Q: Which formula correctly calculates free cash flow?

$$\text{Free Cash Flow} = \text{Net Cash Provided by Operating Activities} - \text{Cash Payments for Investments} - \text{Cash Dividends}$$

Q: Which equation represents the calculation of net cash provided by operating activities using the indirect method?

$$\text{Net Cash Provided by Operating Activities} = \text{Net Income} + \text{Non-cash Expenses} - \text{Gains} + \text{Losses} + \text{Decrease in Current Assets} - \text{Increase in Current Assets} + \text{Increase in Current Liabilities} - \text{Decrease in Current Liabilities}$$

Question 1

Which of the following is NOT a purpose of the statement of cash flows?

Accepted Answer

To determine the market value of the company

Question 2

Which activity is classified as an investing activity on the statement of cash flows?

Accepted Answer

Purchasing equipment for the business

Question 3

Which of the following transactions would be reported in the financing activities section of the statement of cash flows?

Accepted Answer

Cash received from issuing common stock

Question 4

When preparing the operating activities section using the indirect method, which adjustment is made to net income?

Accepted Answer

Add depreciation expense

Question 5

ShopMart, Inc. reported a net income of $$40,000. Depreciation expense was 20$$,000, and there was a gain on disposal of plant assets of $10,000. What is the adjusted net cash provided by operating activities before considering changes in current assets and liabilities?

Accepted Answer

$30,000

Question 6

Which formula correctly calculates free cash flow?

Accepted Answer

$$	ext{Free Cash Flow} = 	ext{Net Cash Provided by Operating Activities} - 	ext{Cash Payments for Investments} - 	ext{Cash Dividends}$$

Question 7

A company acquired a building by issuing common stock. How is this transaction reported on the statement of cash flows?

Accepted Answer

As a non-cash investing and financing activity

Question 8

Which of the following is a cash inflow from operating activities?

Accepted Answer

Cash received from customers for sales of merchandise

Question 9

If accounts receivable increased by $17,000 during the year, what adjustment is made to net income when using the indirect method?

Accepted Answer

Subtract $17,000 from net income

Question 10

Which equation represents the calculation of net cash provided by operating activities using the indirect method?

Accepted Answer

$$	ext{Net Cash Provided by Operating Activities} = 	ext{Net Income} + 	ext{Non-cash Expenses} - 	ext{Gains} + 	ext{Losses} + 	ext{Decrease in Current Assets} - 	ext{Increase in Current Assets} + 	ext{Increase in Current Liabilities} - 	ext{Decrease in Current Liabilities}$$

Question 11

Which of the following is an example of a non-cash investing and financing activity?

Accepted Answer

Acquiring land by issuing notes payable

Question 12

What is the main difference between the direct and indirect methods for preparing the operating activities section of the statement of cash flows?

Accepted Answer

The direct method restates income in terms of cash, while the indirect method adjusts accrual net income to cash

Question 13

ShopMart, Inc. paid $$310,000 for acquisition of plant assets and received 50$$,000 from disposal of plant assets. What is the net cash used for investing activities?

Accepted Answer

$260,000

Question 14

Which of the following would NOT be included in the operating activities section when using the direct method?

Accepted Answer

Depreciation expense

Question 15

A company issued $$90,000 in notes payable and paid 10$$,000 to retire notes payable. What is the net cash flow from financing activities related to notes payable?

Accepted Answer

$80,000

Question 16

Which of the following is a cash outflow from financing activities?

Accepted Answer

Payment for purchase of treasury stock

Question 17

If a company pays $$15,000 in cash dividends and spends 160$$,000 on long-term assets, with net cash provided by operations of $200,000, what is the free cash flow?

Accepted Answer

$25,000

Question 18

Which section of the statement of cash flows would include cash received from the sale of investments?

Accepted Answer

Investing activities

Question 19

Which of the following is a reason why net income does not equal the change in cash balance?

Accepted Answer

Net income includes non-cash expenses such as depreciation

Chapter 14: The Statement of Cash Flows – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards