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Company X paid Company Y $1.35 million for a new plant.During the same accounting period,Company X experienced the following changes in its balance sheet: cash fell $350,000,accounts receivable rose $321,300,inventory rose $275,800,property,plant,and equipment rose $752,900,and bonds payable rose $1 million.The net cash flow from financing activities is:


A) An inflow of $1.35 million.
B) An outflow of $350,000.
C) An inflow of $1 million.
D) An inflow of $752,900.

E) B) and C)
F) A) and D)

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When the indirect method is used,Amortization expense is added to net income in order to calculate net cash flow from operating activities. BT: Knowledge

A) True
B) False

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 Sales revenue $909,272 Amortization expense $3,206 Cost of goods sold 445,563 Selling. general and administrative 91,316 expenses  Interest expense 12,402 Income tax expense 143,126 Accounts receivable 12/31/06 65,305 Accounts receivable 12/31/0767,810 Accounts payable 12/31/06 16,540 Accounts payable 12/31/0717,261 Prepaid expenses 12/31/06 4,107 Prepaid expenses 12/31/07 3,875 Inventory 12/31/067,852 Inventory 12/31/076,491\begin{array}{lrlr}\text { Sales revenue } & \$ 909,272 & \text { Amortization expense } & \$ 3,206 \\\text { Cost of goods sold } & 445,563 & \text { Selling. general and administrative } & 91,316\\&&\text { expenses }\\\text { Interest expense } & 12,402 & \text { Income tax expense } & 143,126 \\\text { Accounts receivable 12/31/06 } & 65,305 & \text { Accounts receivable } 12 / 31 / 07 & 67,810 \\\text { Accounts payable 12/31/06 } & 16,540 & \text { Accounts payable } 12 / 31 / 07 & 17,261\\\text { Prepaid expenses 12/31/06 } & 4,107 & \text { Prepaid expenses 12/31/07 } & 3,875 \\\text { Inventory } 12 / 31 / 06 & 7,852 & \text { Inventory } 12 / 31 / 07 & 6,491\end{array} -Use the information provided above to calculate the company's: a.net income for 2007. b.net cash flow from operating activities in 2007 using the indirect method.

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a.b. \[\begin{array}{l} \text { Net income }\\ \begin{array} { l r } \text { Sales revenue } & \$ 909,272 \\ \text { Cost of goods sold } & 445,563 \\ \text { Gross profit } & 463,709 \\ \text { Selling, general and administrative expenses } & 91,316 \\ \text { Amortization expense } & 3,206 \\ \text { Operating income } & 369,187 \\ \text { Interest expense } & 12,402 \\ \text { Income before taxes } & 356,785 \\ \text { Income tax expense } & 143,126 \\ \text { Net income } & \$ 213,659 \end{array} \end{array}\] \[\begin{array}{l} \text { Net cash flow from operations }\\ \begin{array} { l r } \text { Net income } & \$ 213,659 \\ \text { Adjustments } & \\ \text { Add Amortization expense } & 3,206 \\ \text { Subtract the increase in accounts receivable } & ( 2,505 ) \\ \text { Add the decrease in inventory } & 1,361 \\ \text { Add the decrease in prepaid expenses } & 232 \\ \text { Add the increase in accounts payable } & 721 \\ \text { Net cash inflow from operating activities } & \$ 216,674 \end{array} \end{array}\]

Cash flows from investing activities include cash:


A) inflows and outflows reflecting revenues and expenses.
B) outflows from the sale of long-term investments.
C) inflows from the sale of long-term investments.
D) inflows from the sale of a company's own shares to its shareholders.

E) B) and C)
F) A) and B)

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Cash equivalents are assets that are easily converted to cash regardless of their time to maturity. BT: Knowledge

A) True
B) False

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Match the letter with each item below with the following letters to indicate how net income is adjusted when using the indirect method to determine net cash flow from operating activities. A-Add item to net income S-Subtract item from net income N-No adjustment necessary _____ decrease in property,plant,and equipment _____ increase in accounts receivable _____ decrease in inventory _____ decrease in prepaid expenses _____ increase in accounts payable _____ decrease in accrued liabilities _____ decrease in income tax payable _____ increase in dividends payable _____ gain on sales of property,plant,and equipment _____ amortization

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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 bond principal.
C) Buying another company's bonds with cash.
D) Paying for an investment asset by issuing company shares.

E) C) and D)
F) B) and D)

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The proceeds from sales of investments are reported as cash flows from investing activities. BT: Knowledge

A) True
B) False

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Which of the following is not needed to prepare a statement of cash flows?


A) Statement of retained earnings.
B) Comparative balance sheet.
C) Additional information on financing and investing activities.
D) Income statement.

E) A) and B)
F) A) and C)

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If accounts receivable are rising faster than net income,other things being equal,net cash flow from operating activities is:


A) rising,so the Quality of Income Ratio is falling.
B) falling,so the Quality of Income Ratio is falling.
C) rising,so the Quality of Income Ratio is rising.
D) falling,so the Quality of Income Ratio is rising.

E) A) and D)
F) A) and C)

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Cash flows from investing activities are calculated by making adjustments to net income. BT: Comprehension

A) True
B) False

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False

If inventory decreases and unearned revenue increase during an accounting period while the indirect method is used,what does the company do with the changes in these accounts to calculate net 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.

E) A) and B)
F) B) and D)

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In general,the cash flow from operating activities is considered by many to be the most important component of the Statement of Cash Flows. BT: Comprehension

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Company X has a capital acquisitions ratio of 1.42 while Company Y has a capital acquisitions ratio of 7.28.Which of the following could be true?


A) If Company X and Y are in different industries,these ratios may reflect the different production needs of the industry.The ratio cannot really be compared across industries.
B) Company Y may be more efficient at managing cash flows.
C) Company Y may be lagging in adopting new technology which could hurt future sales.
D) All of the above.

E) A) and D)
F) C) and D)

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A company buys a building by issuing bonds.How would it record the purchase of building?


A) It would be an increase to investing activities only.
B) It would be an increase to financing activities only.
C) It would be a noncash transaction listed in supplementary schedule.
D) It would be a noncash transaction not needing any disclosure.

E) B) and D)
F) A) and B)

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Which of the following adjusting journal entries would change the Net Cash Flows from Operating Activities line of the statement of cash flows?


A) Recording bad debts.
B) Recording amortization.
C) All of the above.
D) None of the above.

E) None of the above
F) A) and B)

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If an analyst wishes to analyze the ability of a company's operating activities to fund its level of investment in property,plant,and equipment,a good measure would be the:


A) quality of income ratio.
B) cash coverage ratio.
C) times interest earned ratio.
D) capital acquisitions ratio.

E) B) and C)
F) A) and D)

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D

When the direct method is used to determine the net cash flow from operating activities,the following adjustments must be made to income tax expense to determine total income tax payments:


A) add all changes in income taxes and income taxes payable.
B) add decreases in income taxes payable and subtract increases in income taxes payable.
C) add increases in income taxes payable and subtract decreases in income taxes payable.
D) subtract all changes in income taxes payable.

E) B) and C)
F) A) and D)

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Inventory and accounts payable increase during the accounting period.What is done with these changes to determine the net cash flow from operating activities when the direct method is used?


A) The changes in each account are both added to net income.
B) The change in inventory is subtracted from cost of goods sold and the change in accounts payable is added to cost of goods sold to find the cash paid to suppliers.
C) The changes in each account are both subtracted from net income.
D) The change in inventory is added to cost of goods sold and the change in accounts payable is subtracted from cost of goods sold to find the cash paid to suppliers.

E) None of the above
F) A) and C)

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If net cash flow from operating activities is unchanged,but net income is rising,the quality of income ratio is:


A) rising,which may signal that revenue is being recorded later and/or expenses earlier than in the past.
B) falling,which may signal that revenue is being recorded later and/or expenses earlier than in the past.
C) falling,which may signal that revenue is being recorded earlier and/or expenses later than in the past.
D) rising,which may signal that revenue is being recorded earlier and/or expenses later than in the past.

E) A) and C)
F) B) and C)

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