Accounting 201 Chapters 13 and 14 FINAL
a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities
An increase in accounts receivable of $1,000 over the course of a year would be shown on the company's statement of cash flows prepared under the indirect method as:
True
Buying property, plant, or equipment would be reported as a cash outflow on the investing activities section of the statement of cash flows
False
Cash equivalents on the statement of cash flows consist of any investment that can be converted into cash within one year.
True
Cash payments to insurers and utility providers are considered operating activities on the statement of cash flows.
True
Free cash flow decreases when a company issues common stock for cash.
False
Free cash flow is net cash provided by operating activities less capital expenditures.
True
If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.
False
If the internal rate of return is less than the required rate of return for a project, then the net present value of that project is positive.
equal to 16%
If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is:
False
If the salvage value of equipment at the end of a project is highly uncertain, the salvage value should be ignored in capital budgeting decisions..
operating activities section
In a statement of cash flows, a change in an income taxes payable account would be recorded in the:
financing activities section
In a statement of cash flows, issuing bonds payable affects the:
an investing activity
In a statement of cash flows, the sale of a long-term investment would ordinarily be classified as:
The sale of equipment
In a statement of cash flows, which of the following would be classified as an investing activity?
False
In calculating the "investment required" for the project profitability index, the amount invested should not be reduced by any salvage recovered from the sale of old equipment.
True
In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.
True
In the payback method, depreciation is added back to net operating income when computing the annual net cash flow.
False
In the statement of cash flows, collecting cash from customers is treated as a cash inflow in the financing activities section.
False
Investing activities on the statement of cash flows generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company's owners such as selling or repurchasing shares of common stocks and paying dividends.
False
Negative free cash flow suggests that the company generated enough cash flow from its operating activities to fund its capital expenditures and dividend payments.
False
Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions.
True
Paying interest to lenders is classified as an operating activity on the statement of cash flows.
True
Paying taxes to governmental bodies is considered a cash outflow in the operating activities section on the statement of cash flows.
True
Paying wages and salaries to employees is classified as a cash outflow in the operating activities section of the statement of cash flows
both an initial cash outflow and a future cash inflow
Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:
False
The amount of depreciation added to net income equals the sum of the debits to the Accumulated Depreciation account.
only the net present value method
The assumption that the cash flows from an investment project are reinvested at the company's discount rate applies to:
True
The collection of a loan made to a supplier would be treated as an investing activity on a statement of cash flows.
False
The cost of capital is the average rate of return that the company earns on its investments.
True
The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows.
internal rate of return
The internal rate of return method assumes that a project's cash flows are reinvested at the:
False
The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the company's cost of capital.
False
The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero.
True
The net cash provided by operating activities on the statement of cash flows does not include any dividends paid to the company's own shareholders.
False
The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the internal rate of return.
True
The payback method is most appropriate for projects whose cash flows do not extend far into the future.
will sometimes result in different preference rankings for investment projects.
The project profitability index and the internal rate of return:
False
The required rate of return is the maximum rate of return that an investment project must yield to the acceptable.
False
The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.
False
The simple rate of return focuses on cash flows rather than on accounting net operating income.
True
The simple rate of return is computed by dividing the annual net operating income generated by a project by the initial investment in the project.
True
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, a loss on the sale of an asset would be added to net income
True
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts receivable would be subtracted from net income.
False
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in property, plant, and equipment is subtracted from net income.
False
When a company pays a supplier for inventory it has purchased, the cash outflow is recorded in the investing activities section of the statement of cash flows.
True
When a company pays cash to repurchase its own common stock, this is reported as a cash outflow in the financing activities section of the statement of cash flows.
Decrease in accounts payable
When computing the net cash provided by operating activities using the indirect method on the statement of cash flows, which item below would NOT be added to net income?
True
When the internal rate of return method is used to rank investment proposals, the higher the internal rate of return, the more desirable the investment.
Dividends paid to the company's own stockholders
Which of the following items would not be classified as an operating activity on the statement of cash flows?
a decrease in accounts receivable
Which of the following would be added to net income in the operating activities section of a statement of cash flows prepared using the indirect method?
Purchase of a company's own stock
Which one of the following transactions should be classified as a financing activity on the statement of cash flows?
a net present value greater than zero
A company has unlimited funds to invest at its discount rate. The company should invest in all projects having:
is concerned with determining which of several acceptable alternatives is best
A preference decision in capital budgeting:
True
A shorter payback period does not necessarily mean that one investment is more desirable than another.
an addition to net income of $1,000 in order to arrive at net cash provided by operating activities
An increase in accrued liabilities of $1,000 during a year would be shown on the company's statement of cash flows prepared under the indirect method as:
a deduction from net income of $5,000 in order to arrive at net cash provided by operating activities
An increase in the Inventory account from $10,000 at the beginning of the year to $15,000 at the end of the year would be shown on the statement of cash flows prepared under the indirect method as:
True
An increase in the expected salvage value at the end of a capital budgeting project will increase the internal rate of return for that project.
False
An investment project with a project profitability index of 0.04 has an internal rate of return that is less than the discount rate.
False
Cash payments to repay the principal amount of debt are reported as a cash outflow in the investing activities section of the statement of cash flows.
False
Cash received from the sale of equipment the company had used in its own operations would be considered an operating activity on a statement of cash flows.
True
Collecting the principal on a loan to another company would be reported on the investing activities section of the statement of cash flows.
True
Discounted cash flow techniques automatically take into account recovery of the initial investment.
True
Free cash flow will increase if a company increases its accounts payable balance by delaying payments to suppliers.
False
In preference decisions, the profitability index and internal rate of return methods will rank projects in the same order of preference.
True
Money received from issuing bonds payable would be included as part of a company's financing activities on the statement of cash flows
True
Negative free cash flow does not automatically signal poor performance.
True
The direct method of preparing the statement of cash flows will show the same increase or decrease in cash as the indirect method.
True
The internal rate of return is the rate of return of an investment project over its useful life.
False
The statement of cash flows relies on a fundamental principle of double-entry bookkeeping; namely, the change in the cash balance must equal the change in total liabilities and stockholders' equity.
True
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, a decrease in inventory would be added to net income.
True
When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return
False
When computing the net cash provided by operating activities under the indirect method on the statement of cash flows, a decrease in common stock would be subtracted from net income.
False
When computing the net cash provided by operating activities under the indirect method on the statement of cash flows, an increase in prepaid expenses would be added to net income.
False
When computing the project profitability index of an investment project, the investment required should exclude any investment made in working capital at the beginning of the project.
True
When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.
True
When the net cash inflow is the same every year for a project after the initial investment, the internal rate of return of a project can be determined by dividing the initial investment required in the project by the annual net cash inflow. This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return.
Repurchasing capital stock from owners
Which of the following would be classified as a financing activity on the statement of cash flows?
Issuing bonds payable
Which of the following would be considered a cash inflow in the financing activities section of the statement of cash flows?
