Q: Which of the following is the correct formula for calculating Free Cash Flow?

$$\text{Free Cash Flow} = \text{Net Cash Provided by Operating Activities} - \text{Net Capital Expenditures} - \text{Dividends Paid}$$

Question 1

Which of the following best describes the primary purpose of the statement of cash flows?

Accepted Answer

To provide information about a company’s cash receipts and cash payments during a period.

Question 2

Which of the following transactions would NOT be reported in the statement of cash flows but would be disclosed in a note to the financial statements?

Accepted Answer

Issuance of shares to purchase equipment.

Question 3

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

Accepted Answer

Purchase of property, plant, and equipment.

Question 4

Under the indirect method, which of the following adjustments is ADDED to net income to arrive at net cash provided by operating activities?

Accepted Answer

Depreciation expense.

Question 5

A company reported the following: Net income = $$100,000; Depreciation expense = 10$$,000; Increase in inventory = $$5,000; Decrease in accounts payable = 3$$,000. What is the net cash provided by operating activities using the indirect method?

Accepted Answer

$$102,000 = 100,000 + 10,000 - 5,000 - 3,000$$

Question 6

Which of the following is considered a cash equivalent?

Accepted Answer

A 60-day Treasury bill.

Question 7

Which of the following would be classified as a financing activity?

Accepted Answer

Issuance of common shares for cash.

Question 8

If a company’s cash flow from operating activities is consistently negative, which phase of the corporate life cycle is it most likely in?

Accepted Answer

Introductory

Question 9

Which of the following is the correct formula for calculating Free Cash Flow?

Accepted Answer

$$	ext{Free Cash Flow} = 	ext{Net Cash Provided by Operating Activities} - 	ext{Net Capital Expenditures} - 	ext{Dividends Paid}$$

Question 10

A company sold equipment with a book value of $$20,000 for 25$$,000. How is this transaction reported on the statement of cash flows?

Accepted Answer

A $$5,000 gain is deducted from operating activities; 25$$,000 is reported as an investing inflow.

Question 11

Which of the following would be DEDUCTED from net income in the operating activities section using the indirect method?

Accepted Answer

Increase in prepaid expenses.

Question 12

Which of the following is TRUE regarding the direct and indirect methods for preparing the operating activities section of the statement of cash flows?

Accepted Answer

Both methods result in the same amount of net cash provided (used) by operating activities.

Question 13

Which of the following is NOT a step in preparing the statement of cash flows?

Accepted Answer

Prepare the statement of retained earnings.

Question 14

A company issued shares to acquire land. How should this transaction be reported?

Accepted Answer

As a significant noncash activity in a note to the financial statements.

Question 15

Which of the following would increase cash flow from operating activities under the indirect method?

Accepted Answer

A decrease in inventory.

Question 16

If a company pays cash dividends, how is this reported on the statement of cash flows?

Accepted Answer

As a financing activity outflow.

Question 17

Which of the following best explains why depreciation expense is added back to net income in the operating activities section under the indirect method?

Accepted Answer

Because it is a noncash expense that reduced net income.

Question 18

A company’s comparative balance sheet shows an increase in accounts payable of $10,000. How should this be reflected in the statement of cash flows (indirect method)?

Accepted Answer

Add $10,000 to net income in operating activities.

Question 19

Which of the following is an example of a cash outflow from investing activities?

Accepted Answer

Purchase of equipment.

Question 20

A company had the following cash flows: Net cash provided by operating activities = $$120,000; Net capital expenditures = 40$$,000; Dividends paid = $10,000. What is the company’s free cash flow?

Accepted Answer

$70,000

Chapter 13: Statement of Cash Flows – Comprehensive Study Notes

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