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Reading 34: Understanding the Cash Flow Statement - LOS f,

Q5. Use the following information to calculate cash flows from operations using the indirect method.

  • Net Income: $12,000

  • Depreciation Expense: $1,000

  • Loss on sale of machinery: $500

  • Increase in Accounts Receivable: $2,000

  • Decrease in Accounts Payable: $1,500

  • Increase in Income taxes payable: $500

  • Repayment of Bonds: $3,000

A)   Increase in cash of $7,500.

B)   Increase in cash of $9,500.

C)   Increase in cash of $10,500.

Q6. An analyst compiled the following information for Universe, Inc. for the year ended December 31, 20X4:

  • Net income was $850,000.

  • Depreciation expense was $200,000.

  • Interest paid was $100,000.

  • Income taxes paid were $50,000.

  • Common stock was sold for $100,000.

  • Preferred stock (eight percent annual dividend) was sold at par value of $125,000.

  • Common stock dividends of $25,000 were paid.

  • Preferred stock dividends of $10,000 were paid.

  • Equipment with a book value of $50,000 was sold for $100,000.

Using the indirect method and assuming U.S. GAAP, what was Universe Inc.’s cash flow from operations (CFO) for the year ended December 31, 20X4?

A)   $1,050,000.

B)   $1,015,000.

C)   $1,000,000.

Q7. When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following?

A)   A positive (negative) adjustment to net income when accounts payable increases (decreases).

B)   A negative (positive) adjustment to net income when accounts payable increases (decreases).

C)   A negative adjustment to net income regardless of whether accounts payable increases or decreases.

Q8. Given the following information, what is the adjustment to net income when calculating cash flow from operations using the indirect method?

  • Increase in accounts payable of $25.

  • Sold one share of stock for $15.

  • Paid dividends of $10 to shareholders.

  • Depreciation expense of $100.

  • Increase in inventory of $20.

A)   -$50.

B)   -$95.

C)   +$105.

答案和详解如下:

Q5. Use the following information to calculate cash flows from operations using the indirect method.

  • Net Income: $12,000

  • Depreciation Expense: $1,000

  • Loss on sale of machinery: $500

  • Increase in Accounts Receivable: $2,000

  • Decrease in Accounts Payable: $1,500

  • Increase in Income taxes payable: $500

  • Repayment of Bonds: $3,000

A)   Increase in cash of $7,500.

B)   Increase in cash of $9,500.

C)   Increase in cash of $10,500.

Correct answer is C)         

Cash flow from operations would be calculated as +Net Income $12,000 + Depreciation $1,000 + Loss on sale of machinery $500 − A/R $2,000 − A/P $1,500 + Income taxes payable $500 = $10,500.

Repayment of Bonds is a financing activity and would not be included with operating activities. Depreciation is not a cash flow activity and is therefore always added back to net income to calculate CFO. The loss on the sale of machinery is not a cash outflow so it is also added back to calculate CFO. Accounts receivable is subtracted when there is an increase as this increases net income but does not affect cash.

Q6. An analyst compiled the following information for Universe, Inc. for the year ended December 31, 20X4:

  • Net income was $850,000.

  • Depreciation expense was $200,000.

  • Interest paid was $100,000.

  • Income taxes paid were $50,000.

  • Common stock was sold for $100,000.

  • Preferred stock (eight percent annual dividend) was sold at par value of $125,000.

  • Common stock dividends of $25,000 were paid.

  • Preferred stock dividends of $10,000 were paid.

  • Equipment with a book value of $50,000 was sold for $100,000.

Using the indirect method and assuming U.S. GAAP, what was Universe Inc.’s cash flow from operations (CFO) for the year ended December 31, 20X4?

A)   $1,050,000.

B)   $1,015,000.

C)   $1,000,000.

Correct answer is C)

Cash flow from operations (CFO) using the indirect method is computed by taking net income plus non-cash expenses (i.e. depreciation) less gains from the equipment sale. Note that cash flow from operations must be adjusted downward for the amount of the gain on the sale of the equipment. Cash flow from operations is ($850,000 + $200,000 – ($100,000 − $50,000)) = $1,000,000. Note that interest and income taxes paid are expenses shown on the income statement and will already be factored into net income. The other information relates to financial and investing cash flows.

Q7. When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following?

A)   A positive (negative) adjustment to net income when accounts payable increases (decreases).

B)   A negative (positive) adjustment to net income when accounts payable increases (decreases).

C)   A negative adjustment to net income regardless of whether accounts payable increases or decreases.

Correct answer is A)

A decrease in accounts payable represents an outflow. Hence, a negative adjustment will be required. Conversely, an increase represents an inflow and a positive adjustment.

Q8. Given the following information, what is the adjustment to net income when calculating cash flow from operations using the indirect method?

  • Increase in accounts payable of $25.

  • Sold one share of stock for $15.

  • Paid dividends of $10 to shareholders.

  • Depreciation expense of $100.

  • Increase in inventory of $20.

A)   -$50.

B)   -$95.

C)   +$105.

Correct answer is C)

Using the indirect method, the increase in accounts payable is a source of cash from operations (+25), depreciation expense is a non-cash expense added back in computing cash from operations (+100), and increase in inventory is a use of cash from operations (-20) = 25 + 100 - 20 = 105. The sale of stock and the dividends paid are financing cash flows that are not included in net income, so they do not require adjustment when calculating CFO.

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