Question

17. Which of the following below should be added to net income in calculating net cash flow from operating activities using the indirect method A. Gain on the sale of land. B. An increase in salaries payable. C. A decrease in accounts payable. D. An increase in accounts receivable. 18. Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows. A. True B. False 19. Common stock issued in exchange for land would be reported in the statement of cash flows in which of the following sections? A. Operating activities. B. Investing activities. C. Financing activities. D. None of the above. 20. A company that has free cash flow is able to find internal growth, retire debt, pay dividends, and benefit from financial flexibility. A True B. False 21. The percentage analysis of increases and decreases in individual items in comparative financial statements is called A. Solvency analysis B. Horizontal analysis. C. Profitability analysis. D. Vertical analysis. 22. One reason that a common size statement is a useful tool in financial analysis is that it enables the user to A. Determine which companies in a single industry are of the same size, B. Determine which companies in a single industry are of the same value. C. Make a better comparison of two companies of different sizes in the same industry. D. Judge the relative potential of two companies of similar size in different industries. 23. Walmart should have a higher inventory turnover ratio than TJ Maxx A Tree B. False 24. The current ratio is used to evaluate a company's liquidity and short-term debt paying ability A True. B. False

Answer 1

17..B(Increase in Salary Payable)

Increase in salary payable means salary for the period is not paid. While calculating Cashflow from Indirect Method Net profit from financial activities is considered

In net profit calculation Salaries is treated as expense and is deducted from revenue. However actually there is no actual cash outflow from salaries since not paid. So it is added while calculating cash flow from operating activities since there is no actual outflow.

18. A(True)

While calculating Cashflow from Indirect Method Net profit from financial activities is considered

In net profit calculation Expenses that do not affect cash (like depreciation) is treated as expense and is deducted from revenue. So it is added while calculating cash flow from operating activities since there is no actual outflow.

19. D(None of the above)

In cash flow statement only the items which are having impact on cash of the enterprise are considered

In Purchasing land for exchange of common stock there is no cash being impacted. Hence the

Same will not be reflected in cash flow statement

20.A(True)

Obviously, a Company with the free cash flow is able to fund internal growth, retire debt , pay dividends and benefit from financial flexibility

21.B(Horizontal Analysis)

The percentage analysis of increases and decreases in individual items in comparative financial statements is called horizontal analysis

22.D(judge the relative potential of two companies of similar size in different industries)

One reason that a common-size statement is a useful tool in financial analysis is that it enables the userto. judge the relative potential of two companies of similar size in different industries.

23.A(True)

Walmart should have higher inventory ratio than TJ maxx

24.A(True)

Current ratio=Current assets/Current liabilities

The ratio is an indicator of the firm’s commitment to meet its short-term liabilities

An ideal current ratio is ‘2’. However, a ratio of 1.5 is also acceptable if the firm has adequate arrangements with its bankers to meet its short-term requirements of funds

Hence it it used to evaluate a company’s liquidity and short term paying ability.