Ch11

Student: ___________________________________________________________________________

1. A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting
period.

True False
2. The three primary categories of cash flows are cash flows from operating activities, cash flows from
investing activities, and cash flows from financing activities.

True False
3. Financing activities include cash receipts and cash payments for transactions relating to revenue and
expense activities.

True False
4. Investing activities include cash transactions involving the purchase and sale of long-term assets and
current investments.

True False
5. Operating activities are both inflows and outflows of cash resulting from the external financing of a
business.

True False
6. We report interest and dividends received from investments with investing activities.

True False
7. We report interest paid on bonds or notes payable with operating activities rather than financing activities.

True False
8. We record dividends received as a financing activity.

True False
9. We record dividends paid as a financing activity.

True False
10. Transactions that don't increase or decrease cash, but that result in significant investing and financing
activities, are reported either directly after the cash flow statement or in a separate note to the financial
statements as noncash activities.

True False
11. The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing
activity.

True False
12. The total net cash flows from operating activities differ between the direct and indirect methods.

True False
13. Using the indirect method, we begin with net income and then list adjustments to net income in order to
arrive at operating cash flows.

True False
14. Using the direct method we adjust the items on the income statement to directly show the cash inflows and
outflows from operations.

True False
15. Since depreciation expense reduces net income, companies will add depreciation expense back to net
income as a step in arriving at net cash flows from operations under the indirect method.

True False
16. We need to add back to net income any loss on sale of long-term assets in the operating section of the
statement of cash flows in order to eliminate the noncash component of net income.

True False
17. A gain on the sale of long-term assets is added to net income to arrive at net cash flows from operating
activities under the indirect method.

True False
18. Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash
flows from operating activities.

True False
19. Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows
from operating activities.

True False
20. Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is
subtracted from net income to arrive at net cash flows from operating activities.

True False
21. When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is
subtracted from net income.

True False
22. Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash
flows from operating activities.

True False
23. Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows
from operating activities.

True False
24. The long-term assets section of the balance sheet is the place to look for investing activities.

True False
25. The sale of land is reported in the operating section of the statement of cash flows.

True False
26. We report the purchase of stock in another corporation as a cash outflow from investing activities.

True False
27. We report the actual amount of cash proceeds received from the sale of land as a cash inflow from
investing activities.

True False
28. If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent
this as both an investing activity and a financing activity in the statement of cash flows.

True False
29. We can find most financing activities by examining changes in long-term liabilities and stockholders'
equity accounts.

True False
30. The inflow of cash received from issuing common stock is reported as an investing activity.

True False
31. The balance in Retained Earnings is increased by net income and is decreased by dividends.

True False
32. We report the payment of cash dividends as a cash outflow from investing activities.

True False
33. The total of the cash flows from operating, investing, and financing activities equals the net increase or
decrease in cash for the year.

True False
34. We calculate cash return on assets as the change in cash divided by average total assets.

True False
35. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in
assets.

True False
36. To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales
and sales per dollar of assets invested.

True False
37. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and
asset turnover.

True False
38. Income statement items that have no cash effect are still reported under the direct method.

True False
39. If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers.

True False
40. When accounts payable decrease, cash paid to suppliers must have been more than purchases.

True False
41. If there are no current assets or liabilities associated with operating expenses, the amounts we report for
these expenses in the income statement must equal the amount of cash we paid for these items.

True False
42. Depreciation expense is not reported on the statement of cash flows under the direct method.

True False
43. We add an increase in interest payable to interest expense in arriving at cash paid for interest under the
direct method.

True False
44. We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes.

True False
45. The indirect method begins with net income, while the direct method considers each of the individual
accounts that make up net income.

True False
46. The Statement of Cash Flows:

A. Option a
B. Option b
C. Option c
D. Option d
47. The purchase of landis classified in the statement of cash flows as a(n):

A. Operating activity.
B. Investing activity.
C. Financing activity.
D. Noncash activity.
48. The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n):

A. Operating activity.
B. Investing activity.
C. Financing activity.
D. Noncash activity.
49. The purchase of treasury stock is classified in the statement of cash flows as a(n):

A. Operating activity.
B. Investing activity.
C. Financing activity.
D. Noncash activity.
50. Operating cash flows exclude:

A. Interest received.
B. Interest paid.
C. Dividends received.
D. Dividends paid.
51. The statement of cash flows reports cash flows from the activities of:

A. Operating, purchasing, and investing.

B. Borrowing, paying, and investing.
C. Operating, investing, and financing.
D. Using, investing, and financing.
52. Which one of the following is correct about the statement of cash flows?

A. Option a
B. Option b
C. Option c
D. Option d
53. Which of the following is correct about the statement of cash flows?

A. Option a
B. Option b
C. Option c
D. Option d
54. All classifications on the Balance Sheet have a general relationship with sections identified on the
Statement of Cash Flows. Indicate which relationships are correctly identified in the table below.

A. Option a
B. Option b
C. Option c
D. Option d
55. Under what section of the Statement of Cash Flows would you classify dividends paid on common stock?

A. Option a
B. Option b
C. Option c
D. Option d
56. Under what section of the Statement of Cash Flows would you classify the purchase of equipment by
issuing a long-term note payable?

A. Option a
B. Option b
C. Option c
D. Option d
57. Which of the following transactions would not create a cash flow?

A. Option a
B. Option b
C. Option c
D. Option d
58. Which of the following is an example of a noncash activity?

A. Sale of land for less than its cost.

B. Purchase of land by issuing debt.
C. Sale of land for more than its cost.
D. Purchase of land using cash proceeds from issuance of common stock.
59. Which of the following is not true regarding cash flows?

A. Option a
B. Option b
C. Option c
D. Option d
60. Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends
on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows.

A. Option a
B. Option b
C. Option c
D. Option d
61. The collection of cash from customers would be classified as which type of cash flow on the Statement of
Cash Flows?

A. Option a
B. Option b
C. Option c
D. Option d
62. The indirect and direct methods:

A. are used by companies about equally in actual practice.

B. affect the presentations of operating, investing, and financing activities.
C. arrive at different amounts for net cash flows from operating activities.
D. are two allowable methods to present operating activities in the statement of cash flows.
63. In the operating activities section of the statement of cash flows, we start with net income when using:

A. the direct method.

B. the indirect method.
C. both the direct and the indirect method.
D. neither the direct nor the indirect method.
64. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and
$6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

A. Operating, $2,000; Financing $16,000.

B. Operating, $0; Financing $18,000.
C. Operating, $12,000; Financing $6,000.
D. Operating, $18,000; Financing $0.
Bad Brad's BBQ had cash flows for the year as follows ($ in millions):
65. Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of:

A. $(80).
B. $120.
C. $200.
D. $420.
66. Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of:

A. $(4,000).
B. $100.
C. $(3,900).
D. $(1,900).
67. Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of:

A. $1,100.
B. $(1,100).
C. $820.
D. $900.
68. We can identify operating activities from income statement information and changes in

A. Long-term asset accounts.

B. Long-term liability accounts.
C. Current asset and current liability accounts.
D. Stockholders' equity accounts.
69. In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would

be reported or included as a(n):

A. Option a
B. Option b
C. Option c
D. Option d
70. In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be
reported as a(n):

A. Option a
B. Option b
C. Option c
D. Option d
71. Which of the following is NOT a correct practice when adjusting net income to net operating cash flows?

A. Option a
B. Option b
C. Option c
D. Option d
72. Which of the following is added to net income as an adjustment under the indirect method of preparing the
statement of cash flows?

A. Salaries payable increase.

B. Gain on the sale of land.
C. Inventory increase.
D. Accounts receivable increase.
73. Which of the following is deducted from net income as an adjustment under the indirect method of
preparing the statement of cash flows?

A. Salaries payable decrease.

B. Inventory decrease.
C. Depreciation expense.
D. Accounts receivable decrease.
74. Given the items below, which of the following is a subtraction from net income to arrive at Operating Cash
Flows using the indirect method?

A. Option a
B. Option b
C. Option c
D. Option d
75. Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and
Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were
$12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's
cash flows from operating activities would be:

A. $200,000.
B. $195,000.
C. $205,000.
D. $199,000.
76. Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and
Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were
$30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's cash
flows from operating activities would be:

A. $132,000.
B. $134,000.
C. $136,000.
D. $138,000.
77. Kela Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash
of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflows from operating

activities are:

A. Option a
B. Option b
C. Option c
D. Option d
78. Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by
$7,500, and accounts payable decreased by $2,500. The amount of cash flows from operating activities is:

A. Option a
B. Option b
C. Option c
D. Option d
79. Nevada Boot Co. reported net income of $205,000 Beginning and ending Inventory balances were $40,000
and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000
and $33,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would
report operating cash flows of:

A. $202,000.
B. $198,000.
C. $212,000.
D. $205,000.
80. Lense Laboratories' net income was $250,000. Given the account information below, what is the net
operating cash flows for Lense Laboratories?

A. Option a
B. Option b
C. Option c
D. Option d
81. Allen Company's income statement reported total revenues, $850,000 and total expenses (including
$40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—
beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000
and ending balance, $28,000. Therefore, based only on this information, the net cash inflows from

operating activities were:

A. Option a
B. Option b
C. Option c
D. Option d
82. Assuming Net Income for the year is $115,000, what is the Operating Cash Flows given the following
information:

A. Option a
B. Option b
C. Option c
D. Option d
83. Which of the following statements is true?

A. Option a
B. Option b
C. Option c
D. Option d
84. Which of the following is an example of a cash outflow from an investing activity?

A. Payment of cash for treasury stock.

B. Payment of cash for the purchase of land.
C. Payment of cash for inventory.
D. Payment on a long-term note payable.
85. Which of the following is an example of a cash inflow from a financing activity?

A. Issuance of bonds.
B. Sale of an intangible asset.
C. Receipt of cash dividends.
D. Purchase of land.
86. _________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement
of Cash Flows.

A. Option a
B. Option b
C. Option c
D. Option d
87. Cash flows from investing activities do not include cash flows from:

A. Lending.
B. The sale of equipment.
C. Borrowing.
D. The purchase of land and buildings.
88. Cash flows from financing activities include:

A. Interest received.
B. Interest paid.
C. Dividends received.
D. Dividends paid.
89. Cash flows from investing activities do not include:

A. Proceeds from the sale of land.

B. Proceeds from the issuance of common stock.
C. Proceeds from the sale of marketable securities.
D. Cash outflows from acquiring land.
90. Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report:

A. Operating cash inflows of $12,000.

B. Investing cash inflows of $12,000.
C. Financing cash inflows of $12,000.
D. Financing cash inflows of $2,000.
91. During 2012, Smithson Corp. had the following cash flows: receipt from customers, $10,000; receipt from
the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000,
payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for

investing cash flows on the Statement of Cash Flows?

A. Option a
B. Option b
C. Option c
D. Option d
92. During 2012, Smithson Corp. had the following cash flows: receipt from customers, $10,000; receipt from
the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000,
payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for
financing cash flows on the Statement of Cash Flows?

A. Option a
B. Option b
C. Option c
D. Option d
93. Cash paid for financing activities would include cash paid for:

A. Option a
B. Option b
C. Option c
D. Option d
94. Cash received from issuing common stock would be classified in which section of the Statement of Cash
Flows?

A. Option a
B. Option b
C. Option c
D. Option d
95. Which of the following would be classified as an investing cash flow?

A. Option a
B. Option b
C. Option c
D. Option d
96. During 2012, Victoria Group: (1) received cash of $5,000 billed to a customer in 2011; (2) earned $20,000
of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its
stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock

for $10,000. What is Victoria Group's cash flow from financing activities in 2012?

A. Option a
B. Option b
C. Option c
D. Option d
97. The following information pertains to Alpha Computing at the end of 2012:

Alpha Computing's Retained Earnings account had a zero balance at the beginning of 2012.

What amount of dividends did the company pay in 2012?

A. Option a
B. Option b
C. Option c
D. Option d
98. The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end
of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is
$150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash return on
assets?

A. Option a
B. Option b
C. Option c
D. Option d
99. The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end
of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is
$150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash flow to
sales?

A. Option a
B. Option b
C. Option c
D. Option d
100.The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end
of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income
is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' asset
turnover?

A. Option a
B. Option b
C. Option c
D. Option d
101.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end
of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income
is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on

assets compare to the industry average of 10%?

A. Option a
B. Option b
C. Option c
D. Option d
102.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end
of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income
is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to
sales ratio compare to the industry average of 5%?

A. Option a
B. Option b
C. Option c
D. Option d
103.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end
of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is
$40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover
compare to the industry average of 2.4 times?

A. Option a
B. Option b
C. Option c
D. Option d
104.We can separate cash return on assets into:

A. Cash flow to sales and return on assets.

B. Cash flow to sales and asset turnover.
C. Cash flow to sales and profit margin.
D. Profit margin and asset turnover.
105.We calculate cash return on assets as

A. The change in cash divided by average total assets.

B. Net cash flows from operating activities divided by average total assets.
C. The change in cash divided by ending total assets.
D. Met cash flows from operating activities divided by ending total assets.
106.Which of the following statements is not true relating to cash flow analysis?

A. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in
assets.
B To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales
. and sales per dollar of assets invested.
C. Cash return on assets can be separated to examine two important business strategies: cash flow to sales
and asset turnover.
D. Positive cash flow from operations is not important to a company's survival in the long-run.
107.The balance sheet of Storage Solutions reports total assets of $300,000 and $350,000 at the beginning and
end of the year, respectively. The cash return on assets for the year is 10%. What is Storage Solutions' net
cash flows from operating activities for the year?

A. Option a
B. Option b
C. Option c
D. Option d
108.In 2012, Hope Company incurred sales on account of $100,000. The company also has the following
information:

What is the amount of cash received from customers for Hope Company in 2012?

A. Option a
B. Option b
C. Option c
D. Option d
109.Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the
year are $5 million and $7 million, respectively. What is the amount of cash received from customers?

A. $50 million.
B. $52 million.
C. $48 million.
D. $55 million.
110.Wireless Technologies reports cost of goods sold of $40 million. Inventory at the beginning and end of the
year are $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are
$3 million and $6 million, respectively. What is the amount of cash paid to suppliers?

A. $40 million.
B. $36 million.
C. $44 million.
D. $42 million.
111.Wireless Technologies reports operating expenses of $2 million. Operating expenses include rent expense.
Prepaid rent at the beginning and end of the year are $20,000 and $70,000, respectively. All other operating
expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?

A. $2,000,000.
B. $2,070,000.
C. $1,950,000.
D. $2,050,000.
112.Wireless Technologies reports income tax expense of $800,000. Income tax payable at the beginning and
end of the year are $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes?

A. $780,000.
B. $800,000.
C. $820,000.
D. $870,000.
113.Data Solutions reports sales of $100 million. Accounts receivable at the beginning and end of the year are
$6 million and $9 million, respectively. What is the amount of cash received from customers?

A. $100 million.
B. $103 million.
C. $97 million.
D. $109 million.
114.Data Solutions reports cost of goods sold of $75 million. Inventory at the beginning and end of the year
are $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5
million and $3 million, respectively. What is the amount of cash paid to suppliers?

A. $78 million.
B. $72 million.
C. $75 million.
D. $76 million.
115.Data Solutions reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid
rent at the beginning and end of the year are $120,000 and $80,000, respectively. All other operating
expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?

A. $5,000,000.
B. $5,040,000.
C. $4,960,000.
D. $5,080,000.
116.Data Solutions reports income tax expense of $1,700,000. Income taxes payable at the beginning and end
of the year are $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes?

A. $1,700,000.
B. $1,820,000.
C. $2,070,000.
D. $1,580,000.
117.Schneider Inc. purchases its inventory from suppliers on account. During the year, its Inventory account
increased by $10 million and its accounts payable to suppliers decreased by $3 million. Cost of goods sold
was $440 million, its cash outflows to inventory suppliers totaled:

A. $453 million.
B. $447 million.
C. $433 million.
D. $427 million.
118.A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its
income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct
method?

A. A cash outflow of $12 million.

B. A cash outflow of $78 million.
C. A cash outflow of $80 million.
D. A cash outflow of $82 million.
119.Which of the following items is not reported in the operating section of the statement of cash flows using
the direct method?

A. Depreciation expense.
B. Cash paid to suppliers.
C. Cash received from customers.
D. Cash paid for income taxes.
120.Which of the following items is reported in the statement of cash flows using the direct method?

A. Depreciation expense.
B. Gain on sale of an asset.
C. Cash received from customers.
D. Loss on sale of an asset.
121.Classify each of the following items as an operating, investing, or financing activity.
1. Dividends paid.
2. Sale of goods or services for cash.
3. Sale of equipment.
4. Purchase of inventory.
5. Repayment of notes payable.

122.Classify each of the following items as an operating, investing, or financing activity.

1. Payment of income taxes.
2. Sale of investments.
3. Receipt of interest.
4. Issuance of common stock.
5. Purchase of intangibles.
123.The following selected transactions occur during the first year of operations. Determine how each should
be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it
is an operating, investing, or financing activity.
1. Issued a million shares of common stock at $20 per share.
2. Purchased land and a building for $3 million.
3. Received $200,000 from a cash sale of merchandise to customers.
4. Paid a dividend of $1 per share to common stockholders.
5. Loaned $50,000 to an employee and accepted a note receivable.

124.Analysis of an income statement, balance sheets, and additional information from the accounting records of
Gaming Strategies reveal the following items:
1. Collection of notes receivable.
2. Purchase of equipment.
3. Exchange of long-term assets.
4. Decrease in accounts payable.
5. Payment of dividends.
6. Purchase of a patent.
7. Depreciation expense.
8. Decrease in accounts receivable.
9. Issuance of note payable.
10. Increase in inventory.
Indicate in which section of the statement of cash flows each of these items would be reported: operating
activities (indirect method), investing activities, financing activities, or noncash activities.
125.Place the following items in the correct order as they would appear in the statement of cash flows:
1. Beginning cash balance
2. Ending cash balance
3. Investing activities
4. Financing activities
5. Net increase (decrease) in cash
6. Operating activities

126.Electronic Wonders reports net income of $95,000. The accounting records reveal Depreciation Expense
of $50,000 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000,
$23,000, and $20,000, respectively. Prepare the operating activities section of Electronic Wonders'
statement of cash flows using the indirect method.

127.Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts
Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from
operating activities using the indirect method.
128.Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense
of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts
Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively.
Calculate Fidelity's net cash flows from operating activities.

129.Alpha Computers reports net income of $44 million. Included in that number are depreciation expense of
$7 million and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable,
Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Alpha
Computers' net cash flows from operating activities.
130.Portions of the financial statements for Horizon Telecom are provided below.

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the
indirect method.

131.Mobile Video Systems sold land, investments, and issued their own common stock for $10 million, $15
million, and $20 million, respectively. Mobile Video also purchased treasury stock, equipment, and a
patent for $2 million, $4 million, and $6 million, respectively. What amount should the company report as
net cash flows from investing activities? What amount should the company report as net cash flows from
financing activities?
132.Nathan Herrmann has completed the basic format to be used in preparing the statement of cash flows
(indirect method) for CEO Consultants.

Listed below in random order are line items to be included in the statement of cash flows.
Purchase of equipment $220,000
Increase in inventory 30,000
Increase in prepaid rent 10,000
Payment of dividends 40,000
Depreciation expense 20,000
Increase in accounts receivable 60,000
Increase in accounts payable 10,000
Loss on sale of land 7,000
Net income 70,000
Repayment of notes payable 50,000
Cash received from the sale of land 3,000
Issuance of common stock 250,000
Prepare the statement of cash flows for CEO Consultants using the indirect method.
133.Lowes and Home Depot report the following information in their 2010 annual financial statements ($in

millions):

Calculate Lowe's and Home Depot's cash return on assets, cash flow to sales ratio, and asset turnover ratio
for 2010. Which company has the better cash flow to sales ratio and which company has the better asset
turnover ratio?

134.The balance sheet of Integrated Systems reports total assets of $890,000 and $950,000 at the beginning and
end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows
from operating activities are $155,000. Calculate the cash return on assets, cash flow to sales, and asset
turnover for Integrated Systems.

135.The balance sheet of The Computer Doctor reports total assets of $160,000 and $220,000 at the beginning
and end of the year, respectively. The cash return on assets for the year is 10%. Calculate The Computer
Doctor's net cash flows from operating activities for the year.
136.Discount Computers' accounts receivable increases during the year by $3 million. What is the amount of
cash received from customers during the reporting period if its sales are $47 million?

137.Laser Solutions' inventory decreases during the year by $8 million and its accounts payable to suppliers
increases by $6 million during the same period. What is the amount of cash paid to suppliers of
merchandise during the reporting period if its cost of goods sold is $81 million?

138.Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense
and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by
$25,000. What is the cash paid for operating expenses during the year?

139.Wilson Electric reports income tax expense of $150,000. Income tax payable at the beginning and end of
the year are $20,000 and $25,000, respectively. What is the cash paid for income taxes during the year?
140.Portions of the financial statements for Horizon Telecom are provided below.

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the direct
method.

141.Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.
142.Distinguish between the indirect method and the direct method for reporting net cash flows from operating
activities. Which method is more common in practice? Which method provides a more logical presentation
of cash flows?

143.Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is
a negative $200,000 during the same period. Is this possible? Explain.

144.A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect
operating, investing, and financing activities under the indirect method?

145.Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based
ratios supplement the analysis of ratios based on income statement and balance sheet information?
146.Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each
phrase with the best term placing the letter designating the term in the space provided.

_
_
1. Indirect Begins with net income and then list adjustments to net income_
method in order to arrive at operating cash flows._

_
2. _
Investing Significant investing and financing activities that do not affect_
activities cash._

3. _
Statement _
of cash Sales revenue divided by average total assets;_
flows measures the sales revenue generated per dollar of assets._

_
_
4. Noncash Includes cash receipts and cash payments for transactions_
activities relating to revenue and expense activities._

_
5. Net cash flows from operating activities divided by average_
Financing total assets; measures the operating cash flow generated per dollar_
activities of assets._

_
6. Cash A summary of cash inflows and cash outflows during the_
return reporting period sorted by operating, investing, and financing_
on assets activities._

_
Net cash flows from operating activities divided by sales_
7. Direct revenue; measures the operating cash flow generated per dollar of_
method sales._

_
8. _
Operating Includes cash transactions resulting from the external financing_
activities of a business._

_
9. Cash _
flow to Includes cash transactions involving the purchase and sale of_
sales long-term assets and current investments._

_
Adjusts the items on the income statement to show items such_
10. Asset as cash received from customers, and cash paid for inventory,_
turnover salaries, rent, interest and taxes._
147.For each of the following ten transactions, indicate by letter whether the cash effect of each transaction
is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC)
activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on
cash (NE). The first answer is provided as an example.

Answer:

148.For each of the following five transactions, indicate by letter whether the cash effect of each transaction
is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC)
activity.

Answer:
149.For each of the following five transactions, indicate by letter whether the cash effect of each transaction
is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC)
activity.

Answer:

150.For each of the following five transactions, indicate by letter whether the cash effect of each transaction
is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC)
activity.

Answer:
 Ch11 Key
1. TRUE

2. TRUE

3. FALSE

4. TRUE

5. FALSE

6. FALSE

7. TRUE

8. FALSE

9. TRUE

10. TRUE

11. FALSE

12. FALSE

13. TRUE

14. TRUE

15. TRUE

16. TRUE

17. FALSE

18. TRUE

19. FALSE

20. FALSE

21. TRUE

22. TRUE

23. FALSE

24. TRUE

25. FALSE

26. TRUE

27. TRUE

28. FALSE

29. TRUE

30. FALSE

31. TRUE

32. FALSE
33. TRUE

34. FALSE

35. TRUE

36. TRUE

37. TRUE

38. FALSE

39. FALSE

40. TRUE

41. TRUE

42. TRUE

43. FALSE

44. TRUE

45. TRUE

46. C

47. B

48. C

49. C

50. D

51. C

52. C

53. C

54. C

55. C

56. D

57. B

58. B

59. A

60. B

61. C

62. D

63. B

64. C

65. B

66. C

67. D
68. C

69. A

70. A

71. A

72. A

73. A

74. A

75. C

76. A

77. C

78. D

79. B

80. C

81. B

82. B

83. C

84. B

85. A

86. B

87. C

88. D

89. B

90. B

91. D

92. A

93. D

94. C

95. C

96. C

97. C

98. C

99. B

100. D

101. A

102. B
103. C

104. B

105. B

106. D

107. C

108. C

109. C

110. B

111. D

112. A

113. C

114. A

115. C

116. D

117. A

118. D

119. A

120. C

121. 1. Financing Activity.

2. Operating Activity.
3. Investing Activity.
4. Operating Activity.
5. Financing Activity.

122. 1. Operating Activity.

2. Investing Activity.
3. Operating Activity.
4. Financing Activity.
5. Investing Activity.

123. 1. Cash inflow, Financing activity.

2. Cash outflow, Investing activity.
3. Cash inflow, Operating activity.
4. Cash outflow, Financing activity.
5. Cash outflow, Investing activity.
124. 1. Investing activities.
2. Investing activities.
3. Noncash activities.
4. Operating activities.
5. Financing activities.
6. Investing activities.
7. Operating activities.
8. Operating activities.
9. Financing activities.
10. Operating activities.

125. Operating activities

Investing activities
Financing activities
Net increase (decrease) in cash
Beginning cash balance
Ending cash balance

126.

127.

128.
129.

130.

131.
132.

133.

Lowes has a better (higher) cash flow to sales ratio, while Home Depot has a better (higher) asset turnover.
134.

135.
Operating Cash Flow = .10 * [($160,000 + $220,000) ¸ 2] = $19,000.

136.

137.

138.

139.
140.

141. The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash receipts
and cash payments for transactions relating to revenue and expense activities, essentially the very same activities reported on the income statement.
Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Financing activities are
cash flows resulting from the external financing of a business such as long-term liabilities and stockholders' equity.

142. Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Using
the direct method, we adjust the items on the income statement to directly show the cash inflows and outflows from operations such as cash received
from customers, and cash paid for inventory, salaries, rent, interest and taxes. The indirect method is more common in practice, while the direct
method provides a more logical presentation of cash flows.

143. It is possible to report net income and negative operating cash flows at the same time. Increases in current assets and decreases in current
liabilities both result in net income that is higher than operating cash flows. As one specific example, an increase in accounts receivable of $500,000
would result in net income exceeding operating cash flows by $500,000.

144. The $1,000 gain on sale of the investment is subtracted from net income in arriving at net operating cash flows. The sale of the investment is
also reported as an $11,000 increase to cash flows from investing activities. This transaction has no effect on financing activities.

145. Return on assets has net income in the numerator while cash return on assets has cash flows from operations in the numerator. Both ratios divide
by average total assets. Analysts often supplement their investigation of income statement and balance sheet amounts with cash flow ratios. Some
cash flow ratios are derived by substituting net cash flows from operating activities in place of net income. Cash flow ratios offer additional insight in
the evaluation of a company's profitability and financial strength.

146. Indirect method :: Begins with net income and then list adjustments to net income in order to arrive at operating cash flows. and Noncash
activities :: Significant investing and financing activities that do not affect cash. and Asset turnover :: Sales revenue divided by average total assets;
measures the sales revenue generated per dollar of assets. and Operating activities :: Includes cash receipts and cash payments for transactions
relating to revenue and expense activities. and Cash return on assets :: Net cash flows from operating activities divided by average total assets;
measures the operating cash flow generated per dollar of assets. and Statement of cash flows :: A summary of cash inflows and cash outflows
during the reporting period sorted by operating, investing, and financing activities. and Cash flow to sales :: Net cash flows from operating
activities divided by sales revenue; measures the operating cash flow generated per dollar of sales. and Financing activities :: Includes cash
transactions resulting from the external financing of a business. and Investing activities :: Includes cash transactions involving the purchase and sale
of long-term assets and current investments. and Direct method :: Adjusts the items on the income statement to show items such as cash received
from customers, and cash paid for inventory, salaries, rent, interest and taxes.

147.
148.

149.

150.
 Ch11 Summary
Category # of Questions
AACSB: Analytic 50
AACSB: Reflective Thinking 100
AICPA: Critical Thinking 2
AICPA: Decision Making 18
AICPA: Measurement 20
AICPA: Reporting 110
Blooms: Analysis 50
Blooms: Application 3
Blooms: Comprehension 75
Blooms: Knowledge 22
Difficulty: Easy 27
Difficulty: Hard 19
Difficulty: Medium 104
Learning Objective: 11-01 Classify cash transactions as operating; investing; or financing activities. 48
Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect 33
method.
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement 28
of cash flows.
Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. 19
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct 27
method.
Spiceland - Chapter 11 151