Accounting questions re: cash flow and "extraordinary items"?

Question

1. XYZ Corporation chose to classify its major losses as extraordinary items. Managers might be biased toward this approach because

a. it saves income taxes

b. investors do not use extraordinary items when predicting future performance

c. extraordinary losses are considered a good predictor of the company's future solvency

d. extraordinary losses bypass net income and are reported directly as part of comprehensive income.

2. Money paid for the acquisition of a building is

a. cash provided from operations

b. cash used in operations

c. cash provided from investing activities

d. cash used for investing activities

e. cash provided from financing activities

3. Which one of the following is subtracted from income in determining cash flows from operations?

a. increase in inventory

b. increase in accounts payable

c. decrease in accounts receivable

d. decrease in prepaid insurance

Answer 1

Answer:

1. b. investors do not use extraordinary items when predicting future performance.

Investor uses only the regular and ordinary items in assessing the future cash flows and performance of the company. Extraordinary items are not included in their evaluation.

2. d. cash used for investing activities.

The acquisition of building is an investing cash outflow.

3. a.increase in inventory.

The increase of inventory, generally, implies acquistion of inventory in cash.

Answer 2

1-b, 2-d, 3-a