Q1. The indirect format of the operating section starts with (sales revenue / ___________). Statement A above reports net cash from operating activities using the (___________/ indirect) method, whereas Statement B uses the (direct / ___________) method.
Q2. The direct and indirect methods report the (___________/ different) amount for net cash from operating activities. However, the (direct / ___________) method conveys amounts already reported on the income statement and changes in balance sheet accounts, whereas the (___________ / indirect) method reveals new information not found on other financial statements. So no additional information is shared with (___________/ ___________/ ___________), most companies choose the (direct / ___________) method. (Circle all that apply)
Q3. Refer to Statement B above. Net cash from operating activities is (___________/ less) than net income. This difference is primarily due to the adjustment for (___________/ change in accounts receivable). Because most companies report depreciation expense, most companies also report net cash from operating activities as (___________/ less) than net income.
Q4. Is it possible to report a net loss on the income statement and still report a net cash inflow from operating activities? (___________/ No) Why?
Direct Method
Q5. a. Net income reported on the income statement is primarily based on (___________/ cash) accounting, whereas net cash from operating activities reported on the statement of cash flows is primarily based on (accrual / ___________) accounting.
b. Net income includes (___________/ cash received from customers), whereas net cash from operating activities includes (sales revenue earned / ___________).
c. Net income includes (___________/ cash paid to suppliers), whereas cash from operating activities includes (cost of goods sold / ___________).
Q6. Decision makers compare “net income” to “net cash from operating activities.” To make these two amounts more comparable, it is preferable to report the same accounts on both the income statement and the operating activity section of the statement of cash flows.
Which of the following accounts are used to compute net income?
(___________/ ___________/ ___________ / Dividends paid) (Circle all that apply)
• Interest revenue (______/ is not) reported on the income statement, therefore, on the statement of cash flows interest received is reported as a(n) (___________/ investing / financing) activity.
• Interest expense (_____/ is not) reported on the income statement, therefore, on the statement of cash flows interest payments are reported as a(n) (___________/ investing / financing) activity.
• Dividend revenue (_____/ is not) reported on the income statement, therefore, on the statement of cash flows dividends received are reported as a(n) (___________/ investing / financing) activity.
• Dividends paid (are / _______) reported on the income statement, therefore, on the statement of cash flows dividends paid are reported as a(n) (operating / investing / ___________) activity.
Q7. IFRS allows more flexibility in reporting interest revenue, interest expense, dividend revenue, and dividends paid.
Under IFRS:
• Interest received may be reported the same as U.S. GAAP, as a(n) (___________/ investing / financing) activity, or because interest is earned by (current / ___________) assets as a(n) (operating / ___________/ financing) activity.
• Interest paid may be reported the same as U.S. GAAP, as a(n) (___________/ investing / financing) activity, or because interest is typically owed as a result of (short-term / ___________) debt (liabilities) as a(n) (operating / investing / ___________) activity.
• Dividends received may be reported the same as U.S. GAAP, as a(n) (___________ / investing / financing) activity, or because dividends are typically earned by (current / ___________) assets as a(n) (operating / ___________ / financing) activity.
• Dividends paid may be reported the same as U.S. GAAP, as a(n) (operating / investing / ___________) activity, or as a(n) (___________ / investing / financing) activity