Unit 8: Statement of Cash Flows (8 questions on the OA)

Questions and Answers

Note: Also, Please refer to D103 Where You Covered the Statement of Cash Flows Before!

1. What is the primary purpose of the statement of cash flows?

a. To describe a company's ability to generate future cash flows
b. To help determine a company's ability to pay upcoming debts
c. To explain the difference between net income and operating cash flow
d. To provide information about cash inflows and outflows for a period of time

Ans d: the primary purpose of the statement of cash flows is to provide information about inflows and
outflows of cash. A secondary objective is to provide cash-basis information about the company’s
operating, investing, and financing activities.

2. An individual is reading a company's statement of cash flows in order to better understand the
company.

Which question is able to be answered from this information?

a. Were cash expenditures properly approved?
b. Was the company more profitable than its competitors?
c. Did the company use cash in the most efficient way?
d. Where does the company generate cash inflows?

Ans d: the statement of cash flows therefore reports cash receipts (cash inflows), cash payments (cash
outflows), and net change in cash resulting from a company’s operating, investing, and financing
activities during a period.

3. For what should a statement of cash flows be used?

a. It predicts future net income of the company
b. It makes available information on cash paid to production employees
c. It provides information on how cash was spent on bonuses
d. It determines the reasons for the differences between net income and cash flow

Ans d: the statement of cash flows provides information for the difference between net income and the
net change in cash in the operating section.

4. An accountant is gathering the information necessary to prepare the statement of cash flows. The
first section in the statement of cash flows necessitates the use of information from a comparative
financial statement.

Which comparative financial statement is used for this purpose?

a. Income statement
b. Balance sheet
c. Statement of owner's equity
d. Statement of retained earnings

Ans b: a comparative accrual balance sheet is needed to prepare an indirect statement of cash flows.

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5. How does the direct method compare to the indirect method in preparing the statement of cash
flows?
a. Cash flow from operations is presented differently using the direct method.
b. Cash flow from financing is presented differently using the direct method
c. Cash flow from investing is presented differently using the indirect method
d. Cash flow from asset disposals is presented differently using the indirect method

Ans a: a key difference between the direct cash flow vs. the indirect cash flow method is the type of
transactions used to produce a cash flows statement. The indirect method starts with net income as the
base and adds/deducts noncash expenses, and then adds/deducts the net increase/decrease between
current assets and current liabilities. On the other hand, the direct method only takes the cash
transactions into account (cash received from customers, and cash paid to suppliers, employees, and
others) and produces the cash flow from operations. There is no difference in the presentation of the
information for the other two sections between the direct cash flow method and the indirect cash flow
method.

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Below is an illustration of the direct statement of cash flows. Further down, is an illustration of an
indirect statement of cash flows.

Company Name
Statement of Cash Flows (Direct Method)
Year Ended December 31, 20X2
Cash flows from operating activities:
Receipts:
Collections from customers
Interest received
Dividends received on investments
Total cash receipts
Payments:
To suppliers
To employees
For interest
For income taxes
Total cash payments
= Net cash provided by (used for) operating activities
Cash flows from investing activities:
+ Cash receipts from sales of long-term assets
(investments, land, building, equipment, and so on)
− Purchases of long-term assets
= Net cash provided by (used for) investing activities
Cash flows from financing activities:
+ Cash receipts from issuance of stock
+ Sale of treasury stock
− Purchase of treasury stock
+ Cash receipts from issuance of notes or bonds
payable (borrowing)
− Payment of notes or bonds payable
− Payment of dividends
= Net cash provided by (used for) financing activities
Net increase (decrease) in cash during the year*
+ Cash balance December 31, 20X1
= Cash balance December 31, 20X2
* Net increase (decrease) in case = Net cash provided by (used for) operating
activities +/− Net cash provided by (used for) investing activities +/− Net cash
provided by (used for) financing activities

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6. A company needs to determine the order to use when presenting information in the statement of
cash flows.

Which section should be presented third?

a. Non-cash activities
b. Investing activities

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c. Financing activities
d. Operating activities

Ans c: the three sections of the statement of cash flows in order are: operating, investing, and financing.

7. A company is preparing a statement of cash flows and needs to know the order to use to present
information.

Which section should be presented second?

a. Non-cash activities
b. Cash flow from investing activities
c. Cash flow from operating activities
d. Cash flow from financing activities

Ans b: the three sections of the statement of cash flows in order are: operating, investing, and financing.

8. A company is preparing a statement of cash flows and needs to know the order to use to present
information.

Which section should be presented first?

a. Non-cash activities
b. Cash flow from investing activities
c. Cash flow from operating activities
d. Cash flow from financing activities

Ans c: the three sections of the statement of cash flows in order are: operating, investing, and financing.

9. A company has decided to use the indirect method for its statement of cash flows and needs to
determine which items are subtracted from net income in the operating section.

Which item will be subtracted?

a. Increase in receivables
b. Decrease in inventory
c. Loss on sale of plant assets
d. Increase in accounts payable

Ans a: an increase in any asset, current or noncurrent, is included as a deduction on the statement of
cash flows. Conversely, a decrease in any asset, current or noncurrent, is included as an addition on the
statement of cash flows.

An increase in any liability, current or noncurrent, and equity account is included as an addition on the
statement of cash flows. Conversely, a decrease in any liability, current or noncurrent, and equity
account is included as a deduction on the statement of cash flows. Changes in current assets and current
liabilities are included in the operating section of the statement of cash flows.
The loss on sale of plant assets is a noncash item and since it was deducted in the calculation of net
income, it needs to be added back to net income. Conversely, gain on sale of plant assets is also a
noncash item and since it was added in the calculation of net income, it needs to be deducted from net
income.

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10. A company has determined it is easier to use the indirect method of accounting for cash flows. The
company wishes to increase net cash flows from operating activities.

Which transaction is relevant when this method is used?

a. Decrease in deferred income tax liability
b. Amortization of premium on bonds payable
c. Depreciation expense
d. Gain on sale of plant assets

Ans c: depreciation is included as an addition in the operating activities section of the statement of cash
flows. Depreciation was deducted in the calculation of net income and needs to be added back to it.
Amortization of premium on bonds payable and gain on sale of plant assets are included a deduction in
the operating activities section of the statement of cash flows. A decrease in deferred income tax
liability is included in the financing activities section of the statement of cash flows.

11. The board of directors for a company wants to see how much cash was raised from issuing bonds
during the last quarter.

Where is this information found on the statement of cash flows?

a. Investing activities
b. Operating activities
c. Financing activities
d. Production activities

Ans c: the financing activities section of the statement of cash flows shows changes in long-term
liabilities and stockholders’ equity. The operating activities section of the statement of cash flows shows
changes in current assets and current liabilities. The investing activities section of the statement of cash
flows shows changes in noncurrent assets.

12. A company has determined it is easier to use the indirect method of accounting for cash flows. The
company wishes to increase net cash flows from operating activities.

Which transaction is relevant when this method is used?

a. Decrease in deferred income tax liability
b. Amortization of premium on bonds payable
c. Amortization of discount on bonds payable
d. Gain on sale of plant assets

Ans c: please study and fully understand the following illustration. Since the amortization of a bond
discount increases the cost of borrowing, making interest expense greater than the cash payment for
interest, we have to subtract the amortization of a bond discount to focus only on the cash transaction
of payment of interest.

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13. A company has determined it is easier to use the indirect method of accounting for cash flows. The
company wishes to increase net cash flows from operating activities.

Which transaction is relevant when this method is used?

a. Loss on sale of plant assets
b. Decrease in deferred income tax liability
c. Amortization of discount on bonds payable
d. Gain on sale of plant assets

Ans a: please study and fully understand the following illustration. Because the underlying transaction
that creates the loss should be in the investing section, we need to remove it from the operating section.
Since the loss already drove net income down and we start the operating section with net income, we
need to add it back to remove the impact from the operating section entirely.

14. A company has decided to use the indirect cash flow method to reconcile the differences between
accrual accounting net income and net cash from operating activities. The company is making a
deduction from net income when calculating cash flow from operating activities.

Which deduction is possible under this method?

a. Increase in prepaid expense

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b. Increase in deferred tax liability
c. Decrease in bonds payable
d. Decrease in receivables

Ans a

15. Which kind of activity will be included in the operating activities section of the statement of cash
flows?
a. Cash payments to a financing creditor
b. Cash receipts from selling equipment
c. Cash receipts from issuing stock
d. Cash payments to a supplier

Ans d: this question is testing about the direct method of the statement of cash flows. cash payments to
suppliers are included in the operating activities section

16. A company wishes to prepare its statement of cash flows and wants to know which transaction to
include in the operating activities section.

Which type of transaction should be included?

a. Repurchase of common stock
b. Capital expenditures
c. Depreciation
d. Sale of fixed assets

Ans c: depreciation expense is included as an addition in the operating activities section of the
statement of cash flows. Repurchase of common stock (treasury stock) is included as a deduction in the
financing activities section of the statement of cash flows. Sale of fixed assets is included as an addition
in the investing activities section of the statement of cash flows. On the other hand, the purchase of
capital expenditures is included as a deduction in the investing activities section of the statement of cash
flows.

17. A company wants to prepare its statement of cash flows.

Which type of transaction should be included in the financing activities section?

a. Issuance of common stock
b. Acquisition of businesses
c. Amortization of intangibles
d. Proceeds from the sale of a division

Ans a: the issuance of common stock is included as an addition in the financing activities section of the
statement of cash flows. The acquisition of a business is included as a deduction in the investing
activities section of the statement of cash flows. On the other hand, the proceeds from the sale of a
division is included as an addition in the investing activities section of the statement of cash flows. The
amortization of intangibles is included as an addition to net income in the operating activities section of
the statement of cash flows.

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18. Which transaction should be included in the financing activities section of the statement of cash
flows?
a. Receipt of cash interest
b. Payment of cash interest
c. Receipt of cash dividends
d. Payment of cash dividends

Ans d: the payment of retained earnings is a distribution of profits from retained earnings an equity
account. A reduction of an equity account is included as a deduction in the financing sections of the
statement of cash flows.

19. Which transaction should be included in the investing activities section of the statement of cash
flows?
a. Depreciation expense
b. Receipt of cash dividends
c. Payment of cash for equipment
d. Gain on the sale of equipment

Ans c: a noncurrent asset account is included in the investing activities section of the statement of cash
flows. The only noncurrent asset account in the answer choices is equipment.

20. In March, a company pays its vendors for inventory that was purchased in January. Accounts Payable
is decreased by $500,000.

Where is this activity presented on the statement of cash flows?

a. Sales activities
b. Operating activities
c. Financing activities
d. Investing activities

Ans b: changes in current assets and current liabilities are included in the operating activities section of
the statement of cash flows. Changes in noncurrent assets are included in the investing activities section
of the statement of cash flows. Changes in long-term liabilities and equity are included in the financing
activities section of the statement of cash flows. There is no sales activities in the statement of cash
flows. The three sections in order are: operating, investing, and financing.

21. Which item should be included in the investing section of the statement of cash flows?
a. Making a loan
b. Issuing stock
c. Collections from sales
d. Paying dividends

Ans a

22. Which item should be included in the financing section of the statement of cash flows?
a. Making a loan
b. Issuing stock
c. Collections from sales

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d. Paying dividends

Ans b and d

23. Which item should be included in the operating section of the statement of cash flows?
a. Making a loan
b. Issuing stock
c. Collections from sales
d. Paying dividends

Ans c

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Below is an illustration of an indirect statement of cash flows. Please make sure to study and fully
understand its contents.

Company Name
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20X2
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
+ Depreciation / amortization expense
+ Loss on sale of long-term assets
− Gain on sale of long-term assets
− Increases in current assets other than cash
(accounts receivable, inventory, prepaid items)
+ Decreases in current assets other than cash
(accounts receivable, inventory, prepaid items)
+ Increases in current liabilities
− Decreases in current liabilities
= Net cash provided by (used for) operating activities
Cash flows from investing activities:
+ Cash receipts from sales of long-term assets
(investments, land, building, equipment, and so on)
+ Loans to other entities
− Purchases of long-term assets
− Purchases of debt (bonds) and equity (stock) securities
of other entities
= Net cash provided by (used for) investing activities
Cash flows from financing activities:
+ Cash receipts from issuance of stock
+ Sale of treasury stock
− Purchase of treasury stock
+ Cash receipts from issuance of notes or bonds
payable (borrowing)
− Payment of notes or bonds payable
− Payment of dividends
= Net cash provided by (used for) financing activities
Net increase (decrease) in cash during the year*
+ Cash balance December 31, 20X1
= Cash balance December 31, 20X2
* Net increase (decrease) in case = Net cash provided by (used for) operating activities +/−
Net cash provided by (used for) investing activities +/− Net cash provided by (used for)
financing activities

24. A company reports the following information:

• Net income: $200,000

• Increase in accounts receivable: $82,000

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 • Purchase of equipment: $15,000
• Sale of property: $73,000
• Issuance of notes payable: $12,000
• Paid dividends: $9,000

What is the company's cash flows from financing activities?

a. $3,000
b. $58,000
c. $76,000
d. $118,000

Ans a: any long-term liability account and equity account is included in the financing activity section of
the statement of cash flows. The issuance of notes payable, a long-term liability, and the payment of
dividends, a reduction to retained earnings, an equity account, are the only two items. An increase in a
long-term liability and equity account is addition whereas a decrease would be a deduction. $12,000 –
$9,000.

25. The company is creating a Year 3 statement of cash flows using the indirect method. The company's
information is as follows:

Comparative Balance Sheets

Assets Year 3 Year 2 Year 1
Cash $ 35,000 $ 30,000 $ 25,000
Accounts receivable 45,000 40,000 50,000
Prepaid expenses 20,000 30,000 25,000
Equipment 70,000 80,000 100,000
Accumulated depreciation - equipment (35,000) (40,000) (50,000)
Total assets $135,000 $140,000 $150,000

Liabilities and stockholders’ equity

Accounts payable $100,000 $110,000 $115,000
Common stock ($5 par) 25,000 20,000 20,000
Retained earnings 10,000 10,000 15,000
Total liabilities and stockholders’ equity $135,000 $140,000 $150,000

How does the change in prepaid expenses affect the statement of cash flows?
Ans: A decrease in prepaid expenses increases cash flows from operating activities.

How does the change in accounts receivable affect the statement of cash flows?
Ans: An increase in accounts receivable decreases cash flows from operating activities.

How does the change in accounts payable affect the statement of cash flows?
Ans: A decrease in accounts payable decreases cash flows from operating activities.

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  An increase in a current asset account decreases cash flows from operating activities. On the
other hand, a decrease in a current asset account increases cash flows from operating activities.
 An increase in a current liability account increases cash flows from operating activities. On the
other hand, a decrease in a current liability account decreases cash flows from operating
activities.

How does the change in equipment affect the statement of cash flows?
Ans: A decrease in equipment increases cash flows from investing activities.

 An increase in a noncurrent asset account decreases cash flows from investing activities. On the
other hand, a decrease in a noncurrent asset account increases cash flows from investing
activities.

How does the change in common stock affect the statement of cash flows?
Ans: An increase in common stock increases cash flows from financing activities.

 An increase in an equity account increases cash flows from financing activities. On the other
hand, a decrease in an equity account decreases cash flows from financing activities.

26. A company reports the following financial information:

Payment on accounts payable $ 10,000

Gain on the sale of equipment $ 4,000
Collection of accounts receivable $ 20,000
Issuance of bonds payable for cash $ 100,000
Purchase of treasury stock $ 35,000
Purchase of investment stock $ 43,000
Purchase of equipment $ 40,000
Issuance of common stock for cash $ 34,000
Receipt of cash dividends $ 13,000
Receipt of cash interest $ 23,000
Payment of cash interest $ 16,000
Payment of cash dividends $ 12,000
Cash proceeds from sale of equipment $ 32,000

What is the cash flow from investing activities?

a. Decrease of $44,000
b. Decrease of $47,000
c. Decrease of $51,000
d. Decrease of $67,000

Ans c: decrease of $51,000 [$32,000 - ($43,000 + $40,000)]

What is the cash flow from financing activities?

a. Increase of $87,000
b. Increase of $99,000
c. Increase of $100,000

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d. Increase of $123,000

Ans a: increase of $87,000 [($100,000 + $34,000) – ($35,000 + $12,000)]

27.
X Company
Balance Sheet
December 31, Year 2

Year 2 Year 1 Change

Assets
Cash $60,000 $ 40,000 $ (20,000)
Accounts Receivable 130,000 140,000 (10,000)
Prepaids 35,000 43,000 (8,000)
Inventory 183,000 120,000 63,000
Property, Plant & Equipment 340,000 310,000 30,000
Less: Accumulated Depreciation (75,000) (50,000)
(25,000)
Total Assets $673,000 $ 603,000 $ 70,000

Liabilities
Accounts Payable $110,600 $ 111,000 $ (400)
Accrued Liabilities 34,000 32,000 2,000
Notes Payable (Long-Term Debt) 50,000 50,000
100,000
Total Liabilities $244,600 $ 193,000 $ 51,600

Stockholders’ Equity
Common Stock ($10 par) $ 75,000 $ 75,000 $ -
Paid in Capital In Excess of Par 220,000 220,000 -
Retained Earnings 143,400 115,000 28,400
Treasury Stock 10,000 - 10,000
Total Stockholders’ Equity $428,400 $ 410,000 $ 18,400
Total Liabilities and Stockholders’ Equity $673,000 $ 603,000 $ 70,000

X Company
Income Statement
For the Year Ended December 31, Year 2

Net Sales $500,000

Interest Revenue 3,000
Total Revenue 503,000

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 Expenses
Cost of Goods Sold $310,000
Selling and Administrative Expenses 91,000
Total Expenses 401,000

Income Before Income Taxes 102,000

Income Taxes
30,600
Net Income $71,400

Additional Information:
1. Depreciation expense for the year is $25,000
2. Equipment purchases for the year is $30,000
3. $50,000 in cash was borrowed on a long term note payable
4. Cash dividends in the amount of $43,000 were declared and paid

What is the cash flow from investing activities?

a. $70,000
b. ($30,000)
c. $30,000
d. ($40,000)

Ans b: PPE is the only investing activity

What is the cash flow from operating activities?

Ans: $53,000 = $71,400 net income + $25,000 depreciation expense +$10,000 accounts receivable +
$8,000 prepaids - $63,000 inventory + $2,000 accrued liabilities – $400 accounts payable

What is the cash flow from financing activities?

Ans: ($3,000) = $50,000 long-term liability - $43,000 cash dividends - $10,000 treasury stock

28.
Y Company
Balance Sheet
December 31, Year 2

Year 2 Year 1 Change

Assets
Cash $169,000 $ 40,000 $ 129,000
Accounts Receivable 130,000 140,000 (10,000)
Prepaids 35,000 43,000 (8,000)
Inventory 110,000 120,000 (10,000)

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 Y Company
Property, Plant & Equipment 350,000 310,000 40,000
Less: Accumulated Depreciation (76,000) (50,000) (26,000)
Total Assets $718,000 $ 603,000 $ 115,000

Liabilities
Accounts Payable $120,000 $ 111,000 $ 9,000
Accrued Liabilities 39,000 32,000 7,000
Notes Payable (Long-Term Debt) 90,000 50,000 40,000
Total Liabilities $249,000 $ 193,000 $ 56,000

Stockholders’ Equity
Common Stock ($10 par) $ 75,000 $ 75,000 $ -
Paid in Capital In Excess of Par 220,000 220,000 -
Retained Earnings 184,000 115,000 69,000
Treasury Stock 10,000 - 10,000
Total Stockholders’ Equity $469,000 $ 410,000 $ 59,000
Total Liabilities and Stockholders’ Equity $718,000 $ 603,000 $ 115,000

Y Company
Income Statement
For the Year Ended December 31, Year 2

Net Sales $600,000

Interest Revenue 8,000
Total Revenue 608,000

Expenses
Cost of Goods Sold $340,000
Selling and Administrative Expenses 92,000
Total Expenses 432,000

Income Before Income Taxes 176,000

Income Taxes 63,000
Net Income $113,000

Additional Information:
1. Depreciation expense for the year is $26,000
2. Equipment purchases for the year is $40,000
3. $40,000 in cash was borrowed on a long term note payable
4. Cash dividends in the amount of $44,000 were declared and paid

What is the cash flow from financing activities?

a. ($14,000)

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b. ($4,000)
c. $40,000
d. $30,000

Ans a: $14,000 – ($10,000 outflow + $44,000 outflow + 40,000 inflow)

What is the cash flow from investing activities?

Ans: $40,000 PPE is the only investing activity

What is the cash flow from operating activities?

$183,000 = $113,000 net income + $26,000 depreciation expense + $10,000 accounts receivable +
$8,000 prepaid + $10,000 inventory +$9,000 accounts payable + $7,000 accrued liabilities

What is the net change in cash flow?

Ans: $129,000 [183,000 - 40,000 – 14,000]

29. Which information is it the main purpose of the statement of cash flows to provide for a given
period?
a. Sources and uses of cash
b. Changes in cash balances
c. Changes in net working capital
d. Differences between cash and cash equivalents

Ans a

30. Which section of the statement of cash flows displays the cash generated from normal day-to-day
business activities?
a. Current cash flows
b. Operating cash flows
c. Investing cash flows
d. Financing cash flows

Ans b

31. Which investor concern does the statement of cash flows address?
a. A company’s ability to stay in business for the long term
b. How effectively a company is using its assets to create sales
c. A company’s ability to meet its current obligations
d. How effectively a company is using its equity to create income

Ans c

32. Which transactions are reported in the financing section of a cash flow statement?
a. Day-to-day business operations
b. Interest payments
c. Purchases of long-term assets
d. Dividend payments

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Ans d

33. Which transactions are reported in the investing section of a cash flow statement?
a. Revenues and expenses
b. Purchases and sales of long-term assets
c. Bond payments
d. Purchases and sales of current assets

Ans b

34. What is a key difference between the direct and indirect methods of preparing a cash flow
statement?
a. The direct method reports receipts and disbursements; the indirect method adjusts net income for
reported items that do not affect cash.
b. The direct method adjusts net income for reported items that do not affect cash; the indirect method
reports receipts and disbursements.
c. The direct method is used for cash basis accounting; the indirect method is used for accrual basis
accounting.
d. The direct method is used for accrual basis accounting; the indirect method is used for cash basis
accounting.

Ans a

35. Which sources provide the information for preparing statements of cash flows?
a. Comparative accrual-based income statements
b. Comparative cash-based income statements
c. Comparative accrual-based balance sheets
d. Comparative cash-based balance sheets

Ans c

36. Which accounts are sources of information for cash flow statements?
a. Accounts payable, employee benefits expense, and fixed assets
b. Accounts receivable, inventory, and fixed assets
c. Accumulated depreciation, payroll tax expense, and prepaid expenses
d. Cost of goods sold, gain on sale of land, and inventory

Ans b

37. A company reports the following transactions at the end of the year:

• Stock dividends: $20,000

• Cash dividends: $10,000
• Purchase of treasury stock: $15,000
• Issuance of common stock: $100,000
• Major equipment repairs: $25,000

The company uses the indirect method to prepare a statement of cash flows for the year.

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How much should the company report as net cash provided by financing activities?
a. $50,000
b. $55,000
c. $75,000
d. $105,000

Ans c: issuance of stock 100,000 less purchase of treasury stock 15,000 less cash dividends 10,000 =
75,000)

38. A company reports the following transactions during the year:

• Purchase of equipment: $15,000

• Depreciation expense: $5,000
• Sale of equipment: $25,000
• Condemnation of land: $18,000

The company uses the indirect method to prepare a statement of cash flows for the year.

How much should the company report as net cash provided by these investment activities?
a. $5,000
b. $10,000
c. $23,000
d. $28,000

Ans d: condemnation of Land 18,000 plus sale of equipment 25,000 less purchase of equipment 15,000 =
28,000

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