Reading 34: Understanding the Cash Flow Statement LOSf习题精选 collected, customers, following, decrease, process

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LOS f: Describe the process of converting a cash flow statement from the indirect to the direct method of presentation.

In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?

Cash collections from customers:

Cash payments to suppliers:

A) Subtract decrease in unearned revenue Subtract an inventory writedown

B) Subtract decrease in unearned revenue Add an inventory writedown

C) Add decrease in unearned revenue Subtract an inventory writedown

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Beginning with net sales, calculating cash collected from customers requires the addition (subtraction) of any increase (decrease) in unearned revenue. Cash advances from customers represent unearned revenue and are not included in net sales, so any advances must be added to net sales in order to calculate cash collected.

An inventory writedown, as a result of applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the period. However, no cash flow is associated with the writedown, so COGS is reduced by the amount of the writedown in calculating cash paid to suppliers.

 

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To convert an indirect statement of cash flows to a direct basis, the analyst would:

A) subtract increases in inventory from cost of goods sold.

B) add increases in accounts payable to cost of goods sold.

C) add decreases in accounts receivables to net sales.

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A decrease in accounts receivable represents an increase in cash so this should be added to sales. Increases in accounts payable represent an increase in cash so these should be subtracted from cost of goods sold. Increases in inventory represent a use of cash so these would be added to cost of goods sold.

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To convert an indirect statement of cash flows to a direct basis, the analyst would:

A) reduce cost of goods sold by any decreases in accounts payable.

B) reduce cost of goods sold by any decreases in inventory.

C) increase cost of goods sold by any depreciation that was included.

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Decreases in inventory represent a source of cash so these would be subtracted from cost of goods sold. Any depreciation and/or amortization included in the cost of goods sold does not represent an actual use of cash, so this amount should be subtracted from cost of goods sold. Decreases in accounts payable represent a use of cash so these should be added to cost of goods sold.

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The only section of the statement of cash flows that must be adjusted to convert a statement of cash flows from the indirect to the direct method is:

A) cash flows from investing.

B) cash flows from financing.

C) cash flows from operations.

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The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same for both the indirect and direct methods. Only the cash flows from operations section must be adjusted to convert the statement of cash flows from the indirect to the direct method.