Chapter 12 - Managerial Accounting

When using the indirect method, subtracting a decrease in Deferred Revenue from net income eliminates the effect of recording revenue that ______ cash this period.

increased net income, but did not impact

During the year, Over Armoir, Inc. purchased a patent for $1,000 cash and equipment for $10,000 cash. Assuming these are the only transactions affecting the investing activities, it will report net cash flows from investing activities of ______.

$(11,000)

Dover Co.'s comparative balance sheet indicated that the Equipment account increased by $40,000. Dover purchased equipment totaling $70,000 for cash during the year and sold equipment with an original cost of $30,000 for $8,000 cash. Assuming these are the only transactions affecting the investing activities, Dover will report net cash flows from investing activities of ______.

$(62,000) ; Reason: Cash is decreased by $70,000, but cash of $8,000 is also received for the sale of equipment.

When a company sold its equipment, it recorded a $10,000 debit to Cash and $40,000 debit to Accumulated Depreciation and a $48,000 credit to Equipment and $2,000 credit to Gain on Disposal. What will be the amount reported in the investing activities section of the statement of cash flows?

$10,000 ; Reason: The investing activities section will report the cash received from the sale, which is a $10,000 inflow. The Gain on Disposal will be a subtracted from net income in the operating activities section if the indirect method is used.

When using the T-account approach to prepare the indirect method of the statement of cash flows, which of the following would be associated with amounts entered on the credit side of the Cash T-account?

- Increase in Accounts Receivable - Increase in Prepaid Expenses - Increase in Inventory

Why is the accrual-based income statement superior to a cash-based income statements in measuring profitability?

- It reports the revenues generated regardless of when the cash was collected. - It reports the expenses incurred in generating the revenues regardless of when the cash was paid. - It better reflects the operating activities of the business.

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

Issuing additional common stock Payments of amounts owed to owners ->Repayments of accounts payable Borrowing from financial institutions

Which balance sheet line item will help explain a difference between net income on the income statement and cash from operating activities on the statement of cash flows?

accounts receivable

If the Accounts Receivable balance is $10 million less than the balance at the beginning of the year, then on the statement of cash flows (indirect method) $10 million should be ______.

added to net income

The direct method presents a summary of all operating transactions that result in either a debit or credit to ______.

cash

When using the T-account approach to prepare the indirect method of the the statement of cash flows, a decrease in Accounts Payable will be associated with the ______ side of the Cash T-Account because the decrease is a cash ______.

credit; outflow

A decrease in Accounts Payable will result in a(n) _____ to net cash flow from operating activities.

decrease

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

Which method of preparing the operating activities section of the statement of cash flows reports the gross receipts and gross payments?

direct

Issuing bonds payable is an example of a(n) _____ activity.

financing

The changes in the non-cash balance sheet accounts explain the differences between the ______.

income statement and the statement of cash flows

The sale of property, plant, and equipment results in a cash ______ (inflow/outflow) to the ______ activities section of the statement of cash flows.

inflow, investing

The sale of its intangible asset, trademark, is considered a(n) ______.

investing activity because the purchase and sale of assets that benefit the company for more than one year are classified as such

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

more

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

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

The classifications used to categorize cash inflows and outflows on the statement of cash flows includes _____ activities, ______ activities, and _______ activities.

operating, investing, financing

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

operating; operations

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

reduces net income, but is a noncash expense

Net cash flows provided by operating activities will be ______ when using the direct method compared to the indirect method.

the same

XYZ Co. sold equipment that originally cost $14,000 with accumulated depreciation of $11,000 for $4,000 cash, resulting in a gain of $1,000. Which of the statements below are correct regarding the treatment of this transaction on the statement of cash flows for the current period?

- $4,000 is a cash inflow in investing activities. - $1,000 is deducted from operating activities.

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 ; Reason: 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.

During the year, Braden and Sons, Inc. paid $342,000 cash to purchase equipment. They also sold equipment that originally cost $230,000 for $70,000 cash. 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 preparing the statement of cash flow using the indirect method, Depreciation Expense is ______.

added back to net income under the operating activities section

Depreciation Expense is ______ net income in a statement of cash flows prepared using the indirect method because it ______.

added back to; is a noncash expense

If the Deferred Revenue account balance increased, how should this be reflected in the operating activities section of the statement of cash flows when using the indirect method? The increase should be ______ net income because ______ during the accounting period.

added to; less revenue was generated than collected

When using the indirect method in preparing the statement of cash flows, if cash collected from customers is greater than the revenues generated, then the ______ net income.

decrease in Accounts Receivable will be added to

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

decreased net income but did not impact

When the operating activity section of the statement of cash flows is prepared by adjusting each revenue and expense on the income statement from the accrual basis to the cash basis, the ______ method is being used.

direct

Which of the following describes the acceptable methods that may be used to prepare the statement of cash flows?

direct method and indirect method

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

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

True or false: When presenting the operating activities section of the statement of cash flows, the direct method starts with net income and adjusts it by eliminating the effects of transactions that do not involve cash. The indirect method reports the total cash inflow or cash outflow from each main type of transaction.

false ; Reason: The direct method reports the total cash inflow or cash outflow from each main type of transaction. The indirect method starts with net income and adjusts it by eliminating the effects of transactions that do not involve cash.

The payment of dividends and changes in the Dividends Payable account are classified as ______ activities.

financing

Using the indirect method, when the direction of change in Inventory is a(n) ______, the amount of that change is subtracted from net income to include inventory transactions that decrease cash, but do not impact net income.

increase

When using the indirect method in preparing the statement of cash flows, if revenues generated during the period are greater than the cash collected, then the ______ net income.

increase in Accounts Receivable will be subtracted from

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 ______ net income.

increased cash, but did not affect

An increase in Accounts Payable indicates that ______ was purchased than paid. Thus, the increase will be ______ net income on the statement of cash flows prepared using the indirect method.

more; added to

The cash flow statement should be evaluated by examining the cash flow pattern ______.

of the subtotals for the three sections of the statement

Because it provides information about the only long run continuing source of cash, most analysts believe ______ activities is the most important section of the statement of cash flows.

operating

If the Deferred Revenue account balance decreased, how should this be reflected in the operating activities section of the statement of cash flows when using the indirect method? The decrease should be ______ net income because ______ during the accounting period.

subtracted from; more revenue was generated than collected

Net cash flows provided by (used in) operating activities is always the same under the direct and indirect methods.

true ; Each method calculates operating activities differently; however, they both result in the same amount of cash provided by (used in) operating activities.

True or false: Depreciation Expense is added to net income when preparing the operating activity section of the statement of cash flows using the indirect method.

true ; Reason: 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.

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

decrease, investing

If the direction of change in Accounts Receivable is a(n) _____ (increase/decrease) from the prior period, the amount of that change is added to net income in the ______ activities section of the statement of cash flows.

decrease, operating

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

Accrual-based net income

When operating cash flows are calculated using the indirect method, if Accrued Liabilities increased, then the change is ______ cash was paid than expensed during the period.

added to net income because less

If the direction of change in Accounts Receivable is a(n) _______ (increase/decrease) from the prior period, the amount of that change is added to net income in the _______ activities section of the statement of cash flows.

decrease, operating

When operating cash flows are calculated using the indirect method, if Prepaid Rent balance increased, then the change is ______ cash was paid than expensed during the period.

deducted from net income because more

Which of the following classifications is not used to categorize cash inflows and cash outflows on the statement of cash flows?

spending

To properly evaluate the statement of cash flows, it is important to evaluate ______.

the pattern of the three sections, not just the change in cash during the period