Question

In preparing a statement of cash flows, cash flows from operating activities

a.   are always equal to accrual accounting income.

b.   are calculated as the difference between revenues and expenses.

c.   can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.

d.   can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

Explain in one or two sentences why your answer (for #4 above) is correct?

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    5.     Free cash flow is calculated as net cash provided by operating activities less

a.   capital expenditures.

b.   dividends.

c.   capital expenditures and dividends.

d.   capital expenditures and depreciation.

Explain in one or two sentences why your answer (for #5 above) is correct?

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6.         Houghton Company has the following items: common stock, $1,600,000; treasury stock, $210,000; deferred income taxes, $250,000 and retained earnings, $780,000. What total amount should Houghton Company report as stockholders’ equity?

a.   $1,390,000.

b.   $2,170,000.

c.   $2,420,000.

d.   $2,590,000.

Show how you calculated your answer (for #6 above)?

Answer 1

1) c.   can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. non cash expenses like amortisation and depreciation are non cash expenses, that why they get added back to net income to adjust it

2) c.   capital expenditures and dividends. , Free cash flow measures how much cash has been generated by company after capital expenditures to maintain competitiveness and business expansions like paying dividend

Free cash flow = net cash provided by operating activities - capital expenditures - dividends

3.) b.   $2,170,000

stockholders’ equity=  common stock, $1,600,000 - treasury stock, $210,000 + retained earnings, $780,000

= $2170000