Question 1

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

Accepted Answer

To determine the market value of the company

Question 2

Which of the following activities would be classified as an investing activity on the statement of cash flows?

Accepted Answer

Purchase of equipment for cash

Question 3

Under the indirect method, which of the following adjustments is made to net income to arrive at cash flows from operating activities?

Accepted Answer

Add back depreciation expense

Question 4

A company sold equipment for $$62,000. The equipment had a book value of 54$$,000. How is this transaction reported on the statement of cash flows using the indirect method?

Accepted Answer

Subtract $$8,000 gain from net income under operating activities and add 62$$,000 under investing activities

Question 5

If accounts receivable increased by $15,000 during the year, how should this be reflected in the operating section of the statement of cash flows using the indirect method?

Accepted Answer

Subtract $15,000 from net income

Question 6

Which of the following is true regarding depreciation expense on the statement of cash flows?

Accepted Answer

It is added back to net income under the indirect method

Question 7

Which of the following would be reported as a cash outflow from financing activities?

Accepted Answer

Payment of dividends to shareholders

Question 8

A company’s inventory decreased by $3,000 during the year. How does this affect the cash flows from operating activities under the indirect method?

Accepted Answer

Add $3,000 to net income

Question 9

Which of the following is a key difference between the direct and indirect methods of reporting cash flows from operating activities?

Accepted Answer

The direct method reports cash receipts and cash payments from operating activities

Question 10

Which of the following transactions would NOT be reported in the statement of cash flows?

Accepted Answer

Acquisition of land by issuing common stock

Question 11

A company declared and paid cash dividends of $17,000 during the year. How is this reported on the statement of cash flows?

Accepted Answer

As a cash outflow from financing activities

Question 12

Which of the following best describes the effect of an increase in accounts payable on the statement of cash flows using the indirect method?

Accepted Answer

It is added to net income in the operating section

Question 13

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

Accepted Answer

Proceeds from issuance of long-term debt

Question 14

Which of the following is true regarding the reporting of depreciation expense under the direct method?

Accepted Answer

It is not reported because it does not affect cash

Question 15

A company made a loan to another company for $21,000. How is this transaction reported on the statement of cash flows?

Accepted Answer

As a cash outflow from investing activities

Question 16

Which of the following formulas correctly computes cash collections from customers using the direct method?

Accepted Answer

$$	ext{Cash Collections} = 	ext{Sales} + (	ext{Beginning Accounts Receivable} - 	ext{Ending Accounts Receivable})$$

Question 17

Which of the following is NOT a cash flow from operating activities under the direct method?

Accepted Answer

Cash paid for plant assets

Question 18

If salary and wages payable decreased by $2,000 during the year, how should this be reflected in the operating section of the statement of cash flows using the indirect method?

Accepted Answer

Subtract $2,000 from net income

Question 19

Which of the following statements is correct regarding the effect of a decrease in accrued liabilities on the statement of cash flows?

Accepted Answer

It decreases cash flows from operating activities

Question 20

Which of the following best explains why the FASB and IASB prefer the direct method for reporting cash flows from operating activities?

Accepted Answer

It provides clearer information about the sources and uses of cash

Chapter 11: Statement of Cash Flows – Financial Accounting Study Notes

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