Question 1

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

Accepted Answer

To explain why net income does not equal the change in cash balance.

Question 2

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

Accepted Answer

Purchase of equipment for cash.

Question 3

A company reports net income of $$50,000. Depreciation expense for the year is 8$$,000. What adjustment should be made to net income under the indirect method when calculating cash flows from operating activities?

Accepted Answer

Add $8,000 to net income.

Question 4

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

Accepted Answer

Acquiring land by issuing a note payable.

Question 5

If a company’s cash flow from operating activities is $$120,000, it spends 80$$,000 on new equipment, and pays $10,000 in dividends, what is its free cash flow?

Accepted Answer

$30,000

Question 6

Which of the following would be added to net income in the operating activities section of the statement of cash flows using the indirect method?

Accepted Answer

A loss on the sale of equipment

Question 7

Under the direct method, which of the following is NOT included in cash payments to suppliers?

Accepted Answer

Payments for dividends

Question 8

Which of the following best describes the difference between the direct and indirect methods of preparing the statement of cash flows?

Accepted Answer

Only the operating activities section differs between the two methods.

Question 9

A company issued $200,000 of common stock to acquire a building. How should this transaction be reported on the statement of cash flows?

Accepted Answer

As a non-cash investing and financing activity

Question 10

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

Accepted Answer

Cash received from issuing bonds payable

Question 11

When preparing the statement of cash flows using the indirect method, which of the following would be subtracted from net income?

Accepted Answer

A gain on the sale of equipment

Question 12

Which of the following best describes free cash flow?

Accepted Answer

Net cash provided by operating activities minus cash paid for investments and dividends

Question 13

Which of the following would NOT be considered a cash flow from operating activities?

Accepted Answer

Cash paid to purchase equipment

Question 14

A company’s comparative balance sheet shows an increase in accounts receivable of $5,000 during the year. How should this be reflected in the operating activities section using the indirect method?

Accepted Answer

Subtract $5,000 from net income

Question 15

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

Accepted Answer

Payment of dividends

Question 16

If a company pays $15,000 to retire notes payable, how is this reported on the statement of cash flows?

Accepted Answer

As a cash outflow from financing activities

Question 17

Which of the following would be considered a cash inflow from investing activities?

Accepted Answer

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

Question 18

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

Depreciation expense reduces net income but does not affect cash.

Question 19

A company collected $12,000 in interest revenue during the year. How is this reported on the statement of cash flows using the direct method?

Accepted Answer

As a cash inflow from operating activities

Question 20

Which of the following is a step in preparing the statement of cash flows using the indirect method?

Accepted Answer

Adjust net income for changes in current assets and liabilities

Chapter 14: The Statement of Cash Flows – Study Notes

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