1. Which of the following would be added to net income using the indirect method? a....
1. Which of the following would be added to net income using the indirect method?
a. An increase in prepaid expenses.
b. Depreciation expense.
c. A decrease in accounts payable.
d. An increase in accounts receivable.
2. T/F Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
3. T/F A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.
4.T/F In preparing a statement of cash flows, increases in the Common Stock and Treasury Stock accounts during a period would be investing activities
5. T/F Free cash flow equals cash provided by operations less capital expenditures and cash dividends.
Homework Answers
The correct answers are given in bold below:
1. Which of the following would be added to net income using the indirect method?
a. An increase in prepaid expenses (is deducted from net income since it is considered as cash outflow).
b. Depreciation expense (depreciation being a non-cash expense is added to net income)
c. A decrease in accounts payable (is deducted from net income since it is considered as cash outflow).
d. An increase in accounts receivable (is deducted from net income since it is considered as cash outflow).
2. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations. - TRUE (since it is considered as cash outflow)
3. A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method. TRUE (since it is a non-cash item, it is added back to net income to derive cash from operations)
4.In preparing a statement of cash flows, increases in the Common Stock and Treasury Stock accounts during a period would be investing activities - FALSE (any change in equity item would go under Cash from Financing activities)
5. Free cash flow equals cash provided by operations less capital expenditures and cash dividends - FALSE (free cash flow are calculated as cash provided by operations less capital expenditures)
Please comment in case of any issue and I will be happy to help.
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