Question 1

From the viewpoint of stockholders or potential investors, which of the following cash flow measurements would be of least importance?
A) The dollar amount of net cash flow from operating activities for the current year.
B) The trend in net cash flow from operating activities from year to year.
C) The corporation's free cash flow for the current year.
D) The dollar amount of overall increase or decrease in cash for the current year.

Accepted Answer

The dollar amount of overall increase or decrease in cash for the current year is the least important measurement for stockholders or potential investors as it only reflects the change in cash position and does not provide any information about the source of cash or its sustainability. The other measurements (A, B, and C) provide more insight into the company's operating performance, financial health, and ability to generate cash from its operations.

Question 2

Cigna Corporation's 2010 net income is smaller than net cash flow from operating activities. Which of the following would not be an explanation of why net income is smaller than net cash flow from operating activities?
A) Cigna paid dividends to shareholders during 2010.
B) Cigna's accounts payable increased during 2010.
C) Cigna recognized depreciation expense in 2010.
D) Cigna sold equipment at a loss in 2010.

Accepted Answer

Dividends paid do not affect net income or operating cash flow, as they are financing activities.

Question 3

Which of the following is not true regarding the direct and indirect methods of computing net cash flow from operating activities?
A) Both methods result in the same dollar amount of cash flow from operating activities.
B) Both methods involve adjusting entries to the company's books so that the accounting records reflect the figures shown in the statement of cash flows.
C) Both methods are acceptable to the FASB for reporting purposes.
D) Both methods convert accrual-based income statement amounts to cash flow results.

Accepted Answer

The direct and indirect methods of computing net cash flow from operating activities do not involve adjusting entries to the company's books. The adjustments are made within the cash flow statement itself to reconcile net income to net cash provided by operating activities (indirect method) or to present cash receipts and payments (direct method).

Question 4

An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is:
A) Recording depreciation expense for the current year.
B) Declaring, but not paying, dividends on common stock.
C) Selling land in exchange for a note receivable.
D) Transferring cash from a checking account into a money market fund.

Accepted Answer

Selling land in exchange for a note receivable is a non-cash investing activity because it does not involve an exchange of cash. It would be disclosed in the supplementary schedule accompanying the statement of cash flows to provide transparency about the transactions affecting the company's overall financial position. Choices A, B, and D all involve changes in cash balances and would be disclosed on the statement of cash flows itself.

Question 5

Which of the following indicates a cash receipt?
A) A decrease in accrued expenses, such as wages payable.
B) A decrease in accounts receivable.
C) An increase in inventory.
D) A decrease in accounts payable.

Accepted Answer

A decrease in accounts receivable indicates that the company has received cash from its customers on account.

Question 6

Which method will yield higher cash flows from operating activities?
A) The indirect method.
B) The direct method.
C) Both direct and indirect methods will yield the same amount.
D) Depends upon the situation.

Accepted Answer

Both the direct and indirect methods of calculating cash flows from operating activities will yield the same amount. The difference between the two methods lies in the presentation and the process of calculation, not in the final amount of cash flows from operating activities.

Question 7

When equipment is purchased entirely through a loan:
A) The equipment is shown as an increase in the investing activities section.
B) The equipment is shown as a decrease in the investing activities section.
C) The loan is shown as an increase in the financing section.
D) Neither the loan nor the purchase of equipment is shown in the investing or the financing sections.

Accepted Answer

The answer of When equipment is purchased entirely through a...

Question 8

Which of the following indicates cash receipts?
A) Debit entries in the Notes Receivable account.
B) Credit entries in the Marketable Securities account.
C) Debit entries in the Notes Payable account.
D) Credit entries in the Accumulated Depreciation account.

Accepted Answer

The answer of Which of the following indicates cash receipts?
A)...

Question 9

Which method will yield the higher cash flows from financing activities?
A) The indirect method.
B) The direct method.
C) Both direct and indirect methods will yield the same amount.
D) Depends upon the situation.

Accepted Answer

The method (direct or indirect) used for calculating cash flows affects only the presentation of the cash flow from operating activities. Cash flows from financing activities are calculated and presented in the same way under both methods, thus yielding the same amount.

Question 10

Craig Corporation's reported net income for 2009 is less than its net cash flow from operating activities. One reason for this could be:
A) The sale of machinery at a loss in 2009.
B) An increase in inventory levels during 2009.
C) The sale of investments at a gain in 2009.
D) An error in the preparation of the statement of cash flows; net income should be greater than or equal to net cash flow from operating activities.

Accepted Answer

The sale of machinery at a loss would decrease net income but not affect cash flow as the cash received from the sale is included in cash flow from investing activities, not operating activities.

Question 11

The Nelson Corporation reported net income in excess of its net cash flow from operating activities for the current year. An explanation for this may be:
A) A loss on the sale of equipment in the current year.
B) An increase in accounts payable during the year.
C) Depreciation expense recognized for the year.
D) A gain on the sale of investments during the year.

Accepted Answer

The answer of The Nelson Corporation reported net income in...

Question 12

Which of the following does not create a difference between net income and the net cash flow from operations?
A) Non-operating gains and losses.
B) Depreciation expense.
C) Timing differences between credit sales and collections from customers.
D) Payment of a cash dividend.

Accepted Answer

Payment of a cash dividend does not affect the difference between net income and net cash flow from operations because it is a financing activity, not an operating activity.

Question 13

Which of the following sets of data is sufficient to compute the amount of cash paid for merchandise?
A) Cost of goods sold, increase or decrease in inventory, increase or decrease in accounts payable.
B) Increase or decrease in cash, increase or decrease in inventory, increase or decrease in accounts payable.
C) Cost of goods sold, increase or decrease in accounts payable.
D) Cost of goods sold.

Accepted Answer

To compute the amount of cash paid for merchandise, you need to know the cost of goods sold, any increase or decrease in inventory (to adjust the cost of goods sold for the actual merchandise purchased), and any increase or decrease in accounts payable (to adjust for merchandise purchased on credit versus cash paid). This combination provides a complete picture of cash movement related to merchandise purchases.

Question 14

Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used?
A) Dividends paid.
B) Dividends received.
C) Neither dividends paid nor dividends received would be shown.
D) Both dividends paid and dividends received would be shown.

Accepted Answer

Dividends paid are typically classified as financing activities, not operating activities, in the statement of cash flows.

Question 15

Which of the following would not be presented in the cash from operating activities section of the statement of cash flows when the indirect method is used?
A) Gain on the sale of investments.
B) Depreciation expense.
C) Neither a gain on the sale of investments nor depreciation expense would be shown.
D) Both a gain on the sale of investments and depreciation expense would be shown.

Accepted Answer

The answer of Which of the following would not be...

Question 16

When equipment is sold at a loss:
A) The net proceeds are shown in the investing section.
B) The book value of the asset is shown in the investing section.
C) The book value of the asset is shown in the investing section, and the loss is shown in the operating section.
D) The net proceeds are shown in the financing section.

Accepted Answer

The net proceeds from the sale of equipment are reported in the investing section of the cash flow statement, regardless of whether the sale results in a gain or a loss.

Question 17

When using the indirect method, depreciation expense:
A) Increases net cash flow from operations.
B) Decreases net cash flow from operations.
C) Does not affect net income.
D) Does not affect net cash flow from operations.

Accepted Answer

The answer of When using the indirect method, depreciation expense:
A)...

Question 18

At the beginning of 2009, Baldwin Corporation bought an automobile for $36,000 by issuing a note payable. The automobile has a six-year life and is depreciated using the straight-line method. To determine net cash flow from operating activities for 2009 using the indirect method, net income should be:
A) Increased by $6,000.
B) Decreased by $6,000.
C) Increased by $42,000.
D) Neither increased nor decreased. No adjustments are necessary since no cash was received or paid.

Accepted Answer

The depreciation expense of $6,000 (calculated as $36,000/6 years) is a non-cash expense and should be added back to net income to determine net cash flow from operating activities using the indirect method.

Question 19

Which of the following statements regarding the direct and indirect methods of reporting cash flow from operating activities is false?
A) Although both methods result in the same net increase or decrease in cash for the year, net cash flow from operating activities will be different under the two methods.
B) The direct method shows the specific cash inflows and outflows constituting the operating activities of the business.
C) Under the indirect method, the computation of net cash flow from operating activities begins with net income as shown in the income statement.
D) The FASB permits both the direct and the indirect methods, but has expressed a preference for the direct method.

Accepted Answer

This statement is false because both methods should result in the same net cash flow from operating activities. The only difference is the level of detail provided in the presentation of the cash inflows and outflows.

Question 20

When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling:
A) Net cash flow from operating activities with net sales.
B) Net income with the net increase or decrease in cash and cash equivalents.
C) Net income with net cash flow from operating activities.
D) Net cash flow from operating activities shown in the statement with that which would result from use of the indirect method.

Accepted Answer

The answer of When net cash flow from operating activities...

Quiz 13: Statement of Cash Flows

From the viewpoint of stockholders or potential investors, which of the following cash flow measurements would be of least importance?

Cigna Corporation's 2010 net income is smaller than net cash flow from operating activities. Which of the following would not be an explanation of why net income is smaller than net cash flow from operating activities?

Which of the following is not true regarding the direct and indirect methods of computing net cash flow from operating activities?

An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is:

Which of the following indicates a cash receipt?

Which method will yield higher cash flows from operating activities?

When equipment is purchased entirely through a loan:

Which of the following indicates cash receipts?

Which method will yield the higher cash flows from financing activities?

Craig Corporation's reported net income for 2009 is less than its net cash flow from operating activities. One reason for this could be:

The Nelson Corporation reported net income in excess of its net cash flow from operating activities for the current year. An explanation for this may be:

Which of the following does not create a difference between net income and the net cash flow from operations?

Which of the following sets of data is sufficient to compute the amount of cash paid for merchandise?

Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used?

Which of the following would not be presented in the cash from operating activities section of the statement of cash flows when the indirect method is used?

When equipment is sold at a loss:

When using the indirect method, depreciation expense:

Which of the following statements regarding the direct and indirect methods of reporting cash flow from operating activities is false?

When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling: