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Learning Objective 14-4 1) Martinez Installations Company uses the direct method

Question : Learning Objective 14-4 1) Martinez Installations Company uses the direct method : 1882763

Learning Objective 14-4

1) Martinez Installations Company uses the direct method to prepare its statement of cash flows. It has reported Sales Revenues of $200,000 on its income statement for the year 2015. If the balance in Accounts Receivable has gone up by $10,000 during the year, then $10,000 will have to be added to $200,000 to calculate collections from customers.

2) Martinez Installations Company uses the direct method to prepare its statement of cash flows. It has reported Cost of Goods Sold of $95,000 on its income statement for the year 2015. If the balance in the Inventory account has gone down by $6,000 during the year, then $6,000 will have to be added to $95,000 as part of the process to calculate payments to suppliers for inventory purchases.

3) Qtopia Electric Company uses the direct method to prepare its statement of cash flows. It has reported Cost of Goods Sold of $85,000 on its income statement for the year 2015. If the balance in Accounts Payable, for inventory suppliers only, has gone down by $8,000 during the year, then $8,000 will have to be subtracted from $85,000 as part of the process to calculate payments to suppliers for inventory purchases.

4) Qtopia Electric Company uses the direct method to prepare its statement of cash flows. It has reported Operating Expenses of $63,000 on its income statement for the year 2014. If the balance in Accrued Liabilities has gone up by $6,000 during the year, then $6,000 will have to be added to $63,000 as part of the process to calculate payments to suppliers for operating expenses.

5) Although the direct method is easier to use, the Financial Accounting Standards Board (FASB) prefers the indirect method of reporting cash flows from operating activities.

6) The amount of net cash flow from operating activities will be different in the direct and indirect methods when preparing the statement of cash flows.

7) The net cash flow from operating activities is calculated in the same way, whether the company uses the direct or the indirect method of preparing the statement of cash flow. The only difference in the two methods is the way the financing activities section is prepared.

8) The cash flow from investing activities section appears exactly the same, whether the company uses the direct or the indirect method to prepare the statement of cash flows.

9) The direct method of preparing the statement of cash flows provides a clearer way of analyzing cash flow information than the indirect method.

10) Most public companies use the indirect method to prepare their statement of cash flows because the FASB prefers this method.

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