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Question
Assume that a company chooses the indirect method to determine net cash flows from operating activities.
Required:
Part a. Explain why net income is the starting point when the indirect method is used to determine cash flows from operating activities.
Part b. Briefly explain why a companys net income is most likely different in amount than its cash flows from operating activities.
Answer
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Related questions
Q:
Use the information above to answer the following question. The company would report net cash provided by (used in) financing activities of:
A) $(2,500).
B) $2,000.
C) $5,000.
D) $6,000.
Q:
A corporation prepared its statement of cash flows for the year. The following information is taken from that statement: Net cash provided by operating activities
$14,500 Net cash provided by investing activities
4,200 Cash balance, beginning of year
5,800 Cash balance, end of year
9,100 What is the amount of net cash provided by (used in) financing activities?
A) $15,400
B) ($3,300)
C) ($15,400)
D) $3,300
Q:
Cash flows from financing activities:
A) includes all cash inflows and outflows associated with a company's lending activities.
B) includes all cash inflows and outflows between a company and its stockholders.
C) are always negative because of the payments of cash dividends as well as interest and principal on debt.
D) are always positive unless the company is experiencing serious financial trouble.
Q:
Which of the following represent cash outflows from financing activities?
A) Distributing a stock dividend
B) Paying a bond's face value at maturity
C) Issuing long-term bonds at a discount
D) Paying interest on promissory notes
Q:
Two years ago, your company bought $40,000 in bonds from another company. This month, it sold half of those bonds for $20,640 and purchased the common stock of another company for $1,000. On the statement of cash flows for this accounting period, your company would report a net cash:
A) outflow of $19,640 from investing activities.
B) inflow of $19,640 from investing activities.
C) inflow of $20,640 from investing activities.
D) outflow of $20,640 from investing activities.
Q:
Chino Company reported net income of $20,000 for the current year. During the year, Inventory decreased by $7,000, Accounts Payable decreased by $8,000, Depreciation Expense was $10,000, and Accounts Receivable increased by $6,500. If the indirect method is used, what is the net cash provided by operating activities?
A) $10,500
B) $22,500
C) $38,500
D) $51,500
Q:
Assume a company uses the indirect method to prepare its statement of cash flows. If Inventory decreases and Unearned Revenue increases during an accounting period, what does the company do with the changes in these accounts to calculate cash flows from operating activities?
A) Both are added to net income.
B) The change in inventory is added to net income; the change in unearned revenue is subtracted.
C) Both are subtracted from net income.
D) The change in unearned revenue is added to net income; the change in inventory is subtracted.
Q:
Which of the following statements about calculation of cash flows from operating activities under the indirect method is correct?
A) When the indirect method is used, changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flow from operating activities.
B) When the indirect method is used, depreciation expense is added to net income as a step in the process of calculating net cash flow provided by operating activities.
C) When the indirect method is used, changes in long-term assets are added to convert net income to net cash flow provided by operating activities.
D) When the indirect method is used, changes in long-term liabilities are subtracted to convert net income to net cash flow provided by operating activities.
Q:
What is the starting point for calculating cash flows from operations when the indirect method is used?
A) Find net income on the income statement.
B) Calculate the net change in the cash account.
C) Add the change in accounts receivable to sales revenue.
D) Identify the balance sheet accounts that relate to operating activities.
Q:
Which of the following statements about financing activities is not correct?
A) Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B) When a company issues stock for cash, it reports a cash inflow from financing activities.
C) When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D) When a company repays a loan, it reports a cash inflow from financing activities.
Q:
Cash flows from financing activities include all of the following except:
A) payment of long-term debt.
B) payment of interest.
C) proceeds from stock issuance.
D) cash dividends paid.
Q:
Which of the following would be classified as an operating activity on the statement of cash flows using the direct method?
A) Cash dividends paid
B) Cash received from selling equipment
C) Cash paid to retire bonds payable at maturity
D) Cash received from accounts receivable collections
Q:
Cash and cash equivalents include assets that:
A) have stable long-term value.
B) are short-term, highly liquid, and purchased by the entity within three months of maturity.
C) consistently grow in value over the long run.
D) are expected to be used up within a year.
Q:
Suppose a company generally records revenues and expenses before receiving or making cash payments. Which of the following statements is not correct?
A) If revenues are falling, a net loss could result even though the company reports a net cash inflow from operating activities.
B) If revenues are rising, net income could result even though the company reports a net cash outflow from operating activities.
C) Net income and net cash flows provided by operating activities will always agree.
D) The income statement doesnt explain changes in cash because it focuses on just the operating results of the business.
Q:
When the net cash flows from operating, investing, and financing activities are combined to arrive at the overall net change in cash, a net decrease in cash is subtracted from the beginning cash balance to calculate the ending cash balance.
Q:
The reporting of financing activities is identical under the indirect and direct methods for the statement of cash flows on the statement of cash flows.
Q:
Use the information above to answer the following question. What is the depreciation expense for 2016?
A) $4,000
B) $3,000
C) $6,000
D) $8,000
Q:
A piece of equipment was acquired on January 1, 2015, at a cost of $22,000, with an estimated residual value of $2,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2016?
A) $5,500
B) $10,000
C) $11,000
D) $12,000
Q:
A building has a 10-year useful life and a residual value equal to 10% of the building's original cost. If the double-declining balance method is used, what depreciation rate would be used?
A) 9%
B) 10%
C) 18%
D) 20%
Q:
A company would most likely choose the double-declining balance depreciation method for which of the following long-lived tangible assets?
A) Vehicles
B) Office buildings
C) Warehouses
D) Land improvements
Q:
Use the information above to answer the following question. If the units-of-production method is used, the depreciation expense for this period is:
A) $80,000.
B) $400,000.
C) $76,000.
D) $380,000.
Q:
Spangle Corporation uses the unit-of-production method to estimate depreciation. The company purchased a new machine for $18,000 that will produce an estimated 100,000 units over its useful life. The estimated residual value of the machine is $2,000. What is the depreciation rate per unit?
A) $1.60
B) $1.80
C) $0.16
D) $0.18
Q:
Which of the following statements about straight-line depreciation is correct?
A) Straight-line depreciation is the most common method of depreciation used in the U.S. for financial reporting, but is not commonly used for taxes.
B) When the straight-line method is used to compute depreciation, an asset's carrying value remains constant over the life of the asset.
C) Straight-line depreciation is an approved method to allocate the cost of an asset to expense and it serves as a measure of the physical decline in the asset.
D) The straight line method of depreciation results in a straight-line increase of depreciation expense over the life of an asset.
Q:
Which of the following is not an amount that is needed to calculate straight-line depreciation?
A) The cost of the asset
B) An estimate of the assets useful economic life to the company
C) The estimated amount that the company will receive when it disposes of the asset
D) The cost the company will be required to incur to replace the asset
Q:
Which of the following statements most appropriately describes the purpose of depreciating a long-lived tangible asset?
A) To indicate how the asset has physically deteriorated
B) To show that the asset will eventually and gradually become obsolete
C) To record that the asset's market value declines over time
D) To match the cost of the asset to the period in which it generates revenue
Q:
The Gulp convenience store chain buys new soda machines for $450,000 and pays $50,000 for installation costs. One-half of the total cost or $250,000 is paid in cash; a note in the amount of $250,000 is signed. How should the company record this transaction?
A) Debit Cash for $250,000, debit Notes Payable for $250,000, and credit Equipment for $500,000
B) Debit Equipment for $500,000, credit Cash for $250,000, and credit Notes Payable for $250,000
C) Debit cash for $250,000, debit Notes Payable for $250,000, credit Equipment for $450,000, and credit Operating Expenses for $50,000
D) Debit Equipment for $450,000, debit Operating Expenses for $50,000, credit cash for $250,000, and credit Notes Payable for $250,000
Q:
Your company buys a computer system for $3 million and pays the vendor $200,000 to install the computer system. Your company should record:
A) $3 million as equipment and $200,000 as expenses.
B) $3.2 million as expenses.
C) $2.8 million as equipment and the rest as expenses.
D) $3.2 million as equipment.
Q:
Under the cost principle, a company capitalizes:
A) all ordinary repair expenditures incurred in the use of an asset.
B) any interest incurred in borrowing money to help pay for asset acquisitions.
C) all reasonable and necessary costs of acquiring an asset and preparing it for use.
D) the total market value of individual assets acquired in a basket purchase.
Q:
The following information was summarized from the adjusted trial balance of Reliance Yacht Repair, Inc. as of September 30, 2015, the end of the companys fiscal year. Accounts Payable
$1,500 Accounts Receivable
6,000 Accumulated DepreciationEquipment
2,000 Cash
9,420 Common Stock
9,300 Equipment
4,000 Insurance Expense
500 Interest Expense
80 Notes Payable (long-term)
2,500 Notes Receivable (short-term)
5,500 Prepaid Rent
500 Retained Earnings
3,200 Service Revenue
11,000 Supplies
1,500 Supplies Expense
2,500 Unearned Revenue
2,000 Utilities Expense
1,500 Required:
Part a. Prepare the closing entry for the company for the year ended September 30, 2015.
Part b. Draw a T-account for the Retained Earnings account. Enter the beginning balance into the T-account, post the closing entry, and then determine the ending balance.
Part c. Prepare a post-closing trial balance at September 30, 2015.
Q:
On December 31, 2016, Ditka Inc. had Retained Earnings of $267,800 before its closing entries were prepared and posted. During 2016, the company had service revenue of $168,100 and interest revenue of $81,300. The company used supplies in the amount of $87,900, advertising expenses were $16,400, salaries and wages totaled $18,300, and income tax expense was calculated as $13,700. During the year, the company declared and paid dividends of $6,000.
Required:
Part a. Prepare the closing entries dated December 31, 2016.
Part b. Draw a T-account for the Retained Earnings account. Enter the beginning balance into the T-account, post the closing entries, and then determine the ending balance.