Dividends paid to shareholders are shown on the statement of cash flows as
Answer (D) is correct. The payment of dividends is a cash outflow from a financing activity. The receipt of dividends, however, is generally considered a cash inflow from an operating activity.
All of the following are classifications on the statement of cash flows except
Answer (B) is correct. The three classifications used on the statement of cash flows are operating activities, investing activities, and financing activities.
The sale of available-for-sale securities should be accounted for on the statement of cash flows as a(n)
Answer (B) is correct. Investing activities include acquiring and disposing of debt or equity instruments.
Hauschka Company reported net income for the year of $1,050,000. During the year, accounts receivable decreased $300,000, prepaid expenses increased $150,000, accounts payable for merchandise decreased $150,000, and liabilities for other expenses increased $100,000. Administrative expenses include depreciation expense of $50,000, and the company reported a loss on the sale of obsolete equipment of $10,000. Calculate Hauschka’s net cash flows from operating activities during the year.
Answer (C) is correct. Net operating cash flow may be determined by adjusting net income. The depreciation expense, decrease in accounts receivable, increase in liabilities, and loss on the sale of obsolete equipment must be added back. The increase in prepaid expense and decrease in accounts payable must be subtracted from net income. Thus, net cash flow from operations is $1,210,000 ($1,050,000 net income + $50,000 depreciation + $300,000 accounts receivable + $100,000 liabilities + $10,000 loss – $150,000 prepaid expenses – $150,000 accounts payable).
Garnett Company’s year-end income statement shows the following: Revenues.............. $5,000,000 Selling and general expenses (including depreciation expense of $200,000)............................ 3,800,000 Interest expense ....................................50,000 Gain on sale of equipment....................... 40,000 Income tax expense (including deferred tax expense of $30,000)........................................... 320,000
Net income.......................................... $ 870,000
During the year, Garnett’s noncash current assets rose by $100,000, and current liabilities increased by $150,000. On its statement of cash flows, Garnett would report cash provided by operating activities of
Answer (B) is correct. Net operating cash flow may be determined by adjusting net income. Net income of $870,000 is decreased by the increase in current assets of $100,000, increased by the increase in current liabilities of $150,000, increased by depreciation expense of $200,000, decreased by the gain on sale of equipment of $40,000, and increased by the deferred tax liability. Thus, cash provided by operating activities would be $1,110,000.
Which one of the following would result in a decrease in cash flow measured under the indirect method of preparing a statement of cash flows?
Answer (B) is correct. The indirect method reconciles accrual-basis net income to net operating cash flow. A decrease in income taxes payable implies an operating cash outflow not reflected in net income. Thus, the reconciling adjustment is a subtraction from net income. The result is a lower measure of net operating cash flow.
A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders?
Answer (D) is correct. A statement of cash flows prepared using either the direct or the indirect method lists the categories of cash flows in the following order: operating, investing, and financing.
Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows?
Answer (A) is correct. Operating activities are all transactions and other events that are not financing or investing activities. In general, operating activities involve the production and delivery of goods and the provision of services. Their effects normally are reported in earnings. A decrease in accounts payable indicates a cash outflow to the entity’s suppliers in payment for goods or services.
The most commonly used method for calculating and reporting a company’s net cash flow from operating activities on its statement of cash flows is the
Answer (B) is correct. The FASB has expressed a preference for the direct method. However, if the direct method is used, a separate reconciliation based on the indirect method must be provided in a separate schedule. For this reason, most entities use the indirect method. The same net operating cash flow is reported under both methods.
The presentation of the major classes of operating cash receipts (such as receipts from customers) minus the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the
Answer (A) is correct. The direct method converts the accrual-basis amounts in the income statement to the cash basis. It then reports the separate categories of gross cash receipts and disbursements. Net cash flow from operating activities is the difference between total cash receipts and total cash disbursements.