Question 1

The Sonesta Company uses the indirect method for the statement of cash flows. In 2013, they sold equipment for $4,800 cash. The net book value of the asset prior to sale was $4,000. Which of the following statements is true?

Accepted Answer

The cash receipt of $4,800 from the sale of equipment is shown as a positive cash flow in the investing activities section, as it represents cash inflow from the disposal of a long-term asset.

Question 2

Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following section of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\
\hline \text { Cash } & \$ 33,000 & \$ 18,000 & \$ 15,000 \
\hline \text { Accounts receivable } & 22,000 & 35,000 & ( 13,000) \
\hline \text { Inventory } & 170,000 & 115,000 & 55,000 \
\hline \text { Total assets } & \$ 225,000 & \$ 168,000 & \$ 57,000 \
\hline
\end{array}$$
-
How will the change in Inventory be shown on the statement of cash flows?

Accepted Answer

The change in inventory will be shown on the statement of cash flows as a decrease in operating cash flows (operating activities minus negative cash flow) because an increase in inventory represents an outflow of cash for the company.

Question 3

In creating a statement of cash flows using the indirect method, which of the following statements is TRUE about depreciation expense?

Accepted Answer

Depreciation expense is a non-cash item and is added back to net income in the operating activities section of the statement of cash flows using the indirect method. This is because depreciation reduces net income, but does not involve any cash flow.

Question 4

Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following portion of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\
\hline \text { Common stock } & \$ 30,000 & \$ 2,000 & \$ 28,000 \
\hline \text { Retained earnings } & 113,000 & 74,000 & 39,000 \
\hline \text { Treasury stock } & ( 8,000 & ( 5,000 ) & ( 3,000 ) \
\hline \text { Total equity } & \$ 135,000 & \$ 71,000 & \$ 64,000 \
\hline
\end{array}$$

Note: There were no stock retirements during the year.
There were no sales of treasury stock during the year.
-
Which of the following statements would be TRUE?

Accepted Answer

A positive cash flow of $28,000 from the issuance of common stock indicates that the company received $28,000 from selling its common stock, which increases the cash inflow for the company.

Question 5

The Sonesta Company sold equipment for cash. The income statement shows a gain on sale of $800. The net book value of the asset prior to sale was $4,000. Which of the following statements describes the cash effect of the transaction?

Accepted Answer

C) Calculations: $4,000 + $800 = $4,800

Question 6

Cash received from selling merchandise would be considered a:

Accepted Answer

Cash received from selling merchandise is a cash inflow from the company's primary business operations, which is classified as an operating activity.

Question 7

Creditor and stockholder transactions are considered ________ activities.

Accepted Answer

Creditor and stockholder transactions refer to obtaining funds from external sources, which falls under financing activities.

Question 8

The Sonesta Company sold equipment for cash. The income statement shows a loss on sale of $5,000. The net book value of the asset prior to sale was $24,000. Which of the following statements describes the cash effect of the transaction?

Accepted Answer

C) Calculations: $24,000 - $5,000 = $19,000

Question 9

Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following section of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\
\hline \text { Accounts payable } & \$ 4,000 & \$ 6,000 & \$ ( 2,000 ) \
\hline \text { Accrued liabilities } & 2,000 & 1,000 & 1,000 \
\hline \text { Long-term notes payable } & 84,000 & 90,000 & ( 6,000 ) \
\hline \text { Total liabilities } & \$ 90,000 & \$ 97,000 & \$ ( 7,000 ) \
\hline
\end{array}$$

- 
How will the change in Accounts payable be shown on the statement of cash flows?

Accepted Answer

The change in Accounts payable will be shown under Operating activities and will be deducted from net income since an increase in AP means that the company has purchased goods or services on credit, resulting in an increase in liabilities. This deduction will result in a negative cash flow. Therefore, the best choice is B, operating activities minus negative cash flow.

Question 10

The Sonesta Company uses the indirect method for the statement of cash flows. In 2013, they purchased equipment for $10,000 cash. Which of the following statements is TRUE?

Accepted Answer

The purchase of equipment is classified as an investing activity in the statement of cash flows under the indirect method. It would be shown as a negative cash flow because cash went out of the company. Therefore, option B is the correct answer.

Question 11

Which of the following would be considered an operating activity on the statement of cash flows?

Accepted Answer

The sale of inventory is considered an operating activity because it is part of the company's primary business operations, involving the production and sale of goods or services.

Question 12

Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following information:
• Repayments on long-term notes payable: $40,000
• New borrowing on long-term notes payable: $34,000
Which of the following statements is accurate regarding the statement of cash flows?

Accepted Answer

New borrowing on long-term notes payable increases cash flow and is reported in the financing section of the statement of cash flows.

Question 13

Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following section of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\ 
\hline \text { Cash } & \$ 33,000 & \$ 18,000 & \$ 15,000 \
\hline \text { Accounts receivable } & 22,000 & 35,000 & ( 13,000) \
\hline \text { Inventory } & 170,000 & 115,000 & 55,000 \
\hline \text { Total assets } & \$ 225,000 & \$ 168,000 & \$ 57,000 \
\hline
\end{array}$$
-
How will the change in Accounts receivable be shown on the statement of cash flows?

Accepted Answer

An increase in accounts receivable is considered a use of cash (negative cash flow) in operating activities because it represents sales that have not yet been collected in cash.

Question 14

A payment of interest on a loan would be considered a:

Accepted Answer

Interest payments on a loan are considered operating activities because they relate to the core operations of a business, affecting its net income.

Question 15

Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following section of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\
\hline \text { Accounts payable } & \$ 4,000 & \$ 6,000 & \$ ( 2,000 ) \
\hline \text { Accrued liabilities } & 2,000 & 1,000 & 1,000 \
\hline \text { Long-term notes payable } & 84,000 & 90,000 & ( 6,000 ) \
\hline \text { Total liabilities } & \$ 90,000 & \$ 97,000 & \$ ( 7,000 ) \
\hline
\end{array}$$

-
How will the change in Accrued liabilities be shown on the statement of cash flows?

Accepted Answer

Accrued liabilities are included in operating activities, and an increase in accrued liabilities indicates that expenses have been incurred but not yet paid in cash, effectively reducing cash outflow and thus being added back to net income in the cash flow from operating activities section.

Question 16

Cash borrowed on a mortgage note would be a(n) ________ activity.

Accepted Answer

Cash borrowed on a mortgage note is categorized as a financing activity since it involves acquiring funds to manage the company's operations. Investing activities include purchasing or selling long-term assets such as property, plant, and equipment, while operating activities include revenues and costs associated with core business operations. Non-cash activities include a variety of accounting adjustments or reclassifications that do not involve cash transactions.

Question 17

Which of the following is NOT a cash outflow from an operating activity?

Accepted Answer

Payment of dividends is considered a financing activity, not an operating activity. Operating activities involve the primary operations of the company such as purchasing inventory, paying salaries, and paying taxes.

Question 18

Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following section of the comparative balance sheet:
$$\begin{array} { | l | r | r | r | } 
\hline&2014 & 2013 & \text { Increase/decrease }\
\hline \text { Accounts payable } & \$ 4,000 & \$ 6,000 & \$ ( 2,000 ) \
\hline \text { Accrued liabilities } & 2,000 & 1,000 & 1,000 \
\hline \text { Long-term notes payable } & 84,000 & 90,000 & ( 6,000 ) \
\hline \text { Total liabilities } & \$ 90,000 & \$ 97,000 & \$ ( 7,000 ) \
\hline
\end{array}$$

- 
Additional information provided:
During 2014, the company repaid $40,000 of long-term notes payable.
During 2014, the company borrowed $34,000 on a new note payable.
Based on the above information only, what amount of net cash flow would be shown in the financing section of the statement of cash flows?

Accepted Answer

The net cash flow from financing activities is calculated as the difference between the repayment of long-term notes payable ($40,000) and the amount borrowed on a new note payable ($34,000), resulting in a net cash outflow of $6,000.

Question 19

How would a new issue of common stock be shown on the statement of cash flows?

Accepted Answer

Issuing new common stock results in the company receiving cash from investors, which is recorded as a positive cash flow in the financing section of the statement of cash flows.

Question 20

Avatar Company uses the indirect method to prepare its statement of cash flows and provides following information about transactions for the year:
• Plant assets, net-beginning balance: $90,000
• Plant assets, net-ending balance: $120,000
• Equipment costing $52,000 was purchased for cash
• Equipment with a net asset value of $10,000 was sold for $14,000
• Depreciation expense of $12,000 was recorded during the year
What was the net amount of Cash from investing activities?

Accepted Answer

A) Calculations: ($52,000) + $14,000 = ($38,000)

Quiz 14: The Statement of Cash Flows