Multiple Choice Answers

Under the direct method of determining net cash provided by operating activities on the statement of cash flows, the net income figure is adjusted for changes in current assets and liabilities.
True
False

Bennett Company reported sales on its income statement last year of $420,000. On the company’s statement of cash flows, sales adjusted to a cash basis were $412,000. (The company uses the direct method to determine the net cash provided by operating activities.) Bennett Company reported the following account balances on its comparative balance sheet:

Ending
Balance           Beginning
Balance
Accounts receivable   $45,000           ?
Prepaid expenses        $38,000           $35,000
Inventory        $45,000           $50,000

Based on this information, the beginning accounts receivable balance was:

$37,000
$42,000
$53,000
$39,000

Last year Lawsby Company reported sales of $330,000 on its income statement. During the year, accounts receivable increased by $34,000 and accounts payable increased by $39,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The sales revenue adjusted to a cash basis for the year would be:

$325,000
$335,000
$296,000
$291,000

If accounts receivable increase during a period, then the amount of cash collected from customers will be greater than the amount of sales reported on the income statement for the period.
True
False

Under the direct method of determining the net cash provided by operating activities on the statement of cash flows, an increase in income taxes payable would be subtracted from income tax expense to convert income tax expense to a cash basis.
True
False

Kelln Corporation’s most recent comparative balance sheet and income statement appear below:

Kelln Corporation
Comparative Balance Sheet
Ending
Balance           Beginning
Balance
Assets:
Cash and cash equivalents     $37      $35
Accounts receivable   85        75
Inventory        64        77
Property, plant and equipment           898      760
Less accumulated depreciation          331      285
Total assets     $753    $662
Liabilities and stockholders’ equity:
Accounts payable       $84      $50
Bonds payable            463      500
Common stock           30        10
Retained earnings       176      102
Total liabilities and stockholders’ equity      $753    $662

Income Statement
Sales   $750
Cost of goods sold      450
Gross margin  300
Selling and administrative expense   161
Net operating income 139
Income taxes   49
Net income     $90

The company paid a cash dividend and it did not dispose of any property, plant, and equipment. The company did not issue any bonds payable or repurchase any of its own common stock. The company uses the direct method to determine the net cash provided by operating activities.
The net cash provided by (used in) operating activities for the year was:

$83
$173
$7
$139

Free cash flow is net cash provided by operating activities less dividends.
True
False
Under the direct method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts payable would be added to cost of goods sold to convert cost of goods sold to a cash basis.
True
False

Last year Burford Company’s cash account decreased by $29,000. Net cash used in investing activities was $8,400. Net cash provided by financing activities was $26,500. On the statement of cash flows, the net cash flow provided by (used in) operating activities was:

$(47,100)
$(29,000)
$(10,900)
$18,100

The change in the cash balance must equal the changes in all other balance sheet accounts besides cash.
True
False

A newly formed company with enormous growth prospects would be expected to have negative free cash flow during its start-up phase.
True
False

A company can increase its net cash flow by increasing the depreciation expense it records during the period.
True
False

Negative free cash flow suggests that the company did not generate enough cash flow from its operating activities to fund its capital expenditures and dividend payments.
True
False

A gain on the sale of equipment would be included as part of a company’s financing activities on the statement of cash flows.
True
False

Last year Cumber Company reported a cost of goods sold of $74,000. Inventories decreased by $16,000 during the year, and accounts payable increased by $14,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be:

The changes in Tener Company’s balance sheet account balances for last year appear below:

Increases
(Decreases)
Asset and Contra-Asset Accounts:
Cash    $(8,000)
Accounts receivable   $(5,000)
Inventory        $0
Prepaid expenses        $12,000
Long-term investments          $42,000
Property, plant and equipment           $17,000
Accumulated depreciation     $57,000
Liability and Equity Accounts:
Accounts payable       $5,000
Accrued liabilities      $(15,000)
Income taxes payable $16,000
Bonds payable            $(20,000)
Common stock           $13,000
Retained earnings       $13,550

The company’s income statement for the year appears below:
Income Statement
Sales   $770,000
Cost of goods sold      460,000
Gross margin  310,000
Selling and administrative expenses 263,000
Net operating income 47,000
Income taxes   16,450
Net income     $30,550

The company declared and paid $17,000 in cash dividends during the year. It did not dispose of any property, plant, and equipment during the year. The company uses the direct method to determine the net cash provided by operating activities.

On the statement of cash flows, the cost of goods sold adjusted to a cash basis would be:

$465,000
$450,000
$460,000
$455,000

Kelln Corporation’s most recent comparative balance sheet and income statement appear below:

Kelln Corporation
Comparative Balance Sheet
Ending
Balance           Beginning
Balance
Assets:
Cash and cash equivalents     $41      $39
Accounts receivable   95        79
Inventory        72        81
Property, plant and equipment           958      800
Less accumulated depreciation          339      289
Total assets     $827    $710
Liabilities and stockholders’ equity:
Accounts payable       $97      $54
Bonds payable            499      540
Common stock           69        45
Retained earnings       162      71
Total liabilities and stockholders’ equity      $827    $710

Income Statement
Sales   $790
Cost of goods sold      470
Gross margin  320
Selling and administrative expenses 155
Net operating income 165
Income taxes   58
Net income     $107

The company paid a cash dividend and it did not dispose of any property, plant, and equipment. The company did not issue any bonds payable or repurchase any of its own common stock.

The net cash provided by (used in) investing activities for the year was:

$108
$158
$(158)
$(108)

A company can have a net loss and still generate a positive net cash provided by operating activities in its statement of cash flows.
True
False

Cridman Company’s selling and administrative expenses for last year totaled $310,000. During the year the company’s prepaid expense account balance decreased by $27,000 and accrued liabilities increased by $30,000. Depreciation for the year was $31,000. Based on this information, selling and administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:
$398,000
$336,000
$284,000
$222,000

Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, a decrease in accounts receivable is added to net income.
True
False

The investing and financing sections of the statement of cash flows record net cash flows rather than gross cash flows.
True
False

Free cash flow increases when a company issues common stock for cash.
True
False

Kelln Corporation’s most recent comparative balance sheet and income statement appear below:

Kelln Corporation
Comparative Balance Sheet
Ending
Balance           Beginning
Balance
Assets:
Cash and cash equivalents     $41      $39
Accounts receivable   95        79
Inventory        72        81
Property, plant and equipment           958      800
Less accumulated depreciation          339      289
Total assets     $827    $710
Liabilities and stockholders’ equity:
Accounts payable       $97      $54
Bonds payable            499      540
Common stock           69        45
Retained earnings       162      71
Total liabilities and stockholders’ equity      $827    $710

Income Statement
Sales   $790
Cost of goods sold      470
Gross margin  320
Selling and administrative expense   155
Net operating income 165
Income taxes   58
Net income     $107

The company paid a cash dividend and it did not dispose of any property, plant, and equipment. The company did not issue any bonds payable or repurchase any of its own common stock.

The net cash provided by (used in) financing activities for the year was:

$(16)
$(41)
$(33)
$24

Baldock Corporation’s balance sheet and income statement appear below:

Baldock Corporation
Comparative Balance Sheet
Ending
Balance           Beginning
Balance
Asset:
Cash and cash equivalents     $43      $38
Accounts receivable   34        29
Inventory        46        57
Property, plant and equipment           445      330
Less accumulated depreciation          211      189
Total assets     $357    $265
Liabilities and stockholders’ equity:
Accounts payable       $66      $58
Accrued liabilities      22        15
Income taxes payable 38        33
Bonds payable            31        35
Common stock           49        40
Retained earnings       151      84
Total liabilities and stockholders’ equity      $357    $265
Income Statement
Sales   $756
Cost of goods sold      473
Gross margin  283
Selling and administrative expenses 166
Net operating income 117
Gain on sale of plant and equipment 16
Income before taxes   133
Income taxes   48
Net income     $85

Cash dividends were $18. The company sold equipment for $16 that was originally purchased for $12 and that had accumulated depreciation of $12. The company uses the direct method to determine the net cash provided by operating activities. The net cash provided by (used in) operating activities for the year was:

$151
$129
$147
$117