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Operating Activities: Direct Method quiz

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  • What is the main purpose of the Direct Method for Operating Cash Flows?
    The Direct Method directly calculates cash flows from operating activities by summing all relevant cash flows, such as cash received from customers and cash paid to suppliers.
  • Which T account is used to determine cash received from customers in the direct method?
    The Accounts Receivable T account is used to determine cash received from customers.
  • How does a sale on credit affect the Accounts Receivable T account?
    A sale on credit increases the Accounts Receivable balance because the company is owed money by customers.
  • What transaction decreases the Accounts Receivable balance?
    Collecting cash from customers decreases the Accounts Receivable balance.
  • What is the formula for calculating cash received from customers using the Accounts Receivable T account?
    Cash received from customers = Beginning balance + Sales - Ending balance.
  • Which two T accounts are relevant for calculating cash paid to suppliers?
    Inventory and Accounts Payable T accounts are relevant for calculating cash paid to suppliers.
  • What increases the Inventory T account balance?
    Purchases of inventory increase the Inventory T account balance.
  • What decreases the Inventory T account balance?
    Selling inventory, which becomes cost of goods sold, decreases the Inventory T account balance.
  • How is the Accounts Payable T account affected by purchases?
    Purchases increase the Accounts Payable balance because the company owes money to suppliers.
  • What transaction decreases the Accounts Payable balance?
    Paying cash to suppliers decreases the Accounts Payable balance.
  • Why might you need to use both Inventory and Accounts Payable balances to calculate cash paid to suppliers?
    You may need to use both balances to determine purchases and then use those purchases in the Accounts Payable T account to find cash paid to suppliers.
  • Which T accounts are used to calculate cash paid for operating expenses in the direct method?
    Interest Payable and Income Tax Payable T accounts are used to calculate cash paid for operating expenses.
  • What increases the Interest Payable T account?
    Interest expense increases the Interest Payable T account.
  • What decreases the Interest Payable T account?
    Cash paid for interest decreases the Interest Payable T account.
  • Why is familiarity with T accounts important when using the direct method?
    Familiarity with T accounts is important because you often need to use them to find missing cash flow amounts for operating activities.