Chapter 11 - Financial Accounting

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

Sale of land Sale of equipment

List the four steps in preparing a statement of cash flows in the correct order.

1. Operating 2. Investing 3. Financing 4. Combine (OIFC)

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

Which of the following are significant noncash activities?

acquiring land by issuing common stock and acquiring equipment by issuing common stock

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 a statement of cash flows using the indirect format, amortization expense must be:

added back to net income

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 the net income

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

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

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(n) _______ in accounts payable will be subtracted from net income.

decrease

Using the indirect method to report cash flows from operating activities, a(n) ______ in the accounts receivable from the prior period is added to net income in the ______ activities section of the statement of cash flows.

decrease, operating

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

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

did not require an outflow of cash and was subtracted in deriving the net income

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

The statement of cash flows classifies items as

financing, operating and investing

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

gain from sale of asset. depreciation expense. loss from sale of asset.

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

in, out

Which of the following financial statements provide(s) useful information to prepare the statement of cash flows?

income statement and balance sheet

A(n) _____ 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

Norbert Company reports the following net cash flows in its statement of cash flows: net inflow from operating activities: $200; net outflow from investing activities: $220; net inflow from financing activities: $130. The current year beginning balance of cash was $80. During the current year, cash must have

increased by $110

The balance of retained earnings:

increases with net income and decreases with dividends declared

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

investing activities

Which of the following are cash inflows from financing activities?

issuance of bonds and issuing stock to investors for cash and borrowing from bank

Diamond Company's land account decreased by 10 million. Cash received from sale of land

may be higher or lower than $10 million.

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

net income

Depreciation expense and amortization expense represent _______ items requiring adjustments to net income under the indirect method.

noncash

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

Adjustments to net income in calculating operating cash flows include:

noncash items, nonoperating items, changes in current assets and current liabilities

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

nonoperating

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

operating activities

Which of the following are cash outflows from investing activities?

purchase of equipment, purchase of building, purchase of long-term investments

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

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

repayment of accounts payable

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

sale of equipment, sale of building, sale of investments

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

sale of machine for cash

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

True or False: Collection on account and sale of services for cash are considered cash inflows, while payment on account and payment of salaries are considered cash outflows from operating activities.

true

During the current period, Schmidt Corp. sold equipment for $1,000, purchased new equipment for $10,000, 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

Western Inc.'s income statement showed net income of $60,000 and depreciation expense of $10,000. Accounts receivable decreased $3,000, Inventory increased $4,000, Supplies increased $1,000, and Accounts payable increased $3,000. Western's net cash flows from operating activities was ______.

71,000

Which of the following statements is correct regarding the information content of the income statement and the balance sheet?

Both provide information that help determine cash flows.

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.

True or false: Every time land is sold, the line item for the sale of land in the investing activities section of the Statement of Cash Flows will equal the change in the asset account on the balance sheet.

False

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

Gains on the sale of long-term assets Losses on the sale of long-term assets

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?

Inventory Accounts receivable Accounts payable

Which of the following provides an indication of a higher quality of net income?

Operating cash flows that are highly correlated with net income

Using the indirect method to report cash flows from operating activities, how is the change in retained earnings accounted for in the statement of cash flows?

The change is accounted for by the addition of net income in operating activities and the subtraction of dividends in financing activities.

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

added to

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

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

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

depreciation expense amortization expense

The two acceptable methods for U.S. GAAP for reporting cash flows from operating activities are the

direct method and indirect method

The payment of dividends is classified as a(n) _____ activity

financing

ssuing stock to owners is classified as a(n) ______ activity

financing

The three classifications on the statement of cash flows are cash flows from

financing activities, investing activities, and operating activities

Which of the following methods for reporting cash flows from operating activities begins with net income and works backward to calculate net cash flow from operating activities?

indirect

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.

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

investing

Cash transactions involving the purchase and sale of long-term assets and current investments are classified on the statement of cash flows as ______ activities

investing

______ activities include cash receipts and cash payments for transactions relating to revenue and expense activities.

operating

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

purchase of the company's common stock for cash

Which is a significant noncash activity?

signing a note payable in exchange for land

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

statement of cash flows

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

the change in cash balance

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.

Carola Inc. issues common stock for $20 million and pays dividends of $2 million. Net cash inflows from financing activities will be:

$18 million

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

Roberts Inc. sells common stock for $10 million and pays dividends of $1 million. Net cash inflows from financing activities will be:

$9 million

Munster Company reports the following net cash in its statement of cash flows: net inflow from operating activities: $200; net outflow from investing activities: $300; net outflow from financing activities: $50. The ending balance in cash is $20; the beginning balance must have been

170

The ______ method of reporting cash flows from operating activities begins with net income.

indirect

During the current period, Kunze Corp. disposed of old equipment for $2,000, purchased new equipment for $20,000, 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

Arlington Inc.'s income statement showed net income of $57,600 and depreciation expense of $9,200. Accounts receivable increased $3,750, Inventory increased $3,200, Supplies decreased $500, Accounts payable increased $2,700 and Salaries payable decreased $1,900. Arlington's net cash flows from operating activities was

61,150

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.

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

long-term liability and stockholders' equity accounts

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

True or false: Amortization of intangible assets is treated the same way as depreciation of tangible assets on the statement of cash flows using the indirect method.

true

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

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

less, sales revenue

A decrease in accounts payable represents a cash ______ from operating activities, whereas a decrease in accounts receivable represents a cash _____ from operating activities.

outflow, inflow

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

purchase of land purchase of equiptment

Noncash investing and financing activities are either:

reported directly after the statement of cash flows and reported in the notes to the financial statements

Michaela is comparing two companies using three years of financial statement data. Company A's net income for the three years was $200 million and its operating cash flows $80 million. Company B's net income for the three years was $120 million and its operating cash flows $110 million. Which company appears to have a higher quality net income?

Company B