Question

True of false:

1. if a company uses the direct method of calculating net cash flows from operating activities, it must adjust net income for gains or losses when selling property when selling property, plant, & equipment

2. when preparing the operating activities section of the statement of cash flows using the indirect method, an increase in income taxes payable is added to net income

3. the issuance of a stock dividend is a cash outflow in the financing activities section of the statement of cash flows

4. when calculating net cash flow from financing activities using the direct method, a company mist convert interest expense to cash paid for interest

please explain

Answer 1

Please find below the solution

Statement if FALSE 1. if a company uses the direct method of calculating net cash flows from operating activities, it must adjust net income for gains or losses when selling property when selling property, plant, & equipment

When direct method is used than no adjustment for profit and loss from property plant and equipment is required.

Statement is TRUE : 2. when preparing the operating activities section of the statement of cash flows using the indirect method, an increase in income taxes payable is added to net income

we need to factor only cash inflow or outflow in cash flow statement. If we are using indirect method we need to adjust change in working capital account and therefore tax payable as well.

Statement is FALSE 3. the issuance of a stock dividend is a cash outflow in the financing activities section of the statement of cash flows

Issuance of stock dividend is not a cash item therefore should not be part of cash flow statement.

Statement is TRUE : 4. when calculating net cash flow from financing activities using the direct method, a company mist convert interest expense to cash paid for interest

We need to report interest paid and not interest expenses accrued. therefore we need to convert interest expenses to cash paid .