Intermediate Accounting Chapter 4

True or false: Net cash flows from investing activities represents the total inflows plus the total outflows of cash.

False

What do high turnover ratios suggest?

Fewer assets are required to maintain a given level of activity. The company is more efficient in managing its assets.

Which type of activities involve cash inflows and outflows from transactions with creditors and owners?

Financing

Cryon Corp. has the following information: Borrow from bank $100,000 Pay dividend 30,000 Purchase building 50,000 Collect from customers 50,000 Repay loan from bank 30,000 What is the net cash flow from financing activities?

$40,000

Music Corp. has the following information: Issue common stock $100,000 Pay dividend 20,000 Purchase building 100,000 Collect from customers 50,000 Repay loan from bank 30,000 What is the net cash flow from financing activities?

$50,000

Which of the following are acceptable methods for reporting comprehensive income? (Select all that apply.) - in one single statement of shareholders' equity - in two consecutive statements - income statement and comprehensive income statement - in two consecutive statements - income statement and shareholders' equity statement - In one single statement of comprehensive income

- In two consecutive statements - income statement and comprehensive income statement - In one single statement of comprehensive income

The purpose of the statement of cash flows includes which of the following? (Select all that apply.) - Provide information about cash disbursements on a specific date. - Provide information about cash disbursements during a period. - Provide information about cash receipts on a specific date. - Provide information about cash receipts during a period.

- Provide information about cash disbursements during a period. - Provide information about cash receipts during a period.

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

- sale of land - sale of investment securities

The statement of cash flows is useful because

Accrual-based income is not an indication of cash flows

Some types of gains and losses are excluded from the determination of net income on the income statement, but are included in the broader concept of _______________ income.

Comprehensive

The FASB's expanded view of income is included in _______________ income.

Comprehensive

Net income is part of

Comprehensive income

Margot Company prepares its financial statements consistent with IFRS. The company chose the revaluation method for valuing its equipment. The company will report revaluation surplus if the equipment's

Fair value exceeds its book value

The ratio that provides an indication of how efficiently a company utilizes all of its assets to generate revenue is referred to as the _______________ turnover ratio.

asset

Cash borrowed or paid to a creditor is an example of a(n) _____ activity.

financing

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

indirect method

The sale of a building is a cash ____ from investing activities; a loan made to another entity is a cash ______ from investing activities.

inflow; outflow

Calculating and monitoring the average collection period over time can be useful because

it can signal a future increase in bad debts. it highlights changes in how efficiently a company collects cash from customers

In order to provide more complete information, U.S. GAAP allows that any significant noncash investing and financing activities may be reported

on the face of the statement of cash flows. in the notes to financial statements.

Which of the following are cash outflows from investing activities?

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

Which of the following ratios are activity ratios?

receivables turnover asset turnover inventory turnover

The asset turnover ratio provides an indication of how efficiently a company uses all of its assets to generate _______________.

revenues

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

The direct method and indirect method of preparing the statement of cash flows result in

the same net cash flows from operating activities. the same presentation of investing and financing activities.

Inflows and outflows of cash related to the transactions used to determine net operating income are what type of activities?

Operating

The direct method and indirect method of preparing the statement of cash flows result in (Select all that apply.) - the same presentation of investing and financing activities. - a different amount for net cash flows from operating activities. - a different presentation of investing and financing activities. - the same net cash flows from operating activities.

- the same presentation of investing and financing activities. - the same net cash flows from operating activities.

Gulf Corp. has the following information: End of Year 1 End of Year 2 Net sales $ 80,000 $100,000 Total assets 600,000 800,000 Accounts receivable 30,000 50,000 What is the asset turnover ratio for year 2 rounded to the nearest 1/1000?

0.143

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year's assets in place were $900,000 and this year's assets in place are $1,100,000. Receivables for both years are $50,000.

10% Reason: Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%

Which of the following are cash inflows from financing activities?

Borrowing from bank Issuance of common stock to investors

The receivables turnover ratio offers an indication of how quickly a company is able to

collect its accounts receivable.

The indirect method for preparing a statement of cash flows begins with _______________ _______________.

net income

What is the formula for the asset turnover ratio?

net sales divided by average total assets

The inflows and outflows of cash that result from activities reported in the income statement are classified as cash flows from _______________ activities.

operating

According to IFRS, interest and dividends paid can be classified as a(n)

operating activity financing activity

According to IFRS, interest and dividends received can be classified as a(n)

operating activity investing activity

The statement of cash flows classifies items as

operating, investing, financing

For financing activities, a cash ______ occurs when a company purchases its own securities as treasury stock; a cash ______ occurs when a company issues stock for cash to investors.

outflow; inflow

The purchase of a long-term investment is a cash ______ from investing activities; sale of a long-term investment is a cash ______ from investing activities.

outflow; inflow

Sales on account are $100,000. Beginning accounts receivable is $20,000, and ending accounts receivable is $15,000. What is the cash collected from customers during the period?

$105,000 Reason: $100,000 + 20,000 - 15,000 = $105,000

Tax expense is $100,000 for the period. The beginning balance in taxes payable is $20,000, and the ending balance is $14,000. What is the amount of taxes paid during the period?

$106,000 Reason: $20,000 - 14,000 + 100,000 = $106,000

Roger Corporation reports accumulated other comprehensive income of $10 million at 12/31/16. For the year ended 12/31/17, the company reports net income of $12 million and total comprehensive income of $15 million. On 12/31/17, Roger Corporation should report accumulated other comprehensive income of:

$13 million Reason: beginning AOCI+OCI for 2017 ($10 mill.+($15-12 mill)

Sales on account are $200,000. Cash sales during the period are $50,000. Beginning accounts receivable is $20,000, and ending accounts receivable is $30,000. What is the total cash collected from customers during the period?

$240,000 Reason: Beginning A/R + sales on account - Ending A/R = credit sales collected. $20,000 + $200,000 - $30,000 = $190,000 of the sales on account were collected in cash during the period + the $50,000 cash sales.

When net income and comprehensive income are identical for all years presented in a company's income statement, which of the following is true?

A statement of comprehensive income is not required.

What type of ratios measure a company's efficiency in managing its assets?

Activity

Which of the following may provide useful information about a company's ability to continue to generate a high level of sales and collect its receivables in a timely manner?

Average collection period Receivable turnover ratio

Which accounting standard(s) allow companies to choose between the one and the two statement approach for reporting comprehensive income?

Both U.S. GAAP and IFRS

The two generally accepted formats for preparing the statement of cash flows under U.S. GAAP are the

Direct and indirect method.

In promulgating GAAP for the statement of cash flows, the FASB stated that it prefers the _______________ method; however, nearly all U.S. companies use the _______________ method.

Direct; indirect

The two acceptable methods under U.S. GAAP for preparing the statement of cash flows are the _______________ method and the _______________ method.

Direct; indirect

Consistent with IFRS, comprehensive income must be presented in

Either one or two statement[s]

Comprehensive income is defined as the total change in ______ for a reporting period other than transactions with owners.

Equity

Which information regarding the receivable turnover ratio is true?

It shows the number of times during a period that the average accounts receivable balance is collected. It provides an indication of a company's efficiency in collecting receivables.

What is the formula for the receivables turnover ratio?

Net credit sales divided by average accounts receivable (net).

Which of the following are used in the computation of comprehensive income?

Net income

Under IFRS, if the revaluation option is chosen, the excess of the fair value of property, plant and equipment over its book value is reported as _______________ _______________ _______________.

Other Comprehensive Income

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

Statement of cash flows.

Accumulated other comprehensive income represents

The total of other comprehensive income to date.

The indirect method of statement of cash flow preparation (Select all that apply.) - adjusts for changes in assets to reconcile the difference between accrual net income and cash paid or received. - ignores income statement transactions that have no cash flow effect. - adds back depreciation expense because it affects net income but does not reduce cash. - adjusts for changes in liabilities to reconcile the difference between accrual net income and cash paid or received. - reports the cash effect of each operating activity directly in the statement.

- adjusts for changes in assets to reconcile the difference between accrual net income and cash paid or received. - adds back depreciation expense because it affects net income but does not reduce cash. - adjusts for changes in liabilities to reconcile the difference between accrual net income and cash paid or received.

The statement of cash flows is useful because (select all that apply) - it provides information about liquidity - it reveals the company's ability to generate positive cash flow from its normal operations - it provides a more accurate prediction of the company's ability to generate future cash flows than income does

- it provides information about liquidity - it reveals the company's ability to generate positive cash flow from its normal operations

In preparing the operating activities section of a statement of cash flows using the indirect method, net income should be adjusted for (Select all that apply.) - loss from sale of asset. - issuance of bonds for cash. - depreciation expense. - payment of a note payable. - gain from sale of asset.

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

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows? (Select all that apply.) - payment on accounts payable - purchase of building - issuance of bonds - payment of salaries - purchase of supplies on account

- payment on accounts payable - payment of salaries

Other comprehensive income is reported in the current reporting period on the income statement or as an addition to the income statement, and _______________ other comprehensive income is reported on the balance sheet.

Accumulated

Which of the following is disclosed on the balance sheet?

Accumulated other comprehensive income

The ending balance of accumulated other comprehensive income is calculated by adding this amount to the beginning balance of accumulated other comprehensive income.

Current year other comprehensive income

Which of the following are significant noncash activities?

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

Companies must report comprehensive income in either a single statement of comprehensive income or in two separate statements under

Both US GAAP and IFRS

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows? (Select all that apply.) - borrowing from bank - sale of building - interest received on notes receivable - issuance of common stock - collection on account

- interest received on notes receivable - collection on account

Cash flows from investing activities include inflows and outflows of cash related to the acquisition and disposition of long-term _______________ used in operations.

assets

The formula to compute the receivables turnover ratio is net credit sales divided by

average accounts receivable

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days Reason: 365/receivable turnover = 40.6 days

Black Company has the following information: Receivable turnover 6 Inventory turnover 5 Asset turnover 3 Net credit sales $500,000 What is the average collection period?

60.8 days

Revaluation surplus is reported as other comprehensive income under

IFRS

The _______________ method of preparing the statement of cash flows begins with net income.

Indirect

In preparing the operating section of the statement of cash flows, the _______________ method begins with net income and adjusts for items that affect cash but are not included in net income, whereas, the _______________ method converts each line item in income from operations to a cash basis.

Indirect; direct

Sales of services for cash and collection on account are classified as cash _______________, while payment on account and payment of salaries are classified as cash _______________ from operating activities on the statement of cash flows.

Inflows; outflows

Inflows and outflows of cash related to the acquisition and disposition of long-lived assets used in operations and investment assets are what type of cash flow?

Investing

Which of the following are cash outflows from financing activities?

payment of dividends repayment of note payable

The direct method for preparing the statement of cash flows ignores transactions that have no cash flow effect, such as ______.

depreciation

Two items that are treated differently on the statement of cash flows for U.S. GAAP and IFRS are

dividends. interest.

The operating activities section on the statement of cash flows includes the elements of net income on a(n) _______________ basis rather than a(n) _______________ basis.

Cash; accrual

The indirect method of preparing the operating section of the statement of cash flows begins with net income and adjusts for items that do not affect

cash.

The direct method for preparing the statement of cash flows reports

Cash received and cash paid from operating activities.

Salary expense is $50,000 for the period. The beginning balance in salaries payable is $5,000, and the ending balance is $3,000. What is the amount of salaries paid during the period?

$52,000 Reason: $5,000 - 3,000 + 50,000 = $52,000

Ranier Corp. has the following information: Sale of building $100,000 Sales on account 40,000 Purchase of land 30,000 Collection from customers 50,000 Issue of stock 30,000 What is the net cash flow from investing activities?

$70,000

The indirect method of statement of cash flow preparation

- adjusts for changes in liabilities to reconcile the difference between accrual net income and cash paid or received. - adds back depreciation expense because it affects net income but does not reduce cash. - adjusts for changes in assets to reconcile the difference between accrual net income and cash paid or received.

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

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

The classifications on the statement of cash flows are cash flows from (Select all that apply.) - business activities. - discontinued activities. - financing activities. - operating activities. - investing activities.

- financing activities. - operating activities. - investing activities.

In preparing the operating activities section of a statement of cash flows using the indirect method, net income should be adjusted for (Select all that apply.) - gain from sale of asset. - issuance of bonds for cash. - loss from sale of asset. - depreciation expense. - payment of a note payable.

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

The potential tax expense or benefits of items reported as components of Other Comprehensive Income

Can be shown separately for each item or aggregated and reported as one line item

U.S. GAAP requires that a statement of cash flows must be presented for

Each period for which a balance sheet and income statement are prepared.

Comprehensive income includes net income as well as other _______________ and _______________ that change shareholders' equity but are not included in traditional net income.

Gains; losses

Which is a significant noncash activity?

Signing a note payable in exchange for land.

Operating, investing, and financing activities are found on which financial statement?

Statement of cash flows

True or false: Net cash flows from financing activities, represents the total inflows minus the total outflows of cash from financing activities.

True

True or false: Net income is a portion of comprehensive income.

True

Under which of the following conditions is a statement of comprehensive income not required? - When a company has no other comprehensive income items for all years presented. - For the first year of the company's operations. - When net income and comprehensive income are identical in the current period. - If a company has a comprehensive loss.

When a company has no other comprehensive income items for all years presented.

The ratio that provides an indication of how efficiently a company utilizes all of its assets to generate revenue is referred to as the turnover ratio.

asset

Which of the following ratios are activity ratios?

asset turnover inventory turnover average collection period