On the Statement of Cash Flows Prepared by the Indirect

question 140

Multiple Choice

On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be

• A) deducted from net income in converting the net income reported on the income statement to cash flows from operating activities
• B) added to net income in converting the net income reported on the income statement to cash flows from operating activities
• C) added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends
• D) deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends

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Definitions:

Retention Ratio

The percentage of net income that is retained in the business rather than paid out as dividends; synonymous with Plowback Ratio.

Cash Dividends

Cash dividends refer to the distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders in the form of cash.

Selling and Administrative Expenses

Costs associated with the daily operations of a business that are not directly linked to producing the product or service but are necessary for selling and managing the business.

Plowback Ratio

A financial metric indicating the proportion of earnings a company decides to retain for reinvestment, rather than distributing as dividends.