1. b. Correct. In the direct method, cash from operations is determined from items listed in the cash column of the accounting transaction worksheet. In the indirect method, cash from operations is determined by beginning with net income and adjusting it to cash basis net income. See pages 137-139.

2. a. Correct. In the indirect method of preparing the statement of cash flows, net income is adjusted to cash basis net income which is called net cash flows from operations. See page 138.

3. d. Correct. A current liability decrease should be deducted from net income because cash was used to decrease the liability (and had no direct effect on net income). Answers a., b., and c. are incorrect responses as they are all correct statements. See page 138.

4. c. Correct. Because of the $1,000 increase in accounts receivables, less cash was collected from customers than sales made to them. Thus $9,000 was collected in cash ($10,000 - $1,000 increase in accounts receivables). See page 140.

5. a. Correct. The supplies expense was $2,000, but accounts payable increased by $400 which means that this amount of the supplies purchased were not paid. Thus, the cash payments for supplies during the accounting period were $1,600 ($2,000 - $400). See pages 140-141.

6. c. Correct. Depreciation is added back as an adjustment to net income to cancel itself out because it is not a cash flow and it was deducted in determining net income. See pages 140-141.

7. c. Correct. The amount paid for insurance would be $600, the $100 expense plus the amount of the increase in the current asset, prepaid insurance. See pages 140-141.

8. b. Correct. If the income statement shows $600 of interest expense and the related interest payable account increased $200, cash payments must have been only $400 for interest ($600 expense less $200 not yet paid). See pages 140-142.

9. a. Correct. Most companies use it because it ties together the net income from the income statement and the cash provided from operations.

10. b. Correct. If accounts receivable increased during the accounting period, some of the sales were not collected. Thus, less cash was received than sales made to customers. See pages 140-141.

11. c. Correct. The amount shown in the statement of cash flows-direct method is the amount of cash collected, $18,500. Or it can be reasoned as $20,000 sales less the amount of increase in accounts receivable ($20,000 less $1,500 = $18,500 collected). See pages 139-141.

12. d. Correct. Eransa Company paid the wage expense plus $300 of wages payable during the accounting period. They paid $9,300 in wages ($9,000 + $300 = $9,300). See pages 139-141.

13. c. Correct. The amount of net cash flow from operating activities will be the same under both the direct and indirect methods, $6,700. See direct method amount in data above. See pages 139-141.

14. a. Correct. If the company had a beginning cash balance, or any investing or financing activities, the cash balance would probably not be $6,700. The $6,700 is the increase in cash due to operating activities during this period only. Answers b., c., and d. are all true and therefore are incorrect responses.