Question

1) At the end of the first year of operations, the balance sheet of Midwood Medical Supply showed the following account balances: Accounts Receivable, $4,000; Accounts Payable, $5,000; Inventory, $2,000; and Unexpired Insurance, $1,100. The corporation reported net income of $69,000 for the year, including depreciation expense of $4,000, and uses the indirect method of computing net cash flow from operating activities. Solely on the basis of this information, net cash flow from operating activities is:

Multiple Choice

• $67,900.

• $71,900.

• $70,900.

• $68,000.

2)

Under the indirect method, depreciation, increase in inventories, and "non-operating" losses are added to net income to arrive at net cash flow from operating activities.

True or False

3)

When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling:

Multiple Choice

• a) Net cash flow from operating activities shown in the statement with that which would result from use of the indirect method.

• b) Net cash flow from operating activities with net sales.

• c) Net income with the net increase or decrease in cash and cash equivalents.

• d) Net income with net cash flow from operating activities.

4)

Deferring income taxes by using legal accounting methods is one strategy to permanently improve cash flow.

True or False

Answer 1

1) Statement showing net cash flow from operating activities

Particulars	Amount
Net profit	69000
Add: Depreciation	4000
Net profit before depreciation	73000
WC Changes
Increase in Debtors - Decrease in cash	-4000
Increase in Inventories - Decrease in cash	-2000
Increase in unexpired insurance - Decrease in cash	-1100
Increase in creditors - increase in cash	5000
Net cash flow from Operating activity	70900

2) False

Reason : Depreciation and non operating income such as interest income are added back to net profit. However increase in inventory should be decreased from net profit to arrive at cash flow from operating activities

3) D)  Net income with net cash flow from operating activities.

4) True