Question

Click to watch the Tell Me More Learning Objective 2 video and then answer the questions below. 1. While calculating cash flows from operating activities using the indirect method, which of the following is added to the net income? a. Increase in accounts payable b. Decrease in sundry creditors c. Decrease in common stock d. Increase in inventories 2. Silver Trading Corp. recorded a net income of $200,000 for the year 20X1. For the same period, the company purchased land for $150,000. It sold some of its long term investments for $50,000 during the period. The company also recorded a depreciation of $10,000 on its equipment. Considering the above transactions, Silver's net cash flows from investing activities for the year would be an: a. inflow of $200,000. b. inflow of $50,000. c. outflow of $100,000. d. outflow of $150,000. 3. Wordmill Publications purchased a printing machine for $40,000 on January 1, 20X1. On December 31, 2005, it sold the printing machine for $25,000. The book value of the equipment on the date of sale was $20,000. Assuming that the company used the indirect method while preparing its statement of cash flows, which of the following is true of the treatment of the gain on sale of the printing machine in the cash flow statements? a. The gain of $5,000 is deducted in the financing activities section of the statement of cash flows. b. The gain of $5,000 is added in the operating activities section of the statement of cash flows. c. The gain of 55,000 is added in the cash flows from financing activities section of the statement of cash flows. d. The gain of $5,000 is deducted in the operating activities section of the statement of cash flows.

Answer 1

solution. © to correct Answer i option (A). Reason: cas increase (a) increase in account payable means increased cash due to non-payment to the creditors idest, lby decrease in sundry creditors means payment in cash has been made this cash would have been reduced. A Decrease in connion stock is a non-coch transaction (do Increase in Inventory is an expenses , thuis it must have resulted in cash outflow and thus subtracted is option (c) 2 Correct answer Reason: Cash outflow due to purchase maar $150,000 of Land cash inflow due to sale of $50,000 = Long term investment Repreciation is a non- cash transaction, this it does not affect the cash flow of business in cash flow to om Net flow to an activities - $ 150,000 - $50,000 = outflow of $100,000. Inkestment

Correct Answer is option (D) Reason! (A) gain of $5000 is not to be deducted from the financing activities because it forms the part of investment activities. (B) The gain ú not to be added in operating activities sution became it is an Wasting activity. (c) The gain i r not added to financing activitie becausse it belongs to investing activities (1) This is the correct option because operating income does not include any gain other than from the operations of the business. Thus, for Calculating correct figure of actual cash flow from operating activities, the gain on sale is deducted thereof.