Q: Which equation represents the reconciliation of net income to cash flow from operations using the indirect method?

$$\text{Net income} + \text{Depreciation} + \text{Loss on sale of assets} - \text{Increase in accounts receivable} - \text{Increase in inventory} + \text{Increase in accounts payable} = \text{Cash flow from operations}$$

Question 1

Which of the following best explains why a company can report positive net income but still face bankruptcy?

Accepted Answer

Net income includes non-cash items and accruals, so it may not reflect actual cash available to pay obligations.

Question 2

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

Accepted Answer

Purchase of property, plant, and equipment (PP&E)

Question 3

A company sells goods on credit. How does this transaction affect net income and cash flow from operations in the current period?

Accepted Answer

Net income increases, but cash flow from operations does not increase until cash is collected.

Question 4

Which formula correctly defines free cash flow?

Accepted Answer

Free cash flow = Cash flow from operations − Capital expenditures

Question 5

Which of the following is NOT an outflow classified under operating activities?

Accepted Answer

Repurchase of a firm's own shares

Question 6

A company reports the following changes: Accounts receivable increased by $$5,000, inventory decreased by 2$$,000, and accounts payable increased by $3,000. Using the indirect method, what is the net adjustment to net income for cash flow from operations?

Accepted Answer

$$-5,000 + 2,000 + 3,000 = 0$$

Question 7

Which of the following is a financing activity cash inflow?

Accepted Answer

Proceeds from issuing the firm's own equity securities

Question 8

If a company delays payment of accounts payable, what is the effect on cash flow from operations?

Accepted Answer

Cash flow from operations increases because cash outflow is postponed.

Question 9

Which equation represents the reconciliation of net income to cash flow from operations using the indirect method?

Accepted Answer

$$	ext{Net income} + 	ext{Depreciation} + 	ext{Loss on sale of assets} - 	ext{Increase in accounts receivable} - 	ext{Increase in inventory} + 	ext{Increase in accounts payable} = 	ext{Cash flow from operations}$$

Question 10

Which scenario would most likely require a company to rely on external financing?

Accepted Answer

Negative cash flow from operations, with capital expenditures and debt repayments due

Question 11

Which of the following is a key insight from the Lehman Brothers case regarding cash flow?

Accepted Answer

Massive new borrowings can mask negative cash flow from operations.

Question 12

A company reports net income of $$50,000, depreciation expense of 10$$,000, an increase in accounts receivable of $$5,000, and a decrease in accounts payable of 2$$,000. What is the cash flow from operations using the indirect method?

Accepted Answer

$$50,000 + 10,000 - 5,000 - 2,000 = 53$$,000$

Question 13

Which of the following is a risk associated with financing long-term acquisitions using short-term debt?

Accepted Answer

Short-term debt may not be renewed, creating liquidity risk for long-term assets.

Question 14

Which of the following would be considered an inflow from operating activities?

Accepted Answer

Cash received from sales of goods or services

Question 15

If a company records a gain on sale of assets, how is this treated in the indirect method for cash flow from operations?

Accepted Answer

The gain is subtracted from net income.

Question 16

Which of the following best describes the relationship between the balance sheet and the statement of cash flows?

Accepted Answer

The balance sheet shows account balances at the end of the period, while the statement of cash flows shows changes in those accounts between periods.

Question 17

Which of the following is a qualitative issue that can affect the reliability of cash flow from operations?

Accepted Answer

Recording operating expenses as capital expenditures to inflate CFO

Question 18

A company reports negative cash flow from operations but positive net income. Which of the following is the most likely cause?

Accepted Answer

Increase in accounts receivable and inventory

Question 19

Which of the following is the preferred source of cash inflows for a company?

Accepted Answer

Cash generated from operations

Question 20

Which step is NOT part of preparing a statement of cash flows?

Accepted Answer

Calculate net income for the period

Chapter 4: Statement of Cash Flows — Structure, Preparation, and Analysis

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