Chapter 21 Intermediate Accounting

Which of the following statements best describes the importance of cash flow information?





Investors and creditors rely heavily on cash flow information.

Investors and creditors consider the risk associated with cash flow forecasts.
Which of the following transactions/events commonly give rise to cash outflows of business entities? (Select all that apply.)
Inventory is purchased.

Treasury stock is purchased.
Which of the following are valid categories in the statement of cash flows? (Select all that apply.)

cash flows from operating activities

cash flows from investing activities

cash flows from financing activities
Which of the following are required characteristics of cash equivalents? (Select all that apply.)

low risk

high liquidity

short-term
In addition to the primary activities, what other required information must be presented in a statement of cash flows?
a reconciliation of the net increase or decrease in cash with the change in the cash balance

noncash investing and financing activities
Which of the following decision makers tend to be especially interested in cash flow information? (Select all that apply.)

creditors

investors
Which of the following transactions/events commonly give rise to cash outflows of business entities? (Select all that apply.)

Fire insurance is purchased.

Employees are paid.
Which of the following concepts governs recognition of revenue and expense?
Accrual accounting
Which of the following are not valid categories in the statement of cash flows? (Select all that apply.)

cash flows from continuing operations

cash flows from discontinued operations
Cash flows from operating activities are both inflows and outflows of cash that result from activities reported in the
income statement.
Short-term, highly liquid investments that can be readily converted to cash, with little risk of loss, are referred to as__________________________
cash equivalents
Which of the following are included in the statement of cash flows? (Select all that apply.)
cash flows from investing activities

cash flows from operating activities

cash flows from financing activities

noncash investing and financing activities
The _____________ method of reporting cash flows from operating activities reports the cash effect of each operating activity.

direct
Which of the following is critically important with respect to the ultimate potential of a firm to provide cash flows to investors and creditors?



The firm's ability to generate cash flows for itself.
The __________ method of reporting cash flows from operating activities begins with net income and works backward to derive cash from operating activities.

indirect
Net income (or loss) is the result of netting together the
_________ recognized and the _________ incurred during the current reporting period. (Enter only one word per blank.)
revenue

expenses
Which of the following represent objectives of preparing a statement of cash flows? (Select all that apply.)

adhering to a proper statement format

identifying all operating, investing, and financing events and transactions

classifying the transactions and events correctly
Which of the following are required characteristics of cash equivalents? (Select all that apply.)

low risk

high liquidity

short-term
An important advantage of using a spreadsheet to analyze transactions that may need to be reported in the statement of cash flows is to



make sure that no reportable activity is overlooked.
The method that reports the cash effect of each operating activity explicitly on the statement of cash flows is referred to as the _____ method.

direct
The method of presenting the statement of cash flows that begins with a presentation of net income or net loss is referred to as the ____ method.

indirect
Margaret is analyzing the current year income statement and the comparative balance sheet in order to prepare the statement of cash flows. She should expect the operating cash flows to be ______ the amounts reported in the income statement.

different from
Which of the following concepts governs recognition of revenue and expense?


accrual
Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Cash collected from customers is

$214,000
The objective in preparing the statement of cash flows is to identify all transactions and events that represent
_______, ________, _________ activities and to classify and list them in the proper format.

operating, investing, financing
Wichtel Corp. reports sales revenue of $400,000. During the year, the company's accounts receivable balance decreased by $10,000 and its deferred revenue decreased by $6,000. Cash collected from customers is

$404,000.

Reason: $400,000 + $10,000 – $6,000
An important tool that can be used to ensure that no reportable activities are inadvertently overlooked is a:

spreadsheet
Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Additional information reveals that during the year accounts totaling $7,000 were written off and bad debt expense of $10,000 was recognized. A journal entry prepared to determine cash collected from customers would include debits to (Select all that apply.)

bad debt expense for $10,000.

cash for $207,000.
Jasper's income statement reports revenue from investments that lack significant influence of $10,000, and its balance sheet reports that dividends receivable decreased by $1,500. How much will Jasper report as cash received from investments?

$11,500
Which of the following statements regarding income statement and related cash amounts is correct?
Income statement amounts and cash amounts typically are not the same.
Marten Company's records indicate that, during the current year, land costing $50,000 was sold. A gain of $45,000 was recognized on the sale. Cash inflows associated with this sale were

$95,000
Sales revenue for the year was $100,000; accounts receivable had a beginning balance of $10,000 and an ending balance of $18,000. Cash collected from customers was

$92,000
In a statement of cash flows—direct method, depreciation expense should

not be reported.
Milky Company reports sales revenue of $200, an increase in deferred revenue of $2, and an increase in accounts receivable of $1. Using a journal entry to determine cash collected from customers, accounts receivable should be ____ and deferred revenue ___.

debited; credited
Kester Corp.'s land account increased by $140,000. No specific information regarding this increase is available. In its statement of cash flows, Kester should report

cash outflows from investing activities of $140,000.
Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Additional information reveals that during the year accounts totaling $7,000 were written off and bad debt expense of $10,000 recognized. A journal entry prepared to determine cash collected from customers would include credits to (Select all that apply.)

accounts receivable for $14,000.

allowance for doubtful accounts for $3,000.

sales revenue for $200,000.
Aggie Company reports investment revenue of $14,000 in its income statement relating to a 5% investment in another company's common stock. During the current year, dividends receivable increased by $1,000. Thus, cash collected from investments will be

$13,000.
Which of the following methods of preparing the statement of cash flows is (are) acceptable under U.S. GAAP? (Select all that apply.)
The direct method

The indirect method
Depreciation represents a noncash expense because it is merely an ____ of a ____ cash expenditure.


allocation; previous
Michal Corp.'s land account decreased by $250,000. No specific information regarding this decrease is available. In its statement of cash flows, Michael should report

cash inflows from investing activities of $250,000.
Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Additional information reveals that during the year accounts totaling $7,000 were written off and bad debt expense of $10,000 was recognized. A journal entry prepared to determine cash collected from customers would include debits to (Select all that apply.)
bad debt expense for $10,000.

cash for $207,000.bad debt expense for $10,000.

cash for $207,000.
When preparing the statement of cash flows using the indirect method, depreciation expense and losses are



added to net income.
Carmen Company shows salaries expense of $25,000 in its income statement. During the current year, the balance of its salaries payable account decreased by $3,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $3,000 should be
subtracted from net income.
Which of the following is correct regarding depreciation expense?

It is a noncash expense that does not require the use of cash.
Under the indirect method of deriving net cash flows from operating activities, decreases in assets relating to operating activities must be

added to net income.
Under which method(s) will a reconciliation of net income to cash from operating activities be presented? (Select all that apply.)

Both the direct and the indirect method
If a journal entry is used to derive the amount of cash collected from customers,

sales revenue, bad debt accruals, and changes in A/R and the allowance account need to be recognized.
Under the indirect method of preparing the statement of cash flows, depreciation expense and losses are added back to net income because they (Select all that apply.)

do not require an outflow of cash.

were subtracted in deriving net income.
Kunzen Company shows salaries expense of $15,000 in its income statement. During the current year, the balance of its salaries payable account increased by $2,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $2,000 should be
added to net income
Under the indirect method of deriving net cash flows from operating activities, increases in liabilities relating to operating activities must be

added to net income.
Under which method of preparing a statement of cash flows will a reconciliation between net income and cash from operating activities be shown on a separate schedule?

The direct method only
Carmen Company shows salaries expense of $25,000 in its income statement. During the current year, the balance of its salaries payable account decreased by $3,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $3,000 should be
subtracted from net income.