Question

QUESTION 47

1. What is implied if the inventory account has increased?

   		Cash flow from operating activities has decreased relative to net income.
   		Cash flow from financing activities has decreased relative to net income.
   		Cash flow from financing activities has increased relative to net income.
   		Cash flow from operating activities has increased relative to net income.

QUESTION 48

1. Which of the following items would be a way to manipulate the cash flow from the operating activities amount on the statement of cash flows?

   		Including interest expense and tax expense in the calculation of cash flow from operating activities.
   		Recording an item that should be recorded as an operating activity as an investing activity.
   		The cash flow statement cannot be manipulated.
   		Adding depreciation back to net income to determine cash flow from operating activities.

QUESTION 49

1. Assuming a period of inflation, which statement is true?

   		The FIFO method understates cost of goods sold on the income statement.
   		The FIFO method understates balance sheet inventory.
   		The LIFO method understates cost of goods sold on the income statement.
   		The LIFO method overstates balance sheet inventory.

QUESTION 50

1. Which statement is false?

   		Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income.
   		Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.
   		Temporary differences causing the recognition of deferred taxes may arise from the methods used to account for items such as depreciation, installment sales, leases, and pensions.
   		Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements.

Answer 1

If inventory has increase, more cash has been blocked into purchasing it therefore the cash flow would have reduced in this scenario and as inventory is related to operations, inventory changes impact cash flow from operations. Under indirect method for calculation of CF, we start with NI and then add back non cash expenses such as depreciation and then deal with working capital changes, any increase in current assets such as inventory is subtracted and increase in current liability is added to NI. Therefore with an increase in inventory, CFO will reduce as compared to the NI

Although the entire CFS cant be manipulated as it shows the actual cash balance with the company, but Recording an item that should be recorded as an operating activity as an investing activity can lead to a different CFO than it should actually be. There is a difference in recording conventions as per US GAAP and IFRS regarding following recording

Transaction	IFRS	U.S. GAAP
interest received	operating or investing activities	operating activities
interest paid	operating or financing activities	operating activities
dividends received	operating or investing activities	operating activities
dividends paid	operating or financing activities	financing activities

Therefore above convention under IFRS can lead to manipulation so Recording an item that should be recorded as an operating activity as an investing activity could be a way

Under inflationary environment, the prices are rising but under FIFO method, the cost of goods sold is calculated using the oldest inventory being sold first. So the COGS on Income statement is understated and inventory in balance sheet is at the most recent price and is over stated.

As deferred taxes occurs due to differences in recording depreciation for the purpose of accounting and taxation, the statement Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes is false