Using the Indirect Method, Decreases in Current Assets and Increases

question 78

Multiple Choice

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } \hline \begin{array} { r } \text { Beginning } \\\text { Cash } \\\text { Balance }\end{array} & \begin{array} { r } \text { Cash flows } \\\text { from } \\\text { Operating } \\\text { Activities }\end{array} & \begin{array} { r } \text { Cash flows } + \\\text { from Investing } \\\text { Activities }\end{array} & \begin{array} { r } \text { Cash Flows } \\\text { From } \\\text { Operating } \\\text { Activities }\end{array} & \begin{array} { r } \text { Ending cash } \\\text { balance }\end{array} \\\hline \$ 11,283 + & \$ 37,042 + & ( \$ 16,831 ) + & ( \$ 26,397 ) = & \$ 5,097 \\\hline\end{array}$$
-A company purchases a $300,000 building,paying $200,000 in cash and signing a $100,000 promissory note.What will be reported on the statement of cash flows as a result of this transaction?

• A)A $300,000 cash outflow for investing activities.
• B)A $200,000 cash outflow for investing activities and a $100,000 cash inflow is recorded for financing activities.
• C)A $200,000 cash outflow for investing activities.
• D)A $300,000 cash outflow for investing activities and a $100,000 cash inflow is recorded for financing activities.

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Definitions:

Direct Materials Cost

The expense associated with the raw materials directly used in the production of a product.

Cost Behavior Classifications

The categorization of costs based on how they change in relation to changes in a company’s level of activity or volume.

Activity Base

A measure upon which the allocation of costs is based in activity-based costing, often relating to a metric that causes costs to occur such as machine hours or labor hours.

Cost Behavior

The way in which costs change in relation to variations in an organization’s activity level.