accounting chapter 11

the three primary categories of cash flows are

1. cash flows from operating activities 2. cash flows from investing activities 3. cash flows from financing activities.

what are the three information sources for preparing the statement of cash flows

1. income statement 2. balance sheet 3. detailed accounting records

indirect method

begins wit net income and then lists adjustments to net income in order to arrive at operating cash flows. more popular than the direct method.

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

dividends paid to shareholders

financing

notes payable issued for borrowing cash

financing

notes receivable accepted for lending cash

investing

When accounts receivable decrease

net sales are less than cash receipts from customers.

asset turnover

net sales divided by average total assets, which measures the sales per dollar of assets invested.

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

purchase of supplies, interest paid on bonds, and payment on account payable.

An increase in accounts receivable will result in a(n) ______ in cash from sales revenue when using the direct method to determine cash flows from operations.

decrease

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

payment of salaries, and payment on account

non cash activities

significant investing and financing activities that do not affect cash.

The amount of net cash flows from operating activities calculated using the direct method is

the same as under the indirect method.

operating activities

transactions involving revenue and expense activities. they include the cash effects of the same activities that are reported in the income statement to calculate net income.

investing activities

transactions involving the purchase and sale of long term assets and current investments.

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

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

adjustments to net income in calculating operating cash flows include the following:

1. non cash items 2. nonoperating items, 3. changes in current assets and current liabilities.

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 statements is correct concerning a decrease in accounts payable?

Since the cash payments were more than the credit purchases, the decrease must be added to purchases to calculate cash payments to suppliers.

direct method

adjusts the items in the income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes.

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

amortization expense and depreciation expense.

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

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

cash

Which of the following sections will be identical in every detail under the direct and indirect methods.

cash flows from financing activities and cash flows from investing activites.

Cash from operating activities differs between the direct and indirect method with respect to the:

detail and presentation only.

the _____ method prepares the operating activities section of the statement of cash flows by restating each revenue and expense from the accrual basis to the cash basis. It shows the cash collected from customers and the cash paid for operating expenses.

direct

Repayments of formal, long-term debt contracts are classified as ______ activities.

financing

A decrease in accounts receivable will result in a(n) ______ in cash from sales revenue when using the direct method to determine cash flows from operations.

increase

an _______ in accounts payable indicates that cash payments were less than credit purchases and must be subtracted from purchases to calculate cash payments to suppliers.

increase

Which of the following describes the acceptable methods that may be used to report cash flows from operating activities on the statement of cash flows?

indirect and direct method.

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

inflows and outflows

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

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

investing

property, plant, and equipment purchased for cash

investing

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

investing activities

cash inflows from financing

issuance of bonds or notes payable issuance of stock

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

longterm liability and stockholders' equity accounts.

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

losses on the sale of long term assets, and gains on the sale of long term assets.

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

more

cash return on assets

net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets.

cash flow to sales

net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales.

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 return on assets is calculated by dividing ____ by _______.

net income by average total assets.

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

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

nonoperating

Adjustments to net income in calculating operating cash flows include:

nonoperating items, changes in current assets and current liabilities, and non cash items.

When using the direct method to prepare the Statement of Cash Flows, depreciation expense is

not reported on the statement of cash flows.

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

operating

dividends received from an investment

operating

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

payment on account and payment of salaries.

the ratio that is calculated by dividing net income by average total assets is referred to as

return on assets

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

sale of a machine for cash.

cash inflows from operating

sale of goods or services collection of interest and dividends.

cash inflows from investing

sale of investments sale of long term assets collection of notes receivable

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 the cash balance.

four basic steps in preparing the statement of cash flows

1. calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and changes in current liabilities from the balance sheet. 2. determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the balance sheet. 3. determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders' equity accounts from the balance sheet. 4. combine the operating, investing, and financing activities, and make sure the total from these activities equals the amount of cash reported in the balance sheet this year versus last year ( the change in cash).

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, and accounts payable

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

property, plant, and equipment purchased by issuing stock

non cash

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

noncash

statement of cash flows

provides a summary of cash inflows and cash outflows during the reporting period. A financial statement that measures activities involving cash receipts and cash payments over an interval of time.

cash outflows from operating

purchase of inventory payment for operating expenses payment of interest payment of income taxes

cash outflows from investing

purchase of investments purchase of long term assets lending with notes receivable

Which statement regarding the amount of cash from operating activities is correct?

It is identical under the direct and the indirect method

When using the direct method, why is cash received from customers greater than sales revenue on the income statement when accounts receivable decreases?

There were more collections of accounts receivable than sales on account during the year.

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.

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

financing

cash outflows from financing

repayment of bonds or notes payable acquisition of treasury stock payment of dividends

net cash flows

the difference between cash inflows and cash outflows.

True or false: Cost of goods sold must be adjusted to a cash number because the cost of merchandise sold may be more or less than the amount of cash paid to suppliers during the period.

true

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

net income

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?

interest received on notes receivable and collection on account.

financing activities

include transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock, paying dividends, and purchasing treasury stock.

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

payment on account payable, purchase of supplies, and interest paid on bonds.

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

operating activities

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

When the ______ account decreases, it means the company paid less cash for insurance than it recorded as insurance expense.

prepaid insurance