In Order to Prepare the Statement of Cash Flows for Rag

question 14

Multiple Choice

In order to prepare the statement of cash flows for Rag Dolls Corporation for 2010, the accountant has compiled the following data regarding cash flows:
$\begin{array}{lll}\text {Cash paid to acquire marketable securities }&\$370,000\\\text {Proceeds from sale of marketable securities }&17,500\\\text { Proceeds from issuance of capital stock }&280,000\\\text { Proceeds from issuance of bonds payable }&55,000\\\text {Payments to settle short-term debt }&32,500\\\text {Interest and dividends received }&10,000\\\text {Cash received from customers }&?\\\text {Dividends paid }&130,000\\\text {Cash paid to suppliers and employees }&1,030,000\\\text {Interest paid }&25,000\\\text {Income taxes paid }&70,000\\\text {Cash and cash equivalents, January 1, 2010 }&43,000\\\text {Cash and cash equivalents, December 31,2010 }&58,000\\\end{array}$

-Which of the following correctly describes a difference between the direct method and the indirect method of computing operating cash flow?

• A) The direct method is used when accounting records are kept on a cash basis; the indirect method is used when accounting records are maintained on an accrual basis.
• B) The direct method may be used only when a company maintains special journals for cash receipts and cash disbursements; the indirect method is used in all other situations.
• C) Both the direct and the indirect methods result in the same net cash flow from operating activities, but the format of this section of the statement of cash flows is different under the alternative methods.
• D) The direct method is used when all accounting records and bank statements are available; the indirect method is used when some accounting records or documents are missing or have been destroyeD.

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