PAGE 1 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 MULTIPLE CHOICE 1. current liabilities are defined as those liabilities which will be satisfied a. within 1 year or within the operating cycle whichever is shorter. b. within 1 year or within the operating cycle whichever is longer. c. within 1 year. d. by the end of the operating cycle. 2. If a company purchases $1,000 worth of inventory with terms of 2/10, n/30 and pays within 10 days, then the amount paid to the seller would be: a. $900 b. $800 c. $1,000 d. $980 3. A company's balance sheet shows the account Notes Payable. This resulted from a loan made by the company's bank. If the end-of-year-balance in the notes payable account exceeds the beginning-of-year-balance by $2,000, this is shown on the Cash Flow Statement as an a. inflow in cash of $2,000 in the operating activity section. b. outflow in cash of $2,000 in the operating activity section. c. inflow in cash of $2,000 in the financing activity section. d. outflow in cash of $2,000 in the financing activity section. 4. Which of the following would appear in the balance sheet as a current liability? a. Premium offers in cereal boxes b. The possible loss from a lawsuit c. A loss from an anticipated strike by employees d. Potential damages from explosions in a fireworks factory 5. In 1995, the Acme Appliance Company sold 2,000 toaster ovens for $50 each. The ovens carry a two-year warranty for repairs. Acme estimates that repair costs will average 5% of the total selling price. What is the amount that would be recorded in the warranty liability account during 1995? a. $5,000 b. $10,000 c. $15,000 d. No liability should be recorded until the ovens are brought back for repairs. PAGE 2 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 6. A firm is required to estimate a liability for repairs for products sold with a warranty. If the firm's accountants fail to record the estimated liability for products sold in 1995, what are the balance sheet and income statement effects at the end of 1995? Assets Liabilities Owners' Equity Net Income a. Understated Understated No Effect No Effect b. Overstated No Effect Overstated Overstated c. Understated No Effect Understated No Effect d. No Effect Understated Overstated Overstated 7. To determine whether a lottery winner would prefer to receive the money in a single lump sum immediately or receive an equal amount over a period of years, you would use which type of time-value-of-money calculation? a. The future value of a single amount b. The present value of a single amount c. The future value of an annuity d. The present value of an annuity Solutions to the following problems require time-value-of-money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. 8. If Jack has $2,500 to invest and wants to have $5,000 at the end of 9 years, what compounded interest rate must he get on his money (assume annual compounding)? a. 8% b. 7% c. 6% d. 5% 9. A company's weekly payroll amounts to $15,000 and payday is every Friday. If the previous payday was January 26 and the accounting period ends on January 31, what amount is the ending balance in the wages payable account? a. $0 b. $15,000 c. $10,000 d. $9,000 PAGE 3 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 The following items are selected accounts from a company such as MATTEL, INC. Indicate whether each may be shown on the balance sheet as a current liability. 10. Note Payable, due in 2 years a. Current liability b. Not a current liability 11. Note Payable, due in 6 months a. Current liability b. Not a current liability 12. Advance ticket sales a. Current liability b. Not a current liability 13. Which of the following statements is NOT true with respect to long-term liabilities? a. They are obligations that will not be satisfied within one year. b. A note payable is a good example of a long-term liability because it is interest bearing. c. Long-term liabilities include bonds, pension obligations, and leases. d. Deferred taxes are considered to be long-term liabilities. 14. If a company's bonds are callable a. the investor or buyer of the bonds has the right to retire the bonds. b. the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 5%. c. the bonds are never allowed to remain outstanding until the maturity date. d. the investor never knows what the redemption price will be until the bonds are actually called. PAGE 4 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 15. Bonds are a popular source of financing because a. bond interest is deductible for tax purposes, while stock dividends are not. b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock. c. a company having cash flow problems can postpone payment of interest to bondholders. d. the bondholders can always convert their bonds into stock if they choose. 16. When bonds are sold by a company, the accounting entry shows a. an increase in liabilities and a decrease in owners' equity. b. an increase in liabilities and an increase in owners' equity. c. an increase in assets and an increase in liabilities. d. an increase in assets and an increase in owners' equity. 17. Bonds in the amount of $25,000 and a life of 5 years were issued by the Sanchez Company. If the coupon rate is 4% and interest is paid annually, what would be the total amount of interest paid over the life of the bonds? a. $2,000 b. $3,000 c. $4,000 d. $5,000 18. The selling price of bonds is determined by calculating the a. present value of the stream of interest payments and the future value of the maturity amount. b. future value of the stream of interest payments and the future value of the maturity amount. c. future value of the stream of interest payments and the present value of the maturity amount. d. present value of the stream of interest payments and the present value of the maturity amount. 19. The Garcia Company wishes to issue $100,000 of five-year, 5% bonds, interest paid annually at the end of the year. The market rate of interest is currently 4%. What information is needed in order to determine the selling price? a. The market rate of interest b. The face amount of the bonds c. The life of the bonds d. All of the above are needed to calculate the selling price of the bonds. PAGE 5 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 20. Which of the following statements about bond calculations is INCORRECT ? a. The Cash Interest paid is calculated as the Bond Face Value x the Face Rate. b. The Interest Expense is calculated as the Carrying Value x the Market Rate. c. The difference between the Cash Interest paid and the Interest Expense is added to the Carrying Value of the bonds if bonds were sold at a discount. d. The difference between the Cash Interest paid and the Interest Expense is deducted from the Carrying Value of the bonds if bonds were sold at a discount. 21. The Copper Company issued $200,000 of bonds for $204,560. The interest is paid semiannually. The bond markets and the financial press are likely to state the bond issue price as: a. 204.56 b. 102.28 c. 51.14 d. 50.00 22. If bonds are issued at 96.5, this means that a. a $1,000 bond sold for $96.50. b. the bond sold at a premium. c. a $1,000 bond sold for $965.00. d. the bond rate of interest is 96.5% of the market rate of interest. 23. The Discount on Bonds Payable account is shown on the balance sheet as a. a type of asset. b. a current liability. c. a long-term liability. d. a contra long-term liability. 24. Amortization of bond discount results in a. a decrease of bond payable. b. a decrease of owners' equity. c. an increase of owners' equity. d. a decrease in the cash account. PAGE 6 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 25. The Goldstein Company issued $100,000 of 6% bonds when the market rate of interest was 4.6%. The proceeds from this bond issue was $104,500. Using the effective interest method of amortization, which of the following statements is TRUE ? Assume interest is paid annually. a. Interest payments to bondholders each period will be $4,807. b. Interest payments to bondholders each period will be $4,500. c. Amortization of the premium for the first interest period will be $4,807. d. Amortization of the premium for the first interest period will be $1,193. 26. One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned ratio for any outstanding bonds the company may have. For the Cliffe Corporation, $10,000 of bonds paying 6.5% annually are outstanding. Its income before interest and tax is $7,000. How would Cliffe Corporation calculate the times interest earned ratio? a. Income before Interest and Tax divided by the Interest Expense b. Income before Interest and Tax divided by the Bonds Outstanding c. Income before Interest and Tax divided by the Coupon Rate on Bonds d. Face amount of Bonds divided by the Income before Interest and Tax 27. Which of the following items should NOT appear in the long-term liability section of the balance sheet? a. The current portion of a lease obligation b. Deferred tax liability c. Pension obligation d. Bonds payable The following questions are based on items selected from the balance sheet of a company like the AMERICAN-MAIZE PRODUCTS COMPANY. Identify how each item would be classified on a balance sheet. 28. Goodwill a. Current liability b. Long-term liability c. Neither 29. Current portion of long-term debt a. Current liability b. Long-term liability c. Neither PAGE 7 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 30. Accrued expenses a. Current liability b. Long-term liability c. Neither 31. Bonds Payable a. Current liability b. Long-term liability c. Neither 32. If a bond is issued at a premium, then the interest expense each year a. is greater than the cash payment for interest. b. is less than the cash payment for interest. c. equals the cash payment for interest. d. cannot be determined without details of the bond issue. 33. With regard to a corporation's stock, par value is a. the current market price of the stock. b. an arbitrary amount that exists to fulfill legal requirements. c. the amount at which the stock has been repurchased. d. the amount at which treasury stock can be sold. 34. The dividend on the Kristalos Company's cumulative preferred stock is $6 per share per year. In 1993 and 1994 there were 10,000 shares of preferred stock outstanding, but no dividends were declared. In 1995 the company had a profitable year and decided to pay dividends to shareholders of both preferred and common stock. If the Kristalos Company had available $200,000 for dividends, how much could it pay to the common stockholders? a. $20,000 b. $140,000 c. $80,000 d. $60,000 35. The Germania Corporation acquired a new manufacturing plant by issuing 10,000 shares of its $50 par, preferred stock with $75 per share market price. Similar buildings have recently cost $720,000. What are the effects of this transaction on the accounting equation for Germania Corporation? a. Building and Preferred Stock increase $720,000. b. Building and Preferred Stock increase $750,000. c. Building increases $720,000; Preferred Stock increases $500,000; Paid-In Capital in Excess of Par Value increases $220,000. d. Building increases $750,000; Preferred Stock increases $500,000; Paid-In Capital In Excess of Par Value increases $250,000. PAGE 8 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 36. Britannica Corporation plans to distribute $134,000 in dividends. It has outstanding 20,000 shares of 7%, $10 par value preferred stock (noncumulative and nonparticipating) and 60,000 shares of $2 par common stock. How much will be distributed per share of preferred and common? Preferred Stock Common Stock a. $10.00 $2.00 b. $ 0.70 $2.00 c. $10.00 $0.00 d. $ 1.68 $1.68 37. The Stockholders' Equity section of the Balance Sheet for the Allegra Corporation appeared as follows before their recent stock dividend: Common stock, $5 par, 10,000 $ 50,000 shares issued and outstanding Additional paid-in capital 80,000 Retained earnings 120,000 Total stockholders' equity $ 250,000 The corporation declared a 10% stock dividend when the market price per share was $12. After the stock dividend was distributed, the components of the Stockholders' Equity section were: Common Stock Additional Paid-in Capital Retained Earnings a. $55,000 $87,000 $108,000 b. $62,000 $80,000 $108,000 c. $55,000 $80,000 $245,000 d. There would be no change in the components of Stockholders' Equity. 38. The Stockholders' Equity section of the Balance Sheet for the Tristee Company appeared as follows before their recent stock dividend: Common Stock, $5 par, 100,000 shares $ 500,000 issued and outstanding Additional paid-in capital 750,000 Retained earnings 800,000 Total stockholders' equity $2,050,000 The corporation declared a 60% stock dividend when the market price per share was $12. After the stock dividend was distributed, the components of the Stockholders' Equity section were: Common Stock Additional Paid-in Capital Retained Earnings a. $ 720,000 $750,000 $80,000 b. $ 800,000 $750,000 $500,000 c. $1,220,000 $750,000 $80,000 d. $ 800,000 $1,170,000 $80,000 PAGE 9 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 39. When a company declares a stock dividend, which of the following occurs? a. A liability is created. b. Retained earnings is reduced. c. Stockholders' equity is decreased. d. The statement of cash flows is affected. 40. When a company declares a 2-for-1 stock split a. owners' equity is doubled. b. there is no effect on owners' equity. c. a shareholder who previously held 100 shares, will have 300 shares after the split. d. there is no effect on the stock price because there is no effect on owners' equity of the company. 41. The balance of the $1.50 par Common Stock account for the Portorola Company was $45,000 before its recent 3-for-1 stock split. The market price of the stock was $30. What occurred as a result of the split? a. The balance in the retained earnings account was decreased. b. The balance in the common stock account was $15,000. c. The market price of the stock was not affected. d. The market price of the stock was approximately $10 per share. The following questions are based on items selected from the Balance Sheet of a company like the SEARS CORPORATION. Indicate where each item would be reported on the balance sheet. 42. Accumulated earnings a. In the stockholders' equity section b. In some other balance sheet section c. In a financial statement other than the balance sheet 43. Intangible assets a. In the stockholders' equity section b. In some other balance sheet section c. In a financial statement other than the balance sheet PAGE 10 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 Use the information below to answer the following set of questions. Common stock, $10 par, 100,000 shares authorized, 60,000 shares issued and outstanding 44. What is the effect of issuing 1,000 shares of common stock for land with a market value of $21,000 if the market value of the common stock is $19 per share. a. Land increases by $19,000. b. Retained Earnings decreases $2,000. c. Common Stock increases $21,000. d. Paid-in Capital in Excess of Par increases $11,000. 45. What is the effect of a 2 for 1 stock split if the market value of the common stock is $20 per share when the stock split is declared? a. Retained earnings in the amount of $300,000 is transferred to the contributed capital accounts. b. Cash decreases $300,000. c. Paid-in Capital in Excess of Par decreases $300,000. d. A stock split has no effect on stockholders' equity. Use the information below for Triad Corp. at December 31, 1995, to answer the following set of questions. Preferred Stock, $50 par, 1,000 shares authorized, issued, and outstanding; cumulative; non-participating; callable at par value $50,000 Common stock, $10 par, 10,000 shares authorized 50,000 Paid-in capital in excess of par value 30,000 Retained earnings 25,000 Total $155,000 Less: Treasury stock (400 shares at cost) 4,000 Total Stockholders' Equity $151,000 46. What is the effect of reissuing the 400 shares of treasury stock at $15 per share? a. Gain on Sales of Treasury Stock increases $2,000. b. Common Stock increases $4,000. c. Paid-in capital from Treasury Stock increases $2,000. d. Total Stockholders' Equity increases to $155,000. PAGE 11 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 Use the following information to answer the questions below. The following appears in the stockholders' equity section of Corporation B's balance sheet at the beginning of year 3: Preferred Stock 10,000, 10% non-participating, cumulative shares $10 par value shares 100,000 Additional paid-in-capital 50,000 150,000 Common Stock Authorized 10 million shares, 10 par value Issued 5 million shares 500,000 Additional paid-in-capital 300,000 800,000 Retained earnings 250,000 Total stockholders' equity before treasury stock 1,200,000 Less treasury stock: 100,000 shares at cost (130,000) Total stockholders' equity $1,070,000 Corporation B has paid no dividends for the last two years due to a temporary downturn in business. For year 3, the company has net earnings of $450,000 and the company's board of directors intend to pay $400,000 as total dividend. 47. For year 3, dividends per share for preferred stockholders will be: a. $1. b. $10. c. $3. d. $30. 48. For year 3, the total dividend available to common stockholders is: a. $400,000. b. $450,000. c. $390,000. d. $370,000. 49. After the dividends for year 3 have been paid, the balance on the retained earnings account will be: a. $250,000. b. $300,000. c. $200,000. d. cannot tell from available information. PAGE 12 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 50. Barry and Kerry's income statement showed the following information for 1995: Net sales, $200,000; Other revenue, $5,000; Cost of sales, $120,000; Operating expense, $30,000. The gross profit percent for 1995 would be: a. 60% b. 73% c. 40% d. 25% 51. Mohammad's Arabian Imports had the following information on its 1995 income statement: Net sales, $300,000; Operating income, $60,000; Operating expense, $20,000; and Income tax expense, $10,000. The gross profit for 1995 would be: a. $80,000 b. $40,000 c. $30,000 d. $280,000 52. The Income Statement of the Barnaby Company showed the following information: Net Income, $5,280; Earnings Per Share, $1.25; and Preferred Stock Dividends, $1,800. What was the weighted average number of shares of Common Stock outstanding throughout the year? a. 4,224 b. 2,250 c. 2,784 d. 4,295 53. Why do preferred stock dividends appear in the calculation of earnings per common share? a. Preferred stock may be converted into common stock at the option of the shareholder. b. Preferred shareholders have a claim to earnings equal to the preferred share dividend. c. The weighted average number of shares in the denominator includes both preferred shares and common shares outstanding. d. Preferred stock dividends do not appear in the calculation of earnings per share unless the preferred stock has been outstanding the entire year. 54. For which of the following income statement sections is earnings per share calculated? a. Sales b. Gross profit c. Income before extraordinary item d. Dividends to common shareholders PAGE 13 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 The following questions are based on the Financial Statements of a company like MOTOROLA. Identify where each item below would appear in the Financial Statements. 55. Gross profit a. Income statement b. Statement of retained earnings c. Balance sheet d. Statement of cash flows 56. Leone Corp. reported net income of $150,000 for 1995, but its cash balance decreased $40,000. Which financial statement should management of Leone refer to for an explanation of this situation? a. A balance sheet b. An income statement c. A retained earnings statement d. A statement of cash flows 57. Which balance sheet accounts are affected by operating activities? a. Current assets and current liabilities b. Non-current assets c. Non-current liabilities d. Stockholders' equity 58. Which balance sheet accounts are affected by investing activities? a. Current assets and current liabilities b. Non-current assets c. Non-current liabilities d. Stockholders' equity 59. The following items were reported on the balance sheets and income statement for Seine Corp.: Accounts payable, December 31, 1994 $ 42,000 Accounts payable, December 31, 1995 48,000 Operating expenses 186,000 How would the change in accounts payable be reported in the operating activities section of the statement of cash flows under the INDIRECT method? a. As an addition to operating expenses b. As a deduction from operating expenses c. As an addition to net income d. As a deduction from net income PAGE 14 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 60. During 1995 the accounts receivable balance of Volga Corp. increased. Which of the following statements is TRUE ? a. The increase in accounts receivable indicates the company sold more than it collected in cash during the period. b. The increase in accounts receivable would be added to net income in the operating activities section of a statement of cash flows prepared under the INDIRECT method. c. The increase in accounts receivable would be added to sales recognized on the income statement to determine the cash collections from customers during the period. d. The increase in accounts receivable must be considered only when the operating activities section of a statement of cash flows is prepared under the INDIRECT method. 61. Occasionally, companies engage in important investing and financing activities which do not affect cash. If the amount of the transaction is significant, how should the transaction be disclosed when financial statements are prepared? a. In a footnote to the financial statements b. In a supplemental schedule of noncash investing and financing activities c. Either (a) or (b) is acceptable. d. The transaction does not need to be disclosed. 62. Abdul Corp. acquired land by issuing its common stock. How should this transaction be disclosed when a statement of cash flows is prepared? a. In a supplemental schedule of noncash investing and financing activities or in a footnote b. The acquisition of land should be reported as an investing activity and the issuance of the stock as a financing activity. c. Either (a) or (b) is acceptable. d. The transaction does not need to be disclosed. 63. Each of the following transactions would be classified as either an investing or a financing activity EXCEPT : a. Investments in stock are purchased. b. A bank loan is obtained. c. Stock is issued to acquire land. d. Dividends are paid. PAGE 15 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 For the following set of questions, indicate how each transaction described would be classified on a statement of cash flows if the operating activities section is prepared under the DIRECT method . 64. Depreciation expense is recorded. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows 65. Cash is collected from customers. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows 66. Stock is issued to retire a long-term debt. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows For the following set of questions, indicate how each transaction described would be classified on a statement of cash flows if the operating activities section is prepared under the INDIRECT method . 67. Depreciation expense is recorded. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows 68. Equipment is purchased for cash. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows PAGE 16 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 69. Stock is issued to retire a long-term debt. a. Operating activity b. Investing activity c. Financing activity d. Noncash investing and financing activity e. Not reported on the statement of cash flows Use the equation presented below to answer the following set of questions. Cash = CL + LTL + CS + RE - NCCA - LTA where CL = Current liabilities LTL = Long-term liabilities CS = Common stock RE = Retained earnings NCCA = Noncash current assets LTA = Long-term assets 70. Which of the following activities results in a cash inflow? a. Increases in noncash current assets (NCCA) b. Decreases in current liabilities (CL) c. Increases in common stock (CS) d. Decreases in retained earnings (RE) 71. Which of the following financing activities results in a cash inflow? a. Buying treasury stock b. Issuing bonds c. Repaying a bank loan d. Paying cash dividends 72. Which of the following operating activities results in a cash outflow? a. Paying creditors for merchandise b. Collecting accounts receivable c. Making cash sales d. Receiving deposits recorded as unearned revenue PAGE 17 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 Use the information below for Sudan Corp. for 1994 and 1995 to answer the following set of questions. Equipment, December 31, 1994 $ 65,000 Equipment, December 31, 1995 72,000 Accumulated depreciation, December 31, 1994 29,000 Accumulated depreciation, December 31, 1995 26,000 During 1995 Sudan sold equipment with a cost of $12,000 and accumulated depreciation of $10,000. A gain of $1,000 was recognized on the sale of the equipment. 73. Which of the following statements is FALSE regarding how the cash flow effects of the changes in the equipment and accumulated depreciation accounts would be reported on a statement of cash flows if the indirect method is used to prepare the operating activities section? a. Cash proceeds from the sale of the equipment would be reported as a cash inflow in the investing activities section. b. The cash paid to purchase equipment would be reported as a cash outflow in the investing activities section. c. Depreciation expense would be added to net income in the operating activities section. d. The gain on the sale of the equipment would be added to net income in the operating activities section. Use the information below for Heintz Corp. for 1994 and 1995 to answer the following set of questions. Bonds payable, December 31, 1994 $ 500,000 Bonds payable, December 31, 1995 800,000 Loss on bond retirement--1995 25,000 Interest expense on bonds--1995 45,000 At the end of 1995, Heintz issued bonds at par value for $800,000 cash. The proceeds from these bonds were used to retire the $500,000 bond issue outstanding at the end of 1994. All interest expense was paid in cash during 1995. 74. How much did Heintz pay to retire the $500,000 bond issue during 1995? a. $570,000 b. $525,000 c. $475,000 d. $500,000 PAGE 18 UNIVERSITY OF ILLINOIS AT CHICAGO SAMPLE EXAM 3 AC 110 FALL 1998 75. The following statements describe how Heintz reported the cash flow effects of the items described above on its 1995 statement of cash flows. The indirect method is used to prepare the operating activities section. Which of the following has been reported incorrectly by Heintz? a. Proceeds of $800,000 from the issuance of bonds were reported as a cash inflow in the financing activities section. b. The loss on bond retirement of $25,000 was added to net income in the operating activities section. c. Payments of $570,000 were reported as a cash outflow in the investing activities section. d. Interest expense of $45,000 was not separately reported because it is included in net income under the operating activities section. 76. Two methods are available to prepare the operating activities section of a statement of cash flows. Which of the following statements regarding these two methods is FALSE ? a. If a company uses the indirect method, it must separately disclose the cash payments made for interest and income taxes. b. If a company uses the direct method, it must present a separate schedule which reconciles net income to net cash flows from operating activities. c. Advocates of the direct method believe that the indirect method reveals too much by telling readers exact amounts of cash receipts and cash payments from operations. d. The FASB prefers the direct method, while most companies use the indirect method in practice. 77. Which of the following measures can be used to evaluate a company's ability to meet future debt obligations after paying taxes and interest and making capital expenditures? a. Earnings per share b. Net income c. Cash flow adequacy ratio d. Net increase or decrease in cash and cash equivalents (c) 1996 by Harcourt Brace & Company. All rights reserved.