Chapter 21 The Statement of Cash Flows

True/False Questions

1. Amounts held in cash equivalent investments must be reported separately from amounts held as cash on the statement of cash flows.

Answer: False Learning Objective: 2 Level of Learning:

2. Generally speaking, cash flows from operating activities include the elements of net income reported on a cash basis.

Answer: True Learning Objective: 4 Level of Learning: 2

3. In using a spreadsheet to prepare the statement of cash flows, the spreadsheet entries duplicate the actual journal entries used to record the transactions during the year.

Answer: True Learning Objective: 8 Level of Learning: 2

4. Interest payments on debt are classified as cash outflows from financing activities.

Answer: False Learning Objective: 6 Level of Learning: 2

5. Transactions that represent noncash investing and financing should be reported in the statement of cash flows.

Answer: True Learning Objective: 7 Level of Learning: 2

6. If the direct method is used to report cash flows from operating activities in the body of the statement of cash flows, a reconciliation of net income to net cash flows from operating activities also is required.

Answer: True Learning Objective: 4 Level of Learning: 1

7. Cash paid for taxes and interest must be disclosed on the face of the statement or in the disclosure notes under both the direct and indirect methods of reporting cash flows from operating activities.

Answer: True Learning Objective: 4 Level of Learning: 1

8. The purchase of treasury stock is an investing cash outflow.

Answer: False Learning Objective: 5 Level of Learning: 1

9. A decrease in cash dividends payable means that dividends declared were less than dividends paid.

Answer: True Learning Objective: 4 Level of Learning: 2

10. When one enters a $50,000 credit entry to the Land account in a spreadsheet for the statement of cash flows, it represents a negative change in that account and probably is due to selling such assets.

Answer: True Learning Objective: 8 Level of Learning: 2

Matching Pair Questions

Use the following to answer questions 11-15:

11-15. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating cash inflow

B. Operating cash outflow

C. Investing cash inflow

D. Investing cash outflow

E. Financing cash inflow

F. Financing cash outflow

G. Noncash financing and investing activity

H. Not reported on the statement of cash flows

Phrases:

11. ____ Gain from the sale of a cash equivalent.

12. ____ Cash purchase of inventory.

13. ____ Cash dividends received under the equity method.

14. ____ Principal payment on a note.

15. ____ Distribution of a stock dividend.

Answer: 11-A; 12-B; 13-C; 14-F; 15-H

Use the following to answer questions 16-20:

16-20. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating cash inflow

B. Operating cash outflow

C. Investing cash inflow

D. Investing cash outflow

E. Financing cash inflow

F. Financing cash outflow

G. Noncash financing and investing activity

H. Not reported on the statement of cash flows

Phrases:

16. ____ Cash collected on accounts receivable.

17. ____ Cash collection of a nontrade note receivable.

18. ____ Cash purchase of securities issued by another corporation.

19. ____ Issuance of a long-term note payable for cash.

20. ____ Payment of a property dividend.

Answer: 16-A; 17-C; 18-D; 19-E; 20-G

Use the following to answer questions 21-25:

21-25. Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating activity, no adjustment to net income

B. Operating activity, negative adjustment to net income

C. Operating activity, positive adjustment to net income

D. Investing cash inflow

E. Investing cash outflow

F. Financing cash inflow

G. Financing cash outflow

H. Noncash financing and investing activity

Phrases:

21. ____ Increase in inventory account.

22. ____ Payment of cash dividends.

23. ____ Cash sales.

24. ____ Prepayment of an insurance premium for six months.

25. ____ Cash proceeds from sale of equipment.

Answer: 21-B; 22-G; 23-A; 24-B; 25-D

Use the following to answer questions 26-30:

26-30. Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating activity, no adjustment to net income

B. Operating activity, negative adjustment to net income

C. Operating activity, positive adjustment to net income

D. Investing cash inflow

E. Investing cash outflow

F. Financing cash inflow

G. Financing cash outflow

H. Noncash financing and investing activity

Phrases:

26. ____ Payment of semi-annual interest on bonds payable.

27. ____ Acquisition of a building for cash.

28. ____ Depreciation expense.

29. ____ Issuance of bonds at a discount for cash.

30. ____ Decrease in account payable.

Answer: 26-A; 27-E; 28-C; 29-F; 30-B

Use the following to answer questions 31-35:

31-35. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating cash inflow

B. Operating cash outflow

C. Investing cash inflow

D. Investing cash outflow

E. Financing cash inflow

F. Financing cash outflow

G. Noncash financing and investing activity

H. Not reported on the statement of cash flows

Phrases:

31. ____ Acquisition of equipment by issuing bonds payable.

32. ____ Repayment of long-term debt by issuing preferred stock.

33. ____ Interest received on trading securities.

34. ____ Cash sale of a patent.

35. ____ Loan of cash to a supplier in exchange for a six-month note receivable.

Answer: 31-G; 32-G; 33-A; 34-C; 35-D

Use the following to answer questions 36-40:

36-40. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

Terms:

A. Operating cash inflow

B. Operating cash outflow

C. Investing cash inflow

D. Investing cash outflow

E. Financing cash inflow

F. Financing cash outflow

G. Noncash financing and investing activity

H. Not reported on the statement of cash flows

Phrases:

36. ____ Payment of cash dividends.

37. ____ Purchase of treasury stock.

38. ____ Investment of excess cash in an interest-bearing security classified as a cash equivalent.

39. ____ Appropriation of retained earnings for expansion of the R&D program.

40. ____ Acquisition of equipment under a capital lease.

Answer: 36-F; 37-F; 38-H; 39-H; 40-G

Multiple Choice Questions

41. Which of the following financial statements is prepared as of a particular point in time rather than for a period of time?

A) Statement of cash flows.

B) Income statement.

C) Statement of shareholders' equity.

D) Balance sheet.

Answer: D Learning Objective: 1 Level of Learning: 1

42. Which one of the following financial statements does not report amounts primarily on an accrual basis?

A) Income statement.

B) Balance sheet.

C) Statement of cash flows.

D) Statement of shareholders' equity.

Answer: C Learning Objective: 1 Level of Learning: 1

43. Which of the following is not required by generally accepted accounting principles?

A) Cash flow per share.

B) Earnings per share.

C) Statement of cash flows.

D) Disclosure notes.

Answer: A Learning Objective: 1 Level of Learning: 1

44. Which of the following is always reported as an outflow of cash?

A) The accrual of warranty expense.

B) The declaration of a cash dividend.

C) The purchase of equipment for cash.

D) Amortization expense.

Answer: C Learning Objective: 5 Level of Learning: 1

45. Which of the following causes a change in cash?

A) Accrual of interest payable.

B) Recording of depreciation expense.

C) Write-off of an uncollectible account.

D) Payment of a cash dividend declared in the previous fiscal year.

Answer: D Learning Objective: 6 Level of Learning: 1

46. Cash equivalents generally would not include short-term investments in:

A) Commercial paper.

B) Certificates of deposit.

C) Held-to-maturity securities.

D) Money market funds.

Answer: C Learning Objective: 2 Level of Learning: 1

47. How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?

A) A decrease in cash flows from investing activities.

B) An increase in cash flows from investing activities.

C) A deduction from net income.

D) An addition to net income in arriving at cash flows from operations.

Answer: D Learning Objective: 4 Level of Learning: 2

48. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method?

A) Not reported.

B) An increase in cash flows from operating activities.

C) A decrease in cash flows from operating activities.

D) A decrease in cash flows from investing activities.

Answer: A Learning Objective: 1 Level of Learning: 2

49. Which of the following is reported as an investing activity on the statement of cash flows?

A) Sale of a subsidiary.

B) Issuance of a long-term promissory note.

C) Sale of treasury stock.

D) Purchase of highly liquid, short-term investments with excess cash.

Answer: A Learning Objective: 5 Level of Learning: 2

50. Which of the following is reported as an investing activity on the statement of cash flows?

A) The receipt of dividend revenue.

B) The payment of cash dividends.

C) The payment of interest on bonds.

D) The sale of machinery.

Answer: D Learning Objective: 5 Level of Learning: 2

51. Which of the following is reported as an operating activity on the statement of cash flows?

A) The payment of dividends.

B) The sale of office equipment.

C) The payment of interest on long-term notes.

D) The issuance of a stock dividend.

Answer: C Learning Objective: 3 Level of Learning: 2

52. Which of the following is reported as an operating activity on the statement of cash flows?

A) The purchase of operating assets.

B) The acquisition of treasury stock.

C) The retirement of bonds.

D) The payment of prepaid insurance.

Answer: D Learning Objective: 3 Level of Learning: 2

53. Which of the following is reported as a financing activity on the statement of cash flows?

A) The sale of securities classified as available for sale.

B) The acquisition of stock for the purpose of retiring it.

C) The payment of interest on bonds payable.

D) The receipt of dividend revenue.

Answer: B Learning Objective: 6 Level of Learning: 2

54. Which of the following is reported as a financing activity on the statement of cash flows?

A) The amortization of a patent.

B) The exchange of common stock for a building.

C) The acquisition of long-term investments.

D) The repayment of bonds issued at par.

Answer: D Learning Objective: 6 Level of Learning: 2

55. When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities, depreciation is added to net income because:

A) It was deducted as an expense on the income statement, but does not require cash.

B) It was deducted as an expense on the income statement and affects the amount of cash.

C) It is a significant portion of the year's expenses.

D) It represents a source or inflow of cash.

Answer: A Learning Objective: 4 Level of Learning: 2

56. Which of the following is not classified as an operating activity?

A) Interest paid on long-term debt.

B) Dividends received on common stock.

C) Dividends paid on common stock.

D) Payments on accounts payable.

Answer: C Learning Objective: 6 Level of Learning: 2

57. When a company purchases a security it considers a cash equivalent, the cash outflow is:

A) Reported as an operating activity.

B) Reported as an investing activity.

C) Reported as a financing activity.

D) Not reported on a statement of cash flows.

Answer: D Learning Objective: 2 Level of Learning: 2

58. When treasury stock is sold at an amount less than its cost, the sale is classified as:

A) A financing activity.

B) An operating activity.

C) A financing activity and an operating activity.

D) An investing activity.

Answer: A Learning Objective: 6 Level of Learning: 2

59. Using the direct method, cash received from customers is calculated as sales:

A) Plus an increase in allowance for uncollectible accounts.

B) Minus an increase in allowance for uncollectible accounts.

C) Plus an increase in accounts receivable.

D) Plus a decrease in accounts receivable.

Answer: D Learning Objective: 3 Level of Learning: 3

60. Cash paid to suppliers under the direct method is computed as:

A) Cost of goods sold plus a decrease in inventory and minus an increase in accounts payable.

B) Cost of goods sold plus an increase in inventory and minus an increase in accounts payable.

C) Cost of goods sold minus a decrease in inventory and plus an increase in accounts payable.

D) Cost of goods sold minus an increase in inventory and plus an increase in accounts payable.

Answer: B Learning Objective: 3 Level of Learning: 3

61. Which of the following never requires an outflow of cash?

A) Early extinguishment of debt.

B) Retirement of common stock.

C) Payment of dividends.

D) Amortization of patent.

Answer: D Learning Objective: 1 Level of Learning: 1

62. Which of the following is not an inflow of cash?

A) Depletion.

B) Cash borrowed on a short-term note.

C) Sale of a computer.

D) Cash borrowed on a long-term note.

Answer: A Learning Objective: 1 Level of Learning: 1

63. The amortization of bond discount is included in the statement of cash flows (indirect method) as:

A) A financing cash inflow.

B) An investing activity.

C) An addition to net income.

D) A deduction from net income.

Answer: C Learning Objective: 4 Level of Learning: 1

64. Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?

A) Cash dividends paid.

B) A change in accounts receivable.

C) Depreciation.

D) A change in a prepaid expense.

Answer: A Learning Objective: 4 Level of Learning: 1

65. Which of the following is reported as a deduction from net income when using the indirect method to determine net cash flows from operating activities?

A) Depreciation expense.

B) A bad debt written off under the allowance method.

C) Amortization of premium on bonds payable.

D) Dividends declared.

Answer: C Learning Objective: 4 Level of Learning: 2

66. All of the following may qualify as cash equivalents except:

A) Money market accounts.

B) Certificates of deposit.

C) U.S. Treasury bills.

D) Newly issued corporate bonds.

Answer: D Learning Objective: 1 Level of Learning: 1

67. Cost of goods sold as reported on the income statement will be less than cash paid to suppliers if:

A) The increase in accounts payable is greater than the increase in inventory during the period.

B) The decrease in accounts payable is equal to the increase in inventory during the period.

C) The decrease in accounts payable is less than the decrease in inventory during the period.

D) The increase in accounts payable is equal to the decrease in inventory during the period.

Answer: B Learning Objective: 3 Level of Learning: 3

68. The primary objective of the statement of cash flows is to provide information about a company's:

A) Cash receipts and disbursements.

B) Noncash financing and investing activities.

C) Financial position.

D) Profitability.

Answer: A Learning Objective: 1 Level of Learning: 1

69. When a transfer is made between cash and cash equivalents with no gain or loss, how is the transaction treated on the statement of cash flows?

A) It is included as an operating activity.

B) It is included as a noncash financing activity.

C) It is included as an investing activity.

D) It is not reported.

Answer: D Learning Objective: 1 Level of Learning: 2

70. Creditors and investors would generally find the statement of cash flows least useful for assessing the:

A) Ability to generate future cash flows.

B) Ability to pay dividends.

C) Financial position at a point in time.

D) Quality of earnings.

Answer: C Learning Objective: 1 Level of Learning: 2

71. Of the following, which is not an investing activity?

A) Purchasing a new computer.

B) Buying treasury stock.

C) Selling a parcel of land.

D) Purchasing short-term investments.

Answer: B Learning Objective: 6 Level of Learning: 2

72. A loss on the sale of machinery should be reported on the statement of cash flows as:

A) An adjustment to net income under the indirect method.

B) An operating activity under the direct method.

C) An investing activity cash outflow.

D) A noncash investing activity.

Answer: A Learning Objective: 4 Level of Learning: 2

73. Which of the following would not be a cash inflow from financing activities?

A) Cash from issuing common stock.

B) Cash from issuing bonds.

C) Cash from issuing preferred stock.

D) Cash from the sale of stock of a supplier.

Answer: D Learning Objective: 6 Level of Learning: 2

74. Which of the following would be reported as a cash outflow from investing activities?

A) Issuance of bonds.

B) Purchase of land.

C) Payment of dividends.

D) Retirement of common stock.

Answer: B Learning Objective: 5 Level of Learning: 2

75. Payments to acquire bonds of other corporations should be classified on a statement of cash flows as:

A) A lending activity.

B) An operating activity.

C) A financing activity.

D) An investing activity.

Answer: D Learning Objective: 5 Level of Learning: 2

76. Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?

A) A gain on the sale of land.

B) An increase in prepaid expenses.

C) A decrease in accounts payable.

D) A decrease in accounts receivable.

Answer: D Learning Objective: 4 Level of Learning: 3

77. Which of the following would be an example of an investing activity on a statement of cash flows?

A) Sale of equipment.

B) Issuance of long-term bonds.

C) Receipt of investment revenue.

D) Conversion of a cash equivalent into cash.

Answer: A Learning Objective: 5 Level of Learning: 2

78. Interest payments to creditors are reported on a statement of cash flows as:

A) An investing activity.

B) A borrowing activity.

C) A financing activity.

D) An operating activity.

Answer: D Learning Objective: 4 Level of Learning: 1

79. Accrual of payroll expense is:

A) Reported as an operating activity in the statement of cash flows.

B) Reported as an investing activity in the statement of cash flows.

C) Reported as a financing activity in the statement of cash flows.

D) None of the above is correct.

Answer: D Learning Objective: 2 Level of Learning: 2

Rationale: Accruing expenses does not affect cash flows.

80. Purchase of equipment for cash is:

A) Reported as an operating activity in the statement of cash flows.

B) Reported as an investing activity in the statement of cash flows.

C) Reported as a financing activity in the statement of cash flows.

D) None of the above is correct.

Answer: B Learning Objective: 5 Level of Learning: 2

81. Acquiring land with a long-term note is:

A) Reported as an investing activity in the statement of cash flows.

B) Reported as a financing activity in the statement of cash flows.

C) Reported as a noncash investing and financing activity in the statement of cash flows.

D) None of the above is correct.

Answer: C Learning Objective: 7 Level of Learning: 2

82. Proceeds from the sale of a plant site are:

A) Reported as an operating activity in the statement of cash flows.

B) Reported as an investing activity in the statement of cash flows.

C) Reported as a financing activity in the statement of cash flows.

D) None of the above is correct.

Answer: B Learning Objective: 5 Level of Learning: 2

83. Purchase of treasury stock is:

A) Reported as a financing activity in the statement of cash flows.

B) Reported as an investing activity in the statement of cash flows.

C) Reported as an operating activity in the statement of cash flows.

D) None of the above is correct.

Answer: A Learning Objective: 6 Level of Learning: 2

Use the following to answer questions 84-88:

Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases.

84. In its 2006 income statement, WME reported a $60,000 loss on the sale of equipment. In its reconciliation schedule, WME should:

A) Report a $40,000 cash outflow for the direct method.

B) Show a $40,000 positive adjustment to net income under the indirect method.

C) Show a $40,000 negative adjustment to net income under the indirect method.

D) None of the above is correct.

Answer: B Learning Objective: 4 Level of Learning: 3

Rationale: This loss reduces net income, but has no effect on cash flow.

85. In its 2006 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:

A) Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.

B) Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.

C) Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.

D) Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.

Answer: C Learning Objective: 4 Level of Learning: 3

Rationale: When interest expense exceeds the cash paid, the effective interest rate exceeds the stated interest rate; therefore, the bond was sold at a discount.

86. In its 2006 income statement, WME reported $440,000 for the cost of goods sold. WME paid inventory suppliers $380,000 in 2006, and its inventory balance decreased by $41,000 during the year. In its reconciliation schedule, WME should:

A) Show a $19,000 positive adjustment to net income under the indirect method for the increase in accounts payable.

B) Show a $19,000 positive adjustment to net income under the indirect method for the decrease in accounts payable.

C) Show a $19,000 negative adjustment to net income under the indirect method for the increase in accounts payable.

D) Show a $19,000 negative adjustment to net income under the indirect method for the decrease in accounts payable.

Answer: A Learning Objective: 4 Level of Learning: 3

Rationale: Decrease in inventory balance by $41,000 indicates that purchases were less than cost of goods sold by $41,000, totaling $399,000. If cash paid to suppliers was $380,000, accounts payable increased by $19,000.

87. In its 2006 income statement, WME reported $58,000 for insurance expense. WME paid $72,000 in insurance premiums during 2006. In its reconciliation schedule, WME should:

A) Show a $14,000 positive adjustment to net income under the indirect method for the increase in prepaid insurance.

B) Show a $14,000 negative adjustment to net income under the indirect method for the decrease in prepaid insurance.

C) Show a $14,000 negative adjustment to net income under the indirect method for the increase in prepaid insurance.

D) Show a $14,000 positive adjustment to net income under the indirect method for the decrease in prepaid insurance.

Answer: C Learning Objective: 4 Level of Learning: 3

Rationale: Prepaid insurance, an asset account, increased by the cash payment of $72,000 and decreased by the $58,000 portion that was expensed. Thus, prepaid insurance increased by $14,000.

88. In its 2006 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2006. In its reconciliation schedule, WME should:

A) Show a $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue.

B) Show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.

C) Show a $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue.

D) Show a $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue.

Answer: B Learning Objective: 4 Level of Learning: 3

Rationale: Unearned revenue, a liability account, increased by the cash received for $681,000 and decreased by the $695,000 revenue recognized. Thus, unearned revenue decreased by $14,000.

89. Rampart Inc. recorded the following transaction:

Land	15 million
Notes Payable		12 million
Cash		3 million

In the statement of cash flows, this would be reported as:

A) $3 million outflow from investing activities.

B) $15 million outflow from investing activities.

C) $3 million outflow from investing activities and $12 million noncash investing and financing activity.

D) None of the above

Answer: C Learning Objective: 7 Level of Learning: 3

90. On December 31, 2006, Wellstone Company reported net income of $70,000 and sales of $210,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Wellstone will report cash collected from customers in its 2006 statement of cash flows (direct method) in the amount of:

A) $215,000.

B) $285,000.

C) $135,000.

D) $205,000.

Answer: D Learning Objective: 3 Level of Learning: 3

Rationale:

Cash	205,000
Accounts receivable	5,000
Sales revenue		210,000

91. On December 31, 2006, Tiras Company reported net income of $50,000 and sales of $200,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Tiras will report cash collected from customers in its 2006 statement of cash flows (indirect method) in the amount of:

A) $0.

B) $245,000.

C) $205,000.

D) $195,000.

Answer: A Learning Objective: 4 Level of Learning: 3

Rationale: When using the indirect method to determine cash flows from operating activities, cash collected from customers is not calculated or reported.

92. Hemmer Company reported net income for 2006 in the amount of $40,000. The company's financial statements also included the following:

Decrease in accounts receivable	$6,000
Increase in inventory	1,000
Depreciation expense	3,000

What is net cash provided by operating activities?

A) $38,000.

B) $43,000.

C) $35,000.

D) $48,000.

Answer: D Learning Objective: 4 Level of Learning: 3

Rationale:

Net income	$40,000
Decrease in accounts receivable	6,000
Increase in inventory	(1,000	)
Depreciation expense	3,000
Net cash flows from operating activities	$48,000

93. Creble Company reported net income for 2006 in the amount of $40,000. The company's financial statements also included the following:

Increase in accounts receivable	$4,000
Decrease in inventory	2,000
Depreciation expense	3,000
Gain on sale of equipment	5,000

On the statement of cash flows what is net cash provided by operating activities under the indirect method?

A) $36,000.

B) $41,000.

C) $40,000.

D) $38,000.

Answer: A Learning Objective: 4 Level of Learning: 3

Rationale:

Net income	$40,000
Increase in accounts receivable	(4,000	)
Decrease in inventory	2,000
Depreciation expense	3,000
Gain on sale of equipment	(5,000	)
Net cash flows from operating activities	$36,000

94. Lite Travel Company's accounting records include the following information:

Payments to suppliers	$50,000
Collections on accounts receivable	79,000
Cash sales	44,000

What is the amount of net cash provided by operating activities indicated by the numbers provided?

A) $ 50,000.

B) $ 73,000.

C) $ 94,000.

D) $129,000.

Answer: B Learning Objective: 3 Level of Learning: 3

Rationale:

Cash	73,000
Accounts payable	50,000
Accounts receivable		79,000
Sales revenue		44,000

95. Freeman Company's accounting records include the following information:

Payments to suppliers	$50,000
Collections on accounts receivable	90,000
Cash sales	20,000
Income taxes paid	5,000
Equipment purchased	15,000

What is the amount of net cash provided by operating activities indicated by these transactions?

A) $40,000.

B) $45,000.

C) $55,000.

D) $60,000.

Answer: C Learning Objective: 5 Level of Learning: 3

Rationale:

Cash	55,000
Accounts payable	50,000
Income taxes payable	5,000
Accounts receivable		90,000
Sales revenue		20,000

The purchase of equipment is an investing activity.

96. Ludwig Company's prepaid rent was $9,000 at December 31, 2005, and $13,000 at December 31, 2006. Ludwig reported rent expense of $19,000 on the 2006 income statement. What amount would be reported on the statement of cash flows as rent paid using the direct method?

A) $15,000.

B) $19,000.

C) $23,000.

D) None of the above is correct.

Answer: D Learning Objective: 3 Level of Learning: 3

Rationale:

Rent expense	19,000
Prepaid rent	4,000
Cash		23,000

97. Pickering Company's prepaid insurance was $8,000 at December 31, 2005, and $10,000 at December 31, 2006. Pickering reported insurance expense of $15,000 on the 2006 income statement. What amount would be reported on the statement of cash flows as insurance paid using the direct method?

A) $13,000.

B) $17,000.

C) $15,000.

D) $23,000.

Answer: B Learning Objective: 3 Level of Learning: 3

Rationale:

Insurance expense	15,000
Prepaid insurance	2,000
Cash		17,000

98. Alpha Company had the following account balances for 2006:

	Dec. 31	Jan. 1
Accounts receivable	$44,000	$35,000
Accounts payable	58,000	60,000

Alpha reported net income of $210,000 for 2006. Assuming no other changes in current account balances, what is the amount of net cash provided by operating activities for 2006 reported on the statement of cash flows?

A) $224,000.

B) $206,000.

C) $214,000.

D) $196,000.

Answer: D Learning Objective: 4 Level of Learning: 3

Rationale:

Net income	$210,000
Increase in accounts receivable	(9,000	)
Decrease in accounts payable	(5,000	)
	$196,000