Q: Which formula correctly calculates cash collections from customers using the direct method?

$\text{Cash Collections} = \text{Sales} + \text{Beginning Accounts Receivable} - \text{Ending Accounts Receivable}$

Question 1

Which of the following is NOT a primary purpose of the statement of cash flows?

Accepted Answer

To determine the market value of assets

Question 2

Which activity is classified as an investing activity on the statement of cash flows?

Accepted Answer

Acquisition of plant assets

Question 3

Under the indirect method, which adjustment is made to net income for depreciation expense?

Accepted Answer

Depreciation expense is added back to net income

Question 4

A company sold equipment for $62,000. The book value was $54,000. How is the $8,000 gain treated in the operating section of the statement of cash flows (indirect method)?

Accepted Answer

It is subtracted from net income

Question 5

If accounts receivable increased by $15,000 during the year, what is the effect on cash flows from operating activities (indirect method)?

Accepted Answer

Decrease cash flows by $15,000

Question 6

Which of the following is reported as a cash inflow from financing activities?

Accepted Answer

Issuance of common stock

Question 7

Which method of preparing the statement of cash flows is preferred by FASB and IASB, and why?

Accepted Answer

Direct method, because it provides clearer information about sources and uses of cash

Question 8

Which of the following is NOT included in the operating section of the statement of cash flows using the direct method?

Accepted Answer

Depreciation expense

Question 9

A company’s accounts payable increased by $34,000 during the year. What is the effect on cash flows from operating activities (indirect method)?

Accepted Answer

Increase cash flows by $34,000

Question 10

Which of the following transactions is considered a noncash investing and financing activity?

Accepted Answer

Acquisition of building by issuing common stock

Question 11

Given the following data for accounts receivable: Beginning balance $81,000, Sales $303,000, Ending balance $96,000. What is the amount of cash collections from customers?

Accepted Answer

$288,000

Question 12

Which of the following would decrease cash flows from operating activities under the indirect method?

Accepted Answer

Increase in prepaid expenses

Question 13

Which of the following is a cash outflow from investing activities?

Accepted Answer

Cash payments to acquire plant assets

Question 14

A company declared and paid cash dividends of $17,000. How is this reported on the statement of cash flows?

Accepted Answer

As a financing activity cash outflow

Question 15

Which of the following is TRUE regarding the direct and indirect methods for reporting operating activities?

Accepted Answer

The direct method requires more computations than the indirect method

Question 16

If salary and wages payable decreased by $2,000 during the year, what is the effect on cash flows from operating activities (indirect method)?

Accepted Answer

Decrease cash flows by $2,000

Question 17

Which formula correctly calculates cash collections from customers using the direct method?

Accepted Answer

$	ext{Cash Collections} = 	ext{Sales} + 	ext{Beginning Accounts Receivable} - 	ext{Ending Accounts Receivable}$

Question 18

Which of the following is NOT a cash payment reported in the operating section using the direct method?

Accepted Answer

Payments for depreciation

Question 19

A company made a loan to another company for $21,000. How is this transaction reported on the statement of cash flows?

Accepted Answer

As a cash outflow from investing activities

Question 20

Which of the following statements is correct regarding depreciation expense on the statement of cash flows?

Accepted Answer

It is added back to net income under the indirect method

Chapter 11: Statement of Cash Flows – Financial Accounting Study Notes

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