In Preparing Cash Flows Provided by Operating Activities Using the Indirect

question 76

Multiple Choice

In preparing cash flows provided by operating activities using the indirect method, which of the following items is added to net income?

• A)Non-cash expenses such as depreciation
• B)Decreases in current liability balances
• C)Gains on investing and financing transactions
• D)Increases in current asset balances

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Definitions:

Corporate Taxes

Taxes imposed on the income or profit of corporations by the government, affecting the company's net income and cash flow.

Miller Model

A theory that incorporates corporate taxes and bankruptcy costs to determine the optimal capital structure for a firm.

Trade-Off Theory

The addition of financial distress and agency costs to either the MM tax model or the Miller model. When trade-off is added to either model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shield) and the costs of debt (financial distress and agency costs).

Debt Financing

A method of funding in which a company raises capital by borrowing money, agreeing to repay the principal amount along with interest on a specified schedule.