of: (round the tenth of percent)

11.8%; $100k/((800k+900k)/2)

Which of the following items would not be classified as a financing activity?

Repayments of accounts payable; Transactions involving liabilities owed to owners, liabilities owed to financial institutions, and changes in stockholders' equity accounts are classified as financing activities. Changes in current liabilities, such as accounts payable, are classified as operating activities.

Using the indirect method to report cash flows from operating activities, decrease in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities.

added back to

When preparing the statement of cash flows using the indirect method, depreciation expense is ______ ______ net income.

added to

Grant's income statement reveals a loss from the sale of land. In preparing the operating activities section of the statement of cash flows using the indirect format, the loss should be:

added to net income.

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 statement.

Which of the following represents the first step in preparing a statement of cash flows in the correct order?

calculate the net cash flows from operating activities

Which of the following ratios measures the operating cash flows generated for each dollar of sales?

cash flow to sales

Which of the following represents the final step in preparing a statement of cash flows in the correct order?

combine operating, investing, and financing activities

When the indirect method is used to report cash flows from operating activities, a decrease in accrued liabilities, such as wages payable, is subtracted from net income to include the effects of transactions that ______ cash, but ______ net income.

decrease; do not affect A decrease in current liabilities means more cash was paid in the period than the amount reported as expense on the income statement.

The "asset turnover" measures the sales revenue generated per _______________ of assets.

dollar

The "cash flow to sales" ratio measures the operating cash flows generated for each _____________ of sales.

dollar

Cash flows from _____________ activities include both inflows and outflows of cash from the external funding of a business.

financing

Cash inflows and outflows involving stockholders and creditors are classified on the statement of cash flows as _____________ activities.

financing

Issuing stock to owners is classified as a:

financing activity

An increase in accounts receivable indicates that the company collected _____ cash than the amount of ______.

less; sales revenue

Noncash items, nonoperating items, and changes in current assets and liabilities are necessary adjustments to _______________ _________________ to prepare the operating section for the indirect format of the statement of cash flows.

net income

When using the indirect method to prepare the operating activities section of the statement of cash flows, the first amount listed is ___________ _______________.

net income

Cash return on assets is calculated as ______ divided by average total assets

operating cash flows

Using the indirect method to report cash flows from operating activities, an increase in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities.

subtracted from Reason: An increase in inventory indicates that inventory has been purchased resulting in a decrease to cash.

Under the indirect method of preparing the statement of cash flows, depreciation expense is added back to net income because it:

1. did not require an outflow of cash. 2. was subtracted in deriving net income.

The purchase and sale of long-term assets and current investments are classified as:

investing activities

An increase in prepaid insurance is subtracted from net income because:

the company paid additional premiums this period in excess of the insurance expense recorded on the income statement An increase in prepaid insurance (an asset) means the cash paid (which increases prepaid insurance) was greater than the insurance expense incurred (which decreases prepaid insurance.)

When reporting cash flows from operating activities using the indirect method, an increase in accounts payable is ______ net income because payments to suppliers are ______ than new purchases.

added to; less An increase in accounts payable means the company paid less than its purchases for the period. Thus, the increase in accounts payable is added to net income to increase operating cash flows.

The statement of cash flows classifies items as:

operating, financing, and investing

Changes to current assets and current liabilities require adjustment of net income under the indirect method because:

related cash may be higher or lower than the accrued amount included in net income

The financial statement that provides information about cash receipts and cash disbursements for the period is the:

statement of cash flows

Which of the following are classified as cash inflows from investing activities?

1. Sale of land 2. Sale of equipment 3. Sale of investments 4. Sale of buildings

In preparing the operating activities section of a statement of cash flows using the indirect method, net income should be adjusted for:

1. gain from sale of asset. 2. loss from sale of asset. 3. depreciation expense.

Noncash investing and financing activities are either:

1. reported in the notes to the financial statements 2. reported directly after the statement of cash flows

Lein's net income is $200,000 and its operating cash flows are $240,000. The company reports total assets of $1.6 million and $1.8 million at the end of the prior and current year, respectively. Return on assets (rounded to one-tenth of a percent) is:

11.8%; $200k/(($1.6 mill+$1.8mill)/2)

One of the purposes of adjusting net income for changes to certain balance sheet accounts is to:

convert items included in net income to cash.

When cash flows from operating activities are reported using the indirect method, a ______________ in accounts payable will be subtracted from net income.

decrease

A decrease in prepaid insurance is added to net income because:

insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased rather than cash. A decrease in prepaid insurance (an asset) means the cash paid (which increases prepaid insurance) was less than the insurance expense incurred (which decreases prepaid insurance). A decrease in prepaid insurance is added to net income because insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased, rather than cash.

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; Depreciation expense decreases net income on the income statement but does not decrease cash from operating activities on the statement of cash flows (no check is written for depreciation expense). Depreciation expense is a non-cash expense and thus is added back to net income when calculating cash from operating activities.

Cash receipts and cash payments for transactions relating to revenue and expense activities are classified on the statement of cash flows as:

operating activities