Case Reading 2-5 Quiz

1. The primary difference between the direct method and the indirect method of preparing the statement of cash flows is the way in which

a. the net increase or decrease in cash is determined.

b. net cash flow from operations is determined.

c. net cash flow from investing activities is determined.

d. net cash flow from financing activities is determined.

 

2. In determining net cash flow from operations when using the indirect method of the statement of cash flows, adjustments to net income are needed to

a. convert accrual basis data to the cash basis.

b. convert cash basis data to the accrual basis.

c. convert depreciation expense to a cash flow.

d. eliminate owner withdrawals from net income.

 

3. When preparing the statement of cash flows using the indirect method, which of the following combination of items is NOT correct in adjusting net income to net cash flow provided by operations?

 

Type of account

Change in account

Direction of adjustment
a.

Current asset

Increase

Subtract from net income
b.

Current liability

Increase

Add to net income
c.

Current asset

Decrease

Add to net income
d.

Current liability

Decrease

Add to net income

 

 

4. When using the indirect method of the statement of cash flows, if revenues on the income statement were $10,000 and accounts receivable increased $1,000 for the same accounting period, cash inflows from customers should be

a. $10,000.

b. $11,000.

c. $9,000.

d. $1,000.

 

5. When using the indirect method of the statement of cash flows, if supplies expense on the income statement were $2,000 and accounts payable for supplies increased $400 for the same accounting period, cash payments to suppliers should be

a. $1,600.

b. $2,000.

c. $2,400.

d. $400.

 

6. When using the indirect method of the statement of cash flows, if the income statement shows $1,400 of depreciation expense for the accounting period, which of the following is correct?

a. Do nothing in the statement of cash flows because depreciation is not a cash flow.

b. Add the $1,400 as an adjustment to investing activities for the period.

c. Add the $1,400 as an adjustment to operating activities for the period.

d. Deduct the $1,400 as an adjustment to net income for the period.

 

7. When using the indirect method of the statement of cash flows, if insurance expense on the income statement were $100 and prepaid insurance increased $500 for the same accounting period, cash payments for insurance must have been

a. $500.

b. $400.

c. $600.

d. Zero.

 

8. When using the indirect method of the statement of cash flows, if interest expense on the income state were $600 and interest payable increased $200 for the same accounting period, cash payments for interest must have been

a. $200.

b. $400.

c. $600.

d. $800.

 

9. The primary reason why the indirect method of the statement of cash flows is more popular than the direct method is

a. that it directly ties the net income amount to the cash provided by operations.

b. its simplicity in preparation.

c. it gives a larger net cash flow from operations for most companies.

d. it is required by the Securities and Exchange Commission.

 

10. If a company’s accounts receivable increased during the accounting period and they are using the indirect method of the statement of cash flows, which of the following is correct?

a. Cash received from customers was greater than sales made during the period.

b. Cash received from customers was less than sales made during the period.

c. This fact should have no effect on the statement of cash flows.

d. Cash received from customers was equal to sales made during the period.

 

11. The following information was taken from the accounting records of the Eransa Company for 2000.

During 2000 the Eransa Company’s cash collections from customers were

a. $20,000.

b. $21,500.

c. $18,500.

d. $7,000.

 

12. The following information was taken from the accounting records of the Eransa Company for 2000.

During 2000 the Eransa Company’s cash payments to employees were

a. $300.

b. $9,000.

c. $8,700.

d. $9,300.

 

13. The following information was taken from the accounting records of the Eransa Company for 2000.

During 2000 the Eransa Company’s cash provided from operations using the indirect method should be

a. $9,000.

b. $7,000.

c. $6,700.

d. Cannot determine from information given

 

14. The following information was taken from the accounting records of the Eransa Company for 2000.

Which of the following statements is probably NOT true?

a. The ending cash balance for the year is $6,700

b. All the items in the cash flows direct method column above are operating activities

c. Depreciation expense for the period is $2,000

d. The company paid for more insurance during the year than they used