SB 12 Intro to Financial Accounting

Over Armoir, Inc. purchased a patent totaling $1,000 for cash during the year 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)

Long-term Notes Payable was $20 million at the beginning of the year and $30 million at the end. During the year an additional $15 million was borrowed. Repayments on the statement of cash flow during the year were ______.

$(5) million under financing activities

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)

Place in order the developmental stages of a typical life cycle of a business starting with the first stage on top.

1. Introductory phase 2. Growth phase 3. Maturity phase 4. Decline phase

Bolt, Inc.'s income statement showed Net Income of $10,000 and Depreciation Expense of $1,000. Accounts Receivable decreased $100, Inventory increased $300, Supplies increased $200, Accounts Payable decreased $500 and Accrued Liabilities increased $600. Bolt's net cash flow provided by operations totaled $ ____

10,700

Cashew, Inc.'s income statement showed Net Income of $10,000 and Depreciation Expense of $1,000. Accounts Receivable increased $100, Inventory decreased $300, Supplies decreased $200, Accounts Payable increased $500 and Accrued Liabilities decreased $600. Cashew's net cash flow provided by operations totaled $ ____.

11300

The Hill Company's statement of cash flows contained the following: net cash provided from operating activities of $42,500; net cash used by investing activities of $29,300; and net cash provided by financing activities of $15,000. Hill Company's cash increased by $ ____ during the year.

28,200

New companies often experience rapid sales growth causing increases in sales-related asset accounts such as ______ and ______. This growth can lead to differences in net income and operating cash flows.

Accounts Receivable Inventory

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

Accrual-based net income

Which of the following accounts may relate to more than one cash flow category?

Accumulated Depreciation may affect both operating and investing activities. Retained Earnings may affect both operating and financing activities.

Which of the following variations of the accounting equation describes the preparation of the statement of cash flows? Change in Cash = ______.

Change in Liabilities + Change in Stockholders' Equity - Change in Noncash Assets

Which balance sheet sections relate to the operating activities section of the statement of cash flows.

Current assets and current liabilities

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 the expense does not involve paying cash.

Which of the following are steps in preparing the statement of cash flows?

Determine the change in each balance sheet account Create schedules that summarize operating, investing, and financing cash flows Identify the cash flow category or categories to which each balance sheet account relates

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

False

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

Which allows dividends and interest paid to be classified as operating or financing activities?

IFRS

List the steps in preparing a Statement of Cash Flows in the correct order from top to bottom.

Identify the cash flow category/categories to which each account relates Determine the change in each balance sheet account. Create schedules that summarize the operating, investing, and financing cash flows

Which phase of a business' life cycle would you expect to see a negative cash flow from operating and investing activities?

Introductory phase

Which of the following is not a possible cause of deviations in net income and cash flows from operating activities?

Issuance of bonds

What is the purpose of the Statement of Cash Flows?

It is intended to provide a cash-based view of a company.

How is the change in cash classified on the statement of cash flows?

It is the sum of the operating, investing, and financing activities sections.

Which phase of a business' life cycle would you expect to see a negative cash flow from financing activities?

Maturity phase

Darnell, Inc.'s balance sheet indicated that the cash account increased by $5,400 during the past year. The company generated a positive cash flow from operating activities of $14,000 and a negative cash flow from investing activities of $6,100. What was the cash flow effect of the company's financing activities?

Negative cash flow of $2,500

Current assets Stockholders' equity Noncurrent assets

Operating activities Financing activities Investing activities

Payment of Accounts Payable Payment of dividends to stockholders Purchase of a new delivery truck

Operating activities Financing activities Investing activities

The statement of cash flows separates cash inflows and outflows into the following classifications.

Operating, Investing and Financing

What are some reasons for adverse differences between net income and cash flows from operating activities that should cause concern?

Overstocking inventory Uncontrolled growth of accounts receivable

Over Armor, Inc.'s balance sheet indicated that the cash account increased by $5,000 during the past year. The company generated a positive cash flow from financing activities of $1,000 and a negative cash flow from investing activities of $6,000. What was the cash flow effect of the company's operating activities?

Positive cash flow of $10,000

Which of the following will result in a decrease to Net Cash from Investing Activities?

Purchase of intangible assets Purchase of equipment

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

Repayments of accounts payable

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.

Braden and Sons, Inc., paid cash to purchase equipment costing $342,000 this year. Also this year, the company sold for $70,000 cash equipment that originally cost $230,000 5 years ago. 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).

Braden and Sons, Inc. borrowed $700,000 cash from Trenton Savings and Loan last year. In addition, the company repaid a $450,000 note payable to First National Bank. How should these transactions be listed in the Statement of Cash Flows?

Transactions must be shown separately as a decrease to cash for $450,000 and an increase of $700,000 in the financing activities section.

True or false: Change in Cash = Change in Liabilities + Change in Stockholders' Equity - Change in Noncash Assets.

True

True or false: IFRS allows interest payments to be classified as either operating or financing activities on the statement of cash flows, whereas US GAAP requires interest payment to be classified as operating activities only.

True

Depreciation Expense is ______ when preparing the indirect method of the statement of cash flows.

added back to net income because the expense does not involve the payment of cash

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 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

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

added to net income because less cash was paid than expensed

When calculating net cash flow provided by operating activities, an increase in Accounts Payable is ______ net income because payments to suppliers are ______ than new purchases.

added to; less

When using the indirect method, ______ an increase in Deferred Revenue to net income allows the inclusion of transactions that increase cash, but do not impact net income.

adding

Which of the following statements best describes why changes in current liabilities are classified as operating activities? Changes in current liabilities ______.

are directly related to cash inflows and outflows arising from revenues and expenses involved in daily operations of the business

ABC Company issued 30,000 shares of common stock in January. In August, the company repurchased 5,000 shares for the treasury. When reporting these transactions in the statement of cash flows, ABC Company ______ combine them into one transaction in the ______ activities section.

cannot; financing

Short-term, highly liquid investments that are purchased within three months of maturity can be considered ____ equivalents

cash

Credits to the Notes Payable T-account are reported as ______.

cash inflows under financing activities

Debits to the Notes Payable T-account are reported as ______.

cash outflows under financing activities

The complete list of items needed to prepare a statement of cash flows includes ______.

comparative balance sheets, complete income statement, and additional data concerning accounts in investing and financing activities

Cash inflows from financing activities on the statement of cash flows reports the ______.

credits recorded in the Common Stock account

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

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

decrease investing

When calculating net cash flow provided by operating activities using the indirect method, a decrease in Accrued Liabilities, such as Wages and Salaries Payable, is subtracted from net income to include the effects of transactions that ______ cash, but ______ net income.

decrease; do not affect

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

decreased net income, but did not impact cash

When using the indirect method, adding an increase in an account such as Wages and Salaries Payable to net income eliminates the effect of recording Wages and Salary Expense that _____ this period.

decreased net income, but has not been paid in cash

When operating cash flows are calculated using the indirect method, if Accounts Receivable balance increased, then the change is ______.

deducted from net income because less cash was collected than revenues earned during the period

Issuing stock to owners is classified as a(n) ____ activity.

financing

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

financing

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

financing

Any additional cash that can be used in the future to expand the business, repay existing financing and/or build up the cash balance is referred to as ____ cash flow.

free

Fraudulent financial reporting often involves aggressive revenue recognition and delayed expense recognition resulting in ______ net income relative to operating cash flow.

higher

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 ______.

increased cash, but did not affect net income

The two alternative methods that may be used in preparing the operating section of the statement of cash flows are the ____ and ____ methods

indirect direct

The issuance of common stock for cash will be reported on the statement of cash flows as a cash ______ activities.

inflow under financing

Credits to the Common Stock account recorded during the period will be reported as cash ______ activities on the statement of cash flows.

inflows under financing

Which of the following are the developmental stages of a typical life cycle of a business?

introductory phase maturity phase decline phase growth phase

Cash flows associated with intangible assets are ______ activities.

investing

Changes in property, plant and equipment relate to the ______ activities on the statement of cash flows.

investing

Companies are required to report material noncash transactions from ____ and ____ activities in either a supplementary schedule to the statement of cash flows or as a disclosure in the notes to the financial statements.

investing financing

An increase in Prepaid Insurance ______ net income.

is subtracted from

Accrual-basis accounting is superior to cash-basis accounting in that ______.

it provides a better measure of profitability

A decrease in Accrued Liabilities indicates that ______ was expensed than paid. Thus the decrease will be ______ net income on the statement of cash flows prepared using the indirect method.

less; subtracted from

A decrease in Inventory indicates that ______ inventory has been sold than purchased and thus the decrease will be ______ net income on the statement of cash flows prepared using the indirect method.

more; added to

A decrease in Prepaid Expenses indicates that ______ was expensed than paid. Thus the decrease will be ______ net income on the statement of cash flows prepared using the indirect method.

more; added to

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

A healthy expanding company would most likely show a ______ cash flow from investing activities.

negative

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

Seasonality, the corporate life cycle, changes in revenue and expense recognition and changes in working capital management are 4 potential cause of differences between ______.

net income and operating cash flows

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

of the subtotals for the three sections of the statement

A change in Accounts Receivable will be reported in the ____ activities section of the statement of cash flows prepared using the indirect method.

operating

Cash paid for interest is considered a(n) ______ activity on the statement of cash flows.

operating

For any company to survive in the long run, it must generate positive cash flows from ______ activities on a regular basis.

operating

It is most important that a company's statement of cash flows reports a positive cash flows from ____ activities.

operating

The ____ activities section of the statement of cash flows indicates how well a company is able to generate cash through its normal business activities and management of working capital.

operating

U.S. GAAP classifies the payment of interest as a(n) ____ activity on the statement of cash flows.

operating

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

operating investing financing

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

operating; the same

Purchases of property, buildings, equipment are a cash ______ activities section of the statement of cash flows.

outflow in the investing

Cash paid for dividends on the statement of cash flows is reported as a cash ______ activities.

outflow under financing

Repaying principal to lenders is classified as a cash ______ activities on the statement of cash flows.

outflow under financing

Free cash flow is the amount of cash available to use to ______.

repay existing financing expand the business through additional investing activities build up the company's cash balance

Material noncash investing and financing transactions are ______.

reported in a supplementary schedule to the statement of cash flows

An increase in Inventory will be ______ net income when determining net cash flow provided by operating activities.

subtracted from

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

When using the indirect method, subtracting an increase in Accounts Receivable from net income eliminates the effect of recording credit sales ______.

that increased net income, but did not impact cash

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

that increased net income, but did not impact cash this period

The change in cash can be accounted for by ______.

the changes in liabilities, stockholders' equity and noncash assets

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

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

the same