Learning Objective 5.7 Questions
1) Which of the following statements is incorrect, regarding the effect of depreciation expense on a statement of cash flows using the indirect method?
A) Depreciation expense is not an outflow of cash.
B) Depreciation expense represents an inflow of cash.
C) Depreciation expense is added in the operating activities section of the statement of cash flows.
D) Depreciation expense is not a source of cash.
E) Depreciation expense will reduce the net income used in determining net cash flow from operations.
2) If an accountant establishes the sales for the month and adds the beginning balance of accounts receivable and subtracts the accounts receivable balance at the end of the month, this would determine
A) cash collections from customers for the month.
B) net income for the month
C) total assets less liabilities for the month.
D) cash payments to vendors for the month.
E) total sales in cash for the month.
3) A supplementary schedule reconciling net income to net cash flow from operating activities is
A) not needed when using the direct method.
B) part of the income statement.
C) needed when using the direct method.
D) part of the balance sheet.
E) used by investors to determine earnings per share.
4) Purchases of inventory minus the increase in accounts payable equals
A) cash collected from customers.
B) cash collected for sales on credit.
C) cash paid to vendors.
D) cash paid for inventory.
E) none of the above
5) To determine cash collections from customers, we take sales and add the increase in Accounts Receivable.
6) Depreciation expense is not a source of cash; however, it is added to net income when determining net cash flow from operations under the indirect method.
7) Depreciation expense is not a source of cash; however, it is subtracted from net income when determining net cash flow from operations under the direct method.
8) Cash received from customers is equal to sales plus the increase in accounts receivable.
9) Purchases of inventory minus the increase in accounts payable equals cash paid for inventory.
10) Cost of goods sold plus the increase in inventory equals cash paid for inventory.
11) Molecule Labs, Inc. had sales of $450,000, all received in cash. Total operating expenses were $350,000. All expenses except depreciation were paid in cash. Depreciation of $60,000 was included in the operating expenses. Ignore income taxes. Calculate net income and net cash provided by operating activities using the direct method.