Tracy Company Reports the Following in Its Statement of Cash

question 29

Multiple Choice

Tracy Company reports the following in its statement of cash flows:
$\begin{array}{lr}\text { Net income } & \$ 1,000 \\\text { Depreciation and amortization } & 350 \\\text { Decrease (Increase) in accounts receivable } & (10) \\\text { Decrease (Increase) in inventory } & 200 \\\text { Decrease (Increase) in prepaid expenses } & 80 \\\text { Increase (Decrease) in trade payables } & (300) \\\text { Increase (Decrease) in taxes payable } & 75 \\\text { Cash flow from operations } & \$ 1.395\end{array}$

-Tracy used the indirect method of determining cash flow from operations (CFO) . If it had used the direct method:

• A)CFO would have been higher as gains are not deducted in arriving at CFO.
• B)CFO would have been lower as losses and depreciation are not added back in arriving at CFO.
• C)CFO would have been the same.
• D)it is not possible to determine what CFO would have been without more information.

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Definitions:

Required Rate

The minimum percentage return that an investor expects to achieve from an investment.

Average Accounting Return

A measure of the profitability of an investment, calculated as the average net income divided by the average book value of the investment.

Straight-line Depreciation

A method of allocating the cost of a tangible fixed asset over its useful life in equal annual installments.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.