Q: Which formula correctly calculates cash flow from operating activities using the indirect method?

$$CFO = NI + Depr/Amort/Depl – Gain + Loss – \Delta \text{Non-cash Op Assets} + \Delta \text{Op Liab}$$

Q: A company’s free cash flow is calculated as:

$$\text{Net Cash Provided from Operating Activities} - \text{Cash Payments for Capital Investments}$$

Question 1

Which of the following best describes the primary purpose of the Statement of Cash Flows?

Accepted Answer

To explain the changes in cash and cash equivalents from one balance sheet date to the next.

Question 2

Which of the following activities would NOT be classified as an operating activity on the Statement of Cash Flows?

Accepted Answer

Issuing common stock for cash.

Question 3

A company records $10,000 in depreciation expense for the year. How does this affect the operating section of the Statement of Cash Flows under the indirect method?

Accepted Answer

It is added to net income.

Question 4

Which formula correctly calculates cash flow from operating activities using the indirect method?

Accepted Answer

$$CFO = NI + Depr/Amort/Depl – Gain + Loss – \Delta 	ext{Non-cash Op Assets} + \Delta 	ext{Op Liab}$$

Question 5

A company sells equipment for $$7,000 cash. The equipment had an original cost of 8$$,000 and accumulated depreciation of $4,000. What is the effect on the Statement of Cash Flows?

Accepted Answer

A $7,000 cash inflow is reported in investing activities.

Question 6

If accounts receivable increase during the period, how is this reflected in the operating section of the Statement of Cash Flows (indirect method)?

Accepted Answer

It is subtracted from net income.

Question 7

Which of the following is an example of a financing activity?

Accepted Answer

Issuing bonds for cash.

Question 8

A company pays $2,000 cash dividend to shareholders. How is this transaction classified on the Statement of Cash Flows?

Accepted Answer

Financing activity outflow

Question 9

Which of the following best explains why net income does NOT equal cash flow from operations?

Accepted Answer

Net income is calculated on an accrual basis, while cash flow from operations is cash-based.

Question 10

Which of the following would be included as a supplemental disclosure on the Statement of Cash Flows?

Accepted Answer

Acquisition of equipment by issuing common stock.

Question 11

A company’s free cash flow is calculated as:

Accepted Answer

$$	ext{Net Cash Provided from Operating Activities} - 	ext{Cash Payments for Capital Investments}$$

Question 12

Which of the following is TRUE regarding the direct and indirect methods of preparing the Statement of Cash Flows?

Accepted Answer

The total cash flow from operations is the same under both methods.

Question 13

If a company pays $9,000 for wages that were expensed in a prior year, how does this affect the Statement of Cash Flows (indirect method)?

Accepted Answer

Subtract $9,000 from net income as a decrease in wages payable.

Question 14

Which of the following transactions would NOT affect the cash flow from operating activities?

Accepted Answer

Purchasing equipment by issuing a note payable.

Question 15

A company’s accounts payable increased by $15,000 during the year. How should this be reflected in the operating section of the Statement of Cash Flows (indirect method)?

Accepted Answer

Add $15,000 to net income.

Question 16

Which of the following best describes liquidity as it relates to the Statement of Cash Flows?

Accepted Answer

The ability to convert assets to cash quickly to meet obligations.

Question 17

Which of the following is a typical cash inflow from investing activities?

Accepted Answer

Cash received from the sale of property, plant, and equipment.

Question 18

A company purchases inventory for $7,000 cash, but the inventory remains unsold at year-end. What is the effect on the Statement of Cash Flows (indirect method)?

Accepted Answer

Subtract $7,000 from net income as an increase in inventory.

Question 19

Which of the following is NOT a reason why the Statement of Cash Flows is important to external users?

Accepted Answer

It shows the fair value of the company’s assets.

Chapter 11: Statement of Cash Flows – Comprehensive Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards