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40. A cash flow statement where the cash from operations was prepared under the direct method will most likely contain which of the following account titles? A. Cash received from customers. B. Increase in accounts receivable. C. Cash received from accounts receivable collections.

Ans: A. The following figure contains an example of a presentation of operating cash flow for Bao Company using the direct method. Bao Company Operating cash flow- direct method For the year ended December 31, 2012 Cash collections from customers $429,980 Cash paid to suppliers (265,866) Cash paid for operating expenses (124,784) cash paid for interest (4,326) Cash paid for taxes (14,956) Operating cash flow $20,048 The following figure contains an example of a presentation of operating cash flow for Bao Company using the indirect method. Bao Company Operating cash flow- indirect method For the year ended December 31, 2012 Net income $18,788 Adjustments to reconcile net income to cash flow provided by operating activities:   Depreciation and amortization 7,996   Deferred income taxes 416   Increase in accounts receivables (1,220)   Increase in inventory (20,544)   Decrease in prepaid expenses 494   Increase in accounts payable 13,406   Increase in accrued liabilities 712 Operating cash flow $20,048

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41. A company’s financial statement data for the most recent year include the following: Net income $100 Depreciation expense 25 Purchase of machine 50 Sale of company trucks 30 Sale of common stock 45 Decrease in accounts receivable 10 Increase in inventory 20 Issuance of bonds 25 Increase in accounts payable 15 Increase in wages payable 10 Based only on these items, cash flow from financing activities is closest to: A. $70. B. $85. C. $140.

Ans: A. Sale of common stock 45 Issuance of bonds 25 Financing cash flows $70

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42. An analyst gather the following information about a company: CFO $800 Purchase of plant and equipment 40 Sale of land 30 Interest expense 80 Depreciation and amortization 100 The company has a tax rate of 35% and prepares its financial statements under U.S.GAAP. The company’s free cash flow to the firm (FCFF) is closest to: A. $840. B. $870. C. $940.

Ans: A. FCFF = CFO + interest expense net of tax – net capital expenditures = $800+80x(1-0.35)-40+30 =$842 Depreciation and amortization do not have to be added when calculating FCFF from CFO. They are added when calculating FIFF from net income. FCFF= net income+ noncash charges + interest expense x (1-tax rate)- fixed capital investment – working capital investment

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43. For which of the following balance sheet items is a change in market value most likely to affect net income? A. Debt securities issued by the firm. B. Debt securities that the firm intends to hold until maturity. C. Securities held with the intent to profit over the short term.

Ans: C. Securities held with the intent to profit over the short term are classified as trading securities, and the changes in their market values are reflected in their balance sheet values and also reported on the income statement. A and B are incorrect. Debt securities issued by the firm, and debt securities that the firm intends to hold until maturity, are both reported at amortized cost, not market value. Debt and equity securities that the firm does not except to hold to maturity or to sell in the near term are marked to market on the balance sheet, but unrealized gains and losses do not affect the income statement.

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44. An analyst gathers the following information: Net income $100 Decrease in accounts receivable 30 Depreciation 25 Increase in inventory 17 Increase in accounts payable 10 Decrease in wages payable 5 Increase in deferred taxes 17 Sale of fixed assets 150 Purchase of fixed assets 340 Profit from the sale of fixed assets 5 Dividends paid out 35 Sale of new common stock 120 Based on the above information, the company’s cash flow from operations under U.S.GAAP is: A. $155. B. $165. C. $182.

Ans: A. Net income $100 Adjustments for noncash and nonoperating items:   Depreciation 25   Increase in deferred income taxes 17   Profit from sale of equipment (5) Adjustment for working capital items   Decrease in accounts receivables                   30   Increase in inventory (17)   Increase in accounts payable 10   Decrease in wages payable (5) Operating cash flow $155 Dividends paid are CFF, not CFO

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45. Which of the following statements about cash flow is least accurate? Under U.S.GAAP, cash flow from: A. Operations includes cash operating expenses and changes in working capital accounts. B. Financing includes the proceeds of debt issued and from the sale of the company’s common stock. C. Investing includes interest income from investment in debt securities.

Ans: C. Interest income is considered an operating cash flow under U.S.GAAP.

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46. An analyst gathered the following data about a company: Collections for customers $5,000 Depreciation $800 Cash expenses (including taxes) $2,000 Tax rate 30% Net cash increased $1,000 If inventory increases over the period by $800, cash flow from operations equals: A. $1,600. B. $2,400. C. $3,000.

Ans: C. Use the direct method. Collections from customers $5,000 Cash expenses ($2,000) Cash flow from operations $3,000 Cash expenses are given. If you had been given COGS, you would need to adjust that for inventory changes to get cash expenses for inputs. Depreciation is a non-cash change. Changes in depreciation are used with the indirect method. Net change in cash will reflect CFI and CFF, not just CFO.

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47. Which of the following statements about the indirect method of calculating cash flow from operations is least accurate? A. Depreciation is added back to net income because it is an expense not requiring cash. B. No adjustment is needed to account for changes in accounts receivable because no cash is involved. C. No adjustment is needed for the payment of taxes because the tax payment is already in net income.

Ans: B. Using the indirect method requires adjusting for change in working capital accounts such as accounts receivable, inventory, and account payable.

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48. Under U.S.GAAP, which of the following statements about classifying cash flows is least accurate? A. Cash received from issuing long-term debt or stock is considered a financing cash flow. B. All income taxes paid are considered operating cash flows, even if some arise from financing and investing activities. C. Dividend payments made are financing cash flows, while interest payments received are investing cash flows.

Ans: C. Interest and dividends received and interest paid are considered operating cash flows under U.S.GAAP, but dividends paid are considered financing cash flows. Reference: Question 3.

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49. Bao Technologies reported the following information for the year ending December 31: Data Net sales 50,000 Cash expenses 3,250 Cash inputs 17,000 Cash taxes 7,000 Increase in receivables 500 Depreciation expense 1,000 Cash flow from investing(CFI) (5,000) Cash flow from financing(CFF) (4,250) If the cash balance increased $13,000 over the year, cash flow from operations (CFO) is closest to: A. $21,250. B. $21,750. C. $22,250.

Ans: A. The easiest way to calculate CFO here is total cash flow-CFI-CFF =$13,000+5,000+4,250 =$22,250. Alternatively, CFO =$50,000-3,250-17,000-7,000-500          =$22,250.