Multiple Choice: Operating Cash Flows Select the correct answer for each of the following:

Which of the following is added to net income in deriving cash flows generated from operations when using the indirect method?

a. Increases in accounts receivable.

b. Increases in accounts payable.

c. Decreases in accounts payable.

d. None of the above.

Which of the following is deducted from net income in deriving cash flows generated from operations when using the indirect method?

a. Increases in accounts receivable and increases in inventory.

b. Increases in accounts payable and decreases in inventory.

c. Decreases in accounts receivable and decreases in inventory.

d. All of the above.

Expenses that reduce net income in the current period but do not use cash are added back to determine cash generated by operations for the period. They include:

a. Cost of goods sold.

b. Interest expense on short-term bank loans.

c. Amortization of intangible assets.

d. Amortization of premium on bonds payable.

Which of the following decisions are likely to be influenced as much or more by cash flows from operations than by reported net income?

a. Whether the company will have to enter the capital markets to finance its planned expansions.

b. Whether the new product line added this year is profitable enough to improve the overall gross margin.

c. Whether the company should reduce its investment in inventory in accordance with its plans for a just-intime inventory management system.

d. Whether the company would improve its liquidity by changing to an accelerated depreciation method for financial reporting.

Which of the following items reported in the operating

section of the statement of cash flows might indicate a potential liquidity problem?

a. Positive cash flow appears to have been maintained by increasing accounts payable.

b. Cash inflows seem to be lower in the current year because of an increase in accounts receivable and inventory.

c. Prepaid expenses have not decreased in the current year.

d. Both

(a) and

(b) are correct.