Q&A Hero

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: Using the indirect method, which of the following would be added to net income? A) A decrease in Supplies B) An increase in Prepaid Insurance C) A decrease in Salaries and Wages Payable D) An increase in Equipment

Q: Brighton, Inc. uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the companys Accounts Receivable increased by $10,000 and its Accounts Payable decreased by $5,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n): A) subtraction of $5,000. B) addition of $5,000. C) addition of $15,000. D) subtraction of $15,000.

Q: Assume a company uses the indirect method to prepare its statement of cash flows. If the Supplies account increases and Salaries and Wages Payable decreases 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 Salaries and Wages Payable is added to net income; the change in Supplies is subtracted from net income. C) Both are subtracted from net income. D) The change in Supplies is added to net income; the change in Salaries and Wages Payable is subtracted from net income.

Q: When the indirect method is used, if a prepaid expense account decreases during the accounting period, the change in the prepaid expense account is: A) added to the change in the cash account. B) subtracted from net income. C) added to net income. D) subtracted from the change in the cash account.

Q: When the indirect method is used, if accounts receivable increases during the accounting period, the change in accounts receivable is: A) added to the change in the cash account. B) subtracted from net income. C) added to net income. D) subtracted from the change in the cash account.

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: Depreciation Expense is $20,000 and the beginning and ending Accumulated Depreciation balances are $150,000 and $155,000, respectively. What is the cash paid for depreciation? A) $20,000 B) $5,000 C) $0 D) $25,000

Q: Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it: A) reduces net income but not cash. B) is a cash inflow. C) is a revenue. D) is a valuation concept.

Q: Which of the following statements is correct? A) The Accumulated Depreciation account includes cash flows that may be categorized as both operating and investing. B) Inventory includes cash flows that may be categorized as both operating and investing. C) Retained Earnings includes cash flows that may be categorized as both operating and investing. D) Bonds Payable includes cash flows that may be categorized as both operating and financing.

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: If the calculation of cash flows from operating activities starts with net income, the company: A) is using the net income method. B) will remove the effects of all noncash items included in the calculation of net income. C) is using the direct method. D) will add all noncash items not included in the calculation of net income.

Q: Which of the following equations is correct? A) Change in cash = Change in noncash assets B) Change in cash = Change in liabilities + Change in stockholders equity C) Change in cash = Change in liabilities + Change in stockholders equity Change in noncash assets D) Change cash = Change in liabilities + Change in stockholders equity + Change in noncash assets

Q: Which of the following is not needed to prepare a statement of cash flows? A) Statement of Retained Earnings B) Comparative balance sheets C) Additional data concerning selected accounts that increase and decrease as a result of investing and/or financing activities D) A complete income statement

Q: Which of the following statements about classification choices is correct? A) GAAP classifies cash dividends paid as a financing activity, but IFRS allows them to be classified as either an operating or financing activity. B) GAAP allows interest paid to be classified as either an operating or financing activity, but IFRS requires that it be classified as a financing activity. C) GAAP classifies cash dividends received as an investing activity, but IFRS allows them to be classified as either an operating or investing activity. D) GAAP classifies interest received as either an operating or investing activity, but IFRS requires it to be classified as an investing activity.

Q: Which of the following statements about cash flows from financing activities is correct? A) When a company borrows from lenders, a cash outflow from financing activities has occurred. B) When a company receives cash dividends, a cash inflow from financing activities has occurred. C) When a company repurchases its own stock, a cash outflow for financing activities has occurred. D) When a company pays cash dividends, a cash inflow from financing activities has occurred.

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: The repayment of the principal of a loan which had been used to finance the purchase of equipment should be reported on the statement of cash flows as a: A) cash outflow from investing activities. B) cash outflow from operating activities. C) cash outflow from financing activities. D) noncash investing and financing activities in a supplemental disclosure.

Q: Which of the following would be classified as a financing activity on the statement of cash flows? A) Cash receipts from accounts receivable collections B) Cash receipts from sale of equipment C) Cash paid to purchase treasury stock D) Cash paid for interest on notes payable

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 included in cash flows from financing activities? A) Cash proceeds from sales B) Cash received from a sale of land C) Cash dividends paid D) Cash used to purchases of equipment

Q: A company's cash flows from investing activities include cash transactions relating to the purchase and disposal of which types of assets? A) All of a company's assets B) All of a company's assets except inventory C) All of a company's non-current assets D) Property, plant and equipment

Q: Which of the following would be classified as an investing activity on the statement of cash flows? A) Cash received from sale of land B) Cash paid for interest C) Cash received from stock issuance D) Cash dividends paid

Q: Cash flows from investing activities include all of the following except a(n): A) purchase of an automobile. B) sale of a trademark. C) purchase of stock of another company. D) issuance of bonds.

Q: Which of the following would be reported as a cash outflow from investing activities? A) Donating an old piece of equipment to charity B) Repaying the principal of a bond C) Buying another company's bonds with cash D) Acquiring an investment security by issuing company stock

Q: Cash flows from investing activities include cash: A) inflows and outflows reflecting revenues and expenses reported on the income statement. B) inflows from the issuance of bonds. C) inflows from the sale of long-term investments. D) inflows from the sale of a company's own stock to its stockholders.

Q: Which of the following would be included in cash flows from investing activities? A) Cash collected from customers B) Cash received from an issuance of bonds C) Cash dividends paid D) Cash used to purchase equipment

Q: Which of the following statements about cash flows from investing activities is correct? A) The proceeds from sales of investments are reported as cash inflows from investing activities. B) Cash flows from investing activities are calculated by making adjustments to net income. C) Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities. D) Cash received from issuing a long-term payable is reported as a cash inflow from investing activities.

Q: Which of the following journal entries has an effect on cash provided by (used in) operating activities? A) Bad debts expense B) Depreciation expense C) Sale of an investment D) Payment of interest on long-term notes payable

Q: A company loaned $1,000,000 with interest at 7% to another company. The interest revenue from this loan would be reported on the statement of cash flows as a: A) cash inflow from operating activities. B) cash inflow from investing activities. C) cash inflow from financing activities. D) noncash investing and/or financing activity.

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 flows from operating activities include all of the following except: A) a purchase of land. B) collections from customers on account. C) payments to employees for hours worked. D) receipt of cash dividends.

Q: Which of the following would be included in cash flows from operating activities? A) Cash received from customers B) Cash received from an issuance of bonds C) Cash dividends paid to stockholders D) Cash used for purchases of equipment

Q: Which of the following statements about the statement of cash flows is not correct? A) The statement of cash flows can be used to assess the likelihood of a company paying dividends. B) Net cash flow is the best measure of profitability since it does not rely on estimates. C) A company can have positive net income but at the same time have negative cash flow. D) The statement of cash flows is the only financial statement that reports business activities.

Q: Which of the following statements is correct? A) Accrual-based net income can be manipulated because it is based on estimates. B) Cash flows are easily manipulated because they are based on estimates. C) Accrual-based net income is not easily manipulated because valuation for such items as bad debts and inventory are precise and based on objectively verifiable information. D) Cash flows are not easily manipulated because they are generated by internal transactions and do not involve external parties.

Q: A company purchased money market funds with cash during the current year. Which of the following statement is correct? A) This transaction will result in a decrease in cash from operating activities. B) This transaction will result in a decrease in cash from investing activities. C) This transaction will result in a decrease in cash from financing activities. D) This transaction will not cause a change in cash from operating, investing, or financing activities.

Q: Which of the following would not be included in the cash and cash equivalents amount reported on the balance sheet? A) Money market funds B) Checking accounts C) Treasury bills D) Notes receivable due in 90 days

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: Which of the following statements about the statement of cash flows is not correct? A) It does not replace the income statement. B) It provides details as to how cash changed during a period. C) It provides information about cash receipts and cash payments over a period of time. D) It measures profitability.

Q: The statement of cash flows cannot be used to determine: A) changes in working capital. B) expenditures on long-term assets. C) profitability as measured by specific revenues and expenses. D) reliance on external financing.

Q: Using the T-account approach to preparing the statement of cash flows, an increase in Accounts Payable would appear on the debit side of the Cash account.

Q: Investing activities include receiving cash from the sale of land and also the resulting gain or loss on the sale.

Q: When preparing the operating activities section of the statement of cash flows using the direct method, a gain or loss from selling equipment is reported in the operating activities section of the statement of cash flows.

Q: When preparing the operating activities section of the statement of cash flows using the direct method, net income must be adjusted for gains or losses realized when property, plant, and equipment is sold.

Q: Depreciation Expense is not reported on the statement of cash flows when prepared using the direct method.

Q: In the decline phase, the company continues to enjoy positive operating cash flows but stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders.

Q: A healthy company typically shows positive cash flows in the financing activities section of the statement of cash flows.

Q: In general, the cash flow from operating activities is considered by many to be the most important component of the statement of cash flows.

Q: Major investing and financing activities that do not involve cash do not have to be reported as part of the statement of cash flows.

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: When preparing the operating activities section of the statement of cash flows using the indirect method, an increase in Income Taxes Payable is added to net income.

Q: When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income.

Q: When preparing the operating activities section of the statement of cash flows using the indirect method, accumulated depreciation is added to net income in the operating section.

Q: Under the indirect method, changes in current assets are used in determining cash flows from operating activities and changes in current liabilities are used in determining cash flows from financing activities.

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: Treasury stock purchases made with cash are classified as cash outflows from financing activities on the statement of cash flows. Answer: True Feedback: Repurchases of stock made with cash are classified as cash outflows from financing activities. 7. The approach to preparing the cash flow statement relies on the following rearrangement of the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders Equity + Noncash Assets). Answer: False Feedback: Assets = Liabilities + Stockholders Equity Cash + Noncash Assets = Liabilities + Stockholders Equity Cash = Liabilities + Stockholders Equity Noncash Assets Change in cash = Change in (Liabilities + Stockholders Equity Noncash Assets)

Q: The payment of interest on bonds is classified as a cash outflow from operating activities on the statement of cash flows.

Q: The receipts of dividends and interest are both reported as cash inflows from investing activities on the statement of cash flows.

Q: Maya Companys purchase of 100 shares of Labrador Inc. common stock would be reported as a financing activity on its statement of cash flows.

Q: The payment of salaries and wages would be reported as an operating activity on the statement of cash flows.

Q: The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

Q: Which of the following would be the best investment? A) A company that pays no dividends, but has substantial net income. B) A company that pays substantial dividends, but whose earnings per share has been declining over the past several years. C) A company whose stock price has increased steadily, but pays no dividends. D) It depends on ones investment objectives.

Q: Melrose Inc. buys back 300,000 shares of its stock from investors at $6.50 a share. Two years later, it reissues this stock for $6.00 a share. The stock reissue would be recorded with a debit to Cash for: A) $1.8 million, a debit to Additional Paid-in Capital for $150,000, and a credit to Treasury Stock for $1.95 million. B) $1.95 million, a credit to Treasury Stock for $1.8 million, and a credit to Additional Paid-in Capital for $150,000. C) $1.95 million and a credit to Treasury Stock for $1.95 million. D) $1.8 million and a credit to Treasury Stock for $1.8 million.

Q: Use the information above to answer the following question. What journal entry will record the reissuance on July 3? A) Debit Cash and credit Treasury Stock for $20,000 B) Debit Cash for $20,000, credit Treasury Stock for $16,000, and credit Additional Paid-in Capital for $4,000 C) Debit Cash for $20,000, credit Common Stock for $6,000, and credit Additional Paid-in Capital for $14,000 D) Debit Cash for $20,000, credit Common Stock for $16,000, and credit Gain on Reissuance of Stock for $4,000

Q: Use the information above to answer the following question. What journal entry will record the purchase of the stock on January 20? A) Debit Treasury Stock for $8,000, debit Additional Paid-in Capital for $24,000, and credit Cash for $32,000 B) Debit Treasury Stock and credit Cash for $32,000 C) Debit Treasury Stock for $8,000, debit Common Stock for $24,000, and credit Cash for $32,000 D) Debit Common Stock and credit Cash for $32,000

Q: GE buys back 300,000 shares of its stock from investors at $45 a share. Two years later it reissues this stock for $65 a share. The stock reissue would be recorded with a debit to Cash for: A) $19.5 million and a credit to Treasury Stock for $19.5 million. B) $13.5 million, a debit to Additional Paid-in Capital for $6 million, a credit to Treasury Stock for $13.5 million, and a credit to Stockholders' Equity for $6 million. C) $19.5 million, a credit to Treasury Stock for $13.5 million, and a credit to Additional Paid-in Capital for $6 million. D) $19.5 million, a credit to Treasury Stock for $13.5 million, and a credit to Gain on Sale of Treasury Stock for $6 million.

Q: An Additional Paid-in Capital account could be used with all of the following transactions except: A) The issuance of par value stock at a price greater than the par value. B) The reissuance of treasury stock at a price less than the price paid when the stock was reacquired. C) The reissuance of treasury stock at a price greater than the price paid when the stock was reacquired. D) The issuance of no-par stock.

Q: Which of the following is correct about reissuing treasury stock? A) If treasury stock is sold at a higher price than the stocks cost when the company reacquired it, a gain will be recognized. B) If treasury stock is sold at a higher price than the stocks par value, a gain will be recognized. C) If the treasury stock is sold at a lower price than the amount of the original issuance, a loss will be recognized. D) A gain or loss on the reissuance of treasury stock is never recognized.

Q: Which of the following statements about treasury stock is correct? A) When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain. B) When a company purchases treasury stock, it increases total stockholders' equity. C) Treasury stock is reported as an asset on the balance sheet. D) Treasury stock is reported as issued and outstanding stock.

Q: Anthem Inc. issues 200,000 shares of stock with a par value of $0.01 for $150 per share. Three years later, it repurchases these shares for $80 per share. Anthem records the repurchase in which of the following ways? A) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $29,998,000 and credit Cash for $30 million. B) Debit Treasury Stock for $16 million and credit Cash for $16 million. C) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $15,998,000 and credit Cash for $16 million. D) Debit Stockholders' Equity for $30 million, credit Additional Paid-in Capital for $16 million and credit Cash for $16 million.

Q: Ambiance Inc. buys back 3,000 shares of its $10 par value common stock from investors at $45 per share. This stock repurchase would be recorded with a debit to: A) Cash and a credit to Treasury Stock for $135,000. B) Treasury Stock and a credit to Cash for $30,000. C) Treasury Stock and a credit to Cash for $135,000. D) Treasury Stock for $30,000, a debit to Additional Paid-in Capital for $105,000, and a credit to Cash for $135,000.

Q: Which of the following statements about the par value of common stock is not correct? A) The par value is not the same as the market value of the stock. B) The par value is a nominal amount identified in the corporate charter. C) The par value is the amount credited to the common stock account when the stock is issued. D) The par value is the amount credited to common stock when treasury stock is reissued.

Q: Treasury stock: A) does not appear on the balance sheet. B) is a contra-equity account. C) is an asset account. D) is recorded as additional paid-in capital.

Q: Which of the following statements would not explain why a company may want to repurchase its stock? A) To demonstrate to investors that it believes its own stock is worth purchasing. B) To obtain shares to reissue to employees as part of an employee stock plan. C) To obtain shares that can be reissued as payment for purchase of another company. D) To increase the number of shares of outstanding stock.

Q: Which of the following statements about stock options is not correct? A) Stock options are intended to give upper management the same goals as stockholders. B) When stock options are exercised by upper management, existing stockholders lose voting power. C) Stock options may create an incentive for upper management to overstate net income. D) An expense is reported by the company when stock options are exercised.

Q: Ms. Jessica Duffy purchased 1 share of $10 par value common stock from Ohio Corporation for $50 per share. Ms. Duffy sold that share to Mike Truesdale for $60 per share. As a result of the sale by Duffy to Truesdale sale, Ohio Corporation would: A) debit Cash and credit Additional Paid-in Capital for $10. B) debit Cash and credit Common Stock for $10. C) debit Common Stock and credit Additional Paid-in Capital for $10. D) not debit or credit any of its accounts.

Q: A company sells 1 million shares of common stock with no par value for $15 a share. In recording the transaction, it would debit: A) Cash and credit Additional Paid-in Capital for $15 million. B) Cash and credit Common Stock for $15 million. C) Common Stock and credit Cash for $15 million. D) Common Stock and credit Additional Paid-in Capital for $15 million.

Q: A company issues 1 million shares of common stock with a par value of $0.02 for $15 a share. The entry to record this transaction includes a debit to Cash for: A) $20,000 and a credit to Common Stock for $20,000. B) $15,000,000 and a credit to Common Stock for $15,000,000. C) $15,000,000, a credit to Common Stock for $20,000, and a credit to Additional Paid-in Capital for $14,980,000. D) $20,000, a debit to Capital Receivable for $14,980,000, a credit to Common Stock for $20,000, and a credit to Additional Paid-in Capital for $14,980,000.

Q: The following data are taken from the stockholders equity section of the balance sheet of a company: Common Stock, $10 Par Value, 30,000 Shares Authorized, 12,000 Shares Issued, 10,000 Shares Outstanding $120,000 Additional Paid-in Capital 60,000 Retained Earnings 50,000 Treasury Stock, 2,000 Shares 26,000 What was the average issue price per share of the common stock? A) $13.00 B) $10.00 C) $15.00 D) $18.00