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Chapter 12 Statement of Cash Flows Answer Key
True / False Questions
1. The statement of cash flows explains the difference between the beginning and ending
balances of cash and cash equivalents.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
2. The payment of salaries and wages would be reported as an operating activity on the
statement of cash flows.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
3. Maya Company's purchase of 100 shares of Labrador Inc. common stock would be reported
as a financing activity on its statement of cash flows.
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12-1
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Topic: Classifying Cash Flows
4. The receipts of dividends and interest are both reported as cash inflows from investing
activities on the statement of cash flows.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
5. The payment of interest on bonds is classified as a cash outflow from operating activities on
the statement of cash flows.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
6. Treasury stock purchases made with cash are classified as cash outflows from financing
activities on the statement of cash flows.
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12-2
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7. The approach to preparing the cash flow statement relies on the following rearrangement of
the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders' Equity +
Noncash Assets).
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Relationship to Other Financial Statements
8. The reporting of financing activities is identical under the indirect and direct methods for the
statement of cash flows on the statement of cash flows.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Preparing the Statement of Cash Flows
9. Under the indirect method, changes in current assets are used in determining cash flows from
operating activities and changes in current liabilities are used in determining cash flows from
financing activities.
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Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-3
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10. When preparing the operating activities section of the statement of cash flows using the
indirect method, accumulated depreciation is added to net income in the operating section.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
11. When preparing the operating activities section of the statement of cash flows using the
indirect method, a decrease in accounts receivable is subtracted from net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12. When preparing the operating activities section of the statement of cash flows using the
indirect method, an increase in Income Taxes Payable is added to net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-4
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13. When the net cash flows from operating, investing, and financing activities are combined to
arrive at the overall net change in cash, a net decrease in cash is subtracted from the
beginning cash balance to calculate the ending cash balance.
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Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
14. Major investing and financing activities that do not involve cash do not have to be reported as
part of the statement of cash flows.
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Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
15. In general, the cash flow from operating activities is considered by many to be the most
important component of the statement of cash flows.
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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
12-5
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16. A healthy company typically shows positive cash flows in the financing activities section of the
statement of cash flows.
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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
17. In the decline phase, the company continues to enjoy positive operating cash flows but stops
spending cash on investing activities and instead uses its cash for financing activities such as
repaying lenders and returning excess cash to shareholders.
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Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
18. Depreciation Expense is not reported on the statement of cash flows when prepared using the
direct method.
12-6
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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
19. When preparing the operating activities section of the statement of cash flows using the direct
method, net income must be adjusted for gains or losses realized when property, plant, and
equipment is sold.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Operating Cash Flows Revisited (Direct Method)
20. When preparing the operating activities section of the statement of cash flows using the direct
method, a gain or loss from selling equipment is reported in the operating activities section of
the statement of cash flows.
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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Operating Cash Flows Revisited (Direct Method)
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-7
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21. Investing activities include receiving cash from the sale of land and also the resulting gain or
loss on the sale.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Classifying Cash Flows
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
22. Using the T-account approach to preparing the statement of cash flows, an increase in
Accounts Payable would appear on the debit side of the Cash account.
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Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.
Topic: T-account Approach (Indirect Method)
Multiple Choice Questions
12-8
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23. The statement of cash flows cannot be used to determine:
A. changes in working capital.
B. expenditures on long-term assets.
D. reliance on external financing.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
24. Which of the following statements about the statement of cash flows is not correct?
A. It does not replace the income statement.
B. It provides details as to how cash changed during a period.
C. It provides information about cash receipts and cash payments over a period of time.
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Topic: Business Activities and Cash Flows
12-9
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25. Suppose a company generally records revenues and expenses before receiving or making
cash payments. Which of the following statements is not correct?
A. If revenues are falling, a net loss could result even though the company reports a net cash
inflow from operating activities.
B. If revenues are rising, net income could result even though the company reports a net cash
outflow from operating activities.
D. The income statement doesn't explain changes in cash because it focuses on just the
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
26. Which of the following statements about the statement of cash flows is not correct?
A. GAAP requires every company to report a statement of cash flows.
C. The statement of cash flows is needed because the income statement and balance sheet
do not provide adequate information about the changes in cash.
D. The statement of cash flows provides information about how each major type of business
activity causes a company's cash to change.
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12-10
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27. Cash and cash equivalents include assets that:
A. have stable long-term value.
C. consistently grow in value over the long run.
D. are expected to be used up within a year.
Cash equivalents are short-term, highly liquid investments purchased within three months of
maturity. They are considered equivalent to cash because they are both (1) readily convertible
to known amounts of cash and (2) so near to maturity that their value is unlikely to change.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
28. Which of the following items is considered to be a cash equivalent?
A. An investment in a U. S. bond due in two years
B. A one-year certificate of deposit due in six weeks
D. A promissory note due from a customer in 7 months
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12-11
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29. Which of the following would not be included in the cash and cash equivalents amount
reported on the balance sheet?
A. Money market funds
B. Checking accounts
C. Treasury bills
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
30. A company purchased money market funds with cash during the current year. Which of the
following statement is correct?
A. This transaction will result in a decrease in cash from operating activities.
B. This transaction will result in a decrease in cash from investing activities.
C. This transaction will result in a decrease in cash from financing activities.
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12-12
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31. Which of the following statements is correct?
B. Cash flows are easily manipulated because they are based on estimates.
C. Accrual-based net income is not easily manipulated because valuation for such items as
bad debts and inventory are precise and based on objectively verifiable information.
D. Cash flows are not easily manipulated because they are generated by internal transactions
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
32. Which of the following statements about the statement of cash flows is not correct?
A. The statement of cash flows can be used to assess the likelihood of a company paying
dividends.
C. A company can have positive net income but at the same time have negative cash flow.
D. The statement of cash flows is the only financial statement that reports business activities.
Accrual-based net income is the best measure of profitability in spite of the estimates made. A
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12-13
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33. Which of the following is the best measure of a company's profitability?
A. Cash-based net income
C. Accounts Receivable
D. Sales Revenue
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Topic: Business Activities and Cash Flows
34. Accrual-basis accounting is superior to cash-basis accounting in that:
B. a statement of cash flows is not needed.
C. the cash balance reported will be greater.
D. there is only one method of preparing the operating activities of the statement of cash
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Topic: Business Activities and Cash Flows
12-14
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35. What is the purpose of the statement of cash flows?
B. It illustrates the profitability of a company.
C. It reports the financial position of a company at a specific point in time.
D. It outlines the changes in stockholders' equity accounts from the beginning of the period to
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Topic: Business Activities and Cash Flows
36. Which of the following would be included in cash flows from operating activities?
B. Cash received from an issuance of bonds
C. Cash dividends paid to stockholders
D. Cash used for purchases of equipment
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
12-15
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37. Cash flows from operating activities include all of the following except:
B. collections from customers on account.
C. payments to employees for hours worked.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
38. Cash flows from operating activities include:
B. paying principal to lenders
C. purchases of equipment
D. proceeds from stock issuance
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
39. The Viviana Co. uses the indirect method to determine its cash flow from operations. Which of
the following items will be subtracted from net income to find its cash flow from operations?
A. Decrease in Supplies
B. Increase in Accounts Payable
C. Depreciation Expense
D. Increase in Accounts Receivable.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
40. Which of the following would be classified as an operating activity on the statement of cash
flows using the direct method?
A. Cash dividends paid
B. Cash received from selling equipment
C. Cash paid to retire bonds payable at maturity
In the direct method, sales would be converted to cash by adding a decrease in accounts
receivable or by subtracting an increase in accounts receivable. Paying cash dividends and
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
41. A company loaned $1,000,000 with interest at 7% to another company. The interest revenue
from this loan would be reported on the statement of cash flows as a:
B. cash inflow from investing activities.
C. cash inflow from financing activities.
D. noncash investing and/or financing activity.
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12-17
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42. Which of the following journal entries has an effect on cash provided by (used in) operating
activities?
A. Bad debts expense
B. Depreciation expense
C. Sale of an investment
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
43. Which of the following statements about cash flows from investing activities is correct?
activities.
B. Cash flows from investing activities are calculated by making adjustments to net income.
C. Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities.
D. Cash received from issuing a long-term payable is reported as a cash inflow from investing
activities.
Cash flows from investing activities are the cash inflows and outflows related to the purchase
and disposal of investments and long-lived assets. Cash flows from operating (rather than
investing) activities are calculated by making adjustments to net income. Cash paid to acquire
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12-18
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44. Which of the following would be included in cash flows from investing activities?
A. Cash collected from customers
B. Cash received from an issuance of bonds
C. Cash dividends paid
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
45. Cash flows from investing activities include cash:
A. inflows and outflows reflecting revenues and expenses reported on the income statement.
B. inflows from the issuance of bonds.
D. inflows from the sale of a company's own stock to its stockholders.
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Topic: Classifying Cash Flows
12-19
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46. Which of the following would be reported as a cash outflow from investing activities?
A. Donating an old piece of equipment to charity
B. Repaying the principal of a bond
D. Acquiring an investment security by issuing company stock
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
47. Cash flows from investing activities include all of the following except a(n):
A. purchase of an automobile.
B. sale of a trademark.
C. purchase of stock of another company.
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12-20
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48. Which of the following would be classified as an investing activity on the statement of cash
flows?
B. Cash paid for interest
C. Cash received from stock issuance
D. Cash dividends paid
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-03 Report cash flows from investing activities.
Topic: Classifying Cash Flows
Topic: Under Armour's Investing Cash Flow Calculations
49. A company's cash flows from investing activities include cash transactions relating to the
purchase and disposal of which types of assets?
A. All of a company's assets
B. All of a company's assets except inventory
D. Property, plant and equipment
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12-21
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50. Cash flows from investing activities include:
A. changes in Accounts Receivable.
C. paying principal to lenders.
D. cash dividends paid.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
51. Which of the following would be included in cash flows from financing activities?
A. Cash proceeds from sales
B. Cash received from a sale of land
D. Cash used to purchases of equipment
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12-22
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52. Cash flows from financing activities include all of the following except:
A. payment of long-term debt.
C. proceeds from stock issuance.
D. cash dividends paid.
GAAP requires the payment of interest to be classified as a cash outflow from operating
activities because it enters into the determination of net income. Cash flows from financing
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
53. Which of the following would be classified as a financing activity on the statement of cash
flows?
A. Cash receipts from accounts receivable collections
B. Cash receipts from sale of equipment
D. Cash paid for interest on notes payable
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12-23
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54. The repayment of the principal of a loan which had been used to finance the purchase of
equipment should be reported on the statement of cash flows as a:
A. cash outflow from investing activities.
B. cash outflow from operating activities.
D. noncash investing and financing activities in a supplemental disclosure.
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Topic: Classifying Cash Flows
55. Which of the following statements about financing activities is not correct?
A. Cash dividends paid to a company's stockholders are reported as cash outflows from
financing activities.
B. When a company issues stock for cash, it reports a cash inflow from financing activities.
C. When a company repurchases stock with cash, it reports a cash outflow for financing
activities.
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Topic: Classifying Cash Flows
12-24
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56. Which of the following statements about cash flows from financing activities is correct?
A. When a company borrows from lenders, a cash outflow from financing activities has
occurred.
B. When a company receives cash dividends, a cash inflow from financing activities has
occurred.
occurred.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
57. Which of the following is included in the financing activities on a statement of cash flows?
A. Changes in accounts payable
B. Purchases of equipment
C. Paying interest to lenders
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Topic: Classifying Cash Flows
12-25
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58. Cash flows from financing activities can include:
A. selling goods on credit.
B. acquiring long-lived assets.
D. purchasing inventory on credit.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
59. Which of the following items below will be subtracted in the financing cash flow portion of the
statement of cash flows?
A. Net income earned
B. Bank loans obtained
D. Disposal of equipment
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
12-26
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60. Which of the following statements about classification choices is correct?
classified as either an operating or financing activity.
B. GAAP allows interest paid to be classified as either an operating or financing activity, but
IFRS requires that it be classified as a financing activity.
C. GAAP classifies cash dividends received as an investing activity, but IFRS allows them to
be classified as either an operating or investing activity.
D. GAAP classifies interest received as either an operating or investing activity, but IFRS
requires it to be classified as an investing activity.
GAAP classifies cash dividends paid as financing activities because they are transactions with
stockholders. IFRS allows cash dividends paid to also be classified as operating activities to
assist users in determining the company's ability to pay dividends out of operating cash flows.
GAAP requires cash payments of interest and the cash receipts of dividends and interest to be
classified as operating activities because all three enter into the determination of net income.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
61. Cash provided by issuing stock to owners should be reported as cash:
B. outflows from financing activities.
C. inflows from investing activities.
D. outflows from investing activities.
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Topic: Classifying Cash Flows
12-27
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62. Which of the following items would not be classified as a cash flow from financing activities?
A. Payments of amounts owed to owners
B. Borrowing from financial institutions
C. Issuing additional common stock
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Source: LearnSmart
Topic: Classifying Cash Flows
63. Which of the following classifications is not used on the statement of cash flows?
A. Operating
B. Investing
C. Financing
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Topic: Classifying Cash Flows
12-28
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64. Which of the following is not needed to prepare a statement of cash flows?
B. Comparative balance sheets
C. Additional data concerning selected accounts that increase and decrease as a result of
investing and/or financing activities
D. A complete income statement
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Relationship to Other Financial Statements
65. Which of the following equations is correct?
A. Change in cash = Change in noncash assets
B. Change in cash = Change in liabilities + Change in stockholders' equity
noncash assets
D. Change cash = Change in liabilities + Change in stockholders' equity + Change in noncash
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Topic: Relationship to Other Financial Statements
12-29
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66. The statement of cash flows may be viewed in terms of the balance sheet equation. Which of
the following expressions below is correct?
B. Change in Cash = Change in (Stockholders' Equity - Liabilities + Noncash Assets)
C. Change in Cash = Change in (Liabilities - Noncash Assets)
D. Change in Cash = Change in (Stockholders' Equity - Liabilities)
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Relationship to Other Financial Statements
67. Which of the statements below is correct when comparing the direct and indirect methods of
reporting operating cash flows?
A. The direct method starts with net income and makes adjustments to arrive at the net cash
provided by or used in operations.
B. The indirect method starts with cash collected from customers and details cash inflows and
outflows from operations.
cash provided by or used in operations.
D. The net cash provided by or used in operations will be different depending on whether the
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Preparing the Statement of Cash Flows
12-30
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68. Which of the following variations of the accounting equation describes the preparation of the
statement of cash flows?
B. Change in cash = Change in (Liabilities - Stockholders' equity + Noncash assets)
C. Change in cash = Change in (Liabilities + Stockholders' equity + Noncash assets)
D. Change in cash = Change in (Liabilities - Stockholders' equity - Noncash assets)
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Source: LearnSmart
Topic: Relationship to Other Financial Statements
69. If the calculation of cash flows from operating activities starts with net income, the company:
A. is using the net income method.
C. is using the direct method.
D. will add all noncash items not included in the calculation of net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-31
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70. What is the starting point for calculating cash flows from operations when the indirect method
is used?
B. Calculate the net change in the cash account.
C. Add the change in accounts receivable to sales revenue.
D. Identify the balance sheet accounts that relate to operating activities.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Preparing the Statement of Cash Flows
71. Which of the following statements is correct?
both operating and investing.
B. Inventory includes cash flows that may be categorized as both operating and investing.
C. Retained Earnings includes cash flows that may be categorized as both operating and
investing.
D. Bonds Payable includes cash flows that may be categorized as both operating and
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Topic: Preparing the Statement of Cash Flows
12-32
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72. How is the change in cash classified on the statement of cash flows?
A. It is found in the investing activities section of the statement.
B. It is found in the operating activities section of the statement.
C. It is found in the financing activities section of the statement.
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Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Source: LearnSmart
Topic: Preparing the Statement of Cash Flows
73. Darnell, Inc.'s balance sheet indicated that the cash account increased by $5,400 during the
past year. Net cash provided by operating activities was $14,000 and net cash used in
investing activities was $6,100. What was the net cash flow effect of the company's financing
activities?
A. Net cash provided of $2,500
C. Net cash used of $14,700
D. Net cash provided of $14,700
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12-33
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74. In calculating the net cash provided by or used in operations using the indirect method, which
of the following items would be subtracted from net income?
A. A decrease in Prepaid Rent
C. An increase in long-lived assets
D. An increase in Salaries and Wages Payable
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
75. If operating cash flows are calculated using the indirect method, which of the choices below
correctly states the direction of adjustments to convert net income into net cash provided by or
used in operations?
Account Deduct from
Net Income
Add to Net
Income
A) Inventory Increase Decrease
B) Accounts
Payable Increase Decrease
C) Accounts
Receivable Decrease Increase
D) Accrued
Liabilities Increase Decrease
B. Option B
C. Option C
D. Option D
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Difficulty: 1 Easy
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
76. Depreciation is added back to net income in a statement of cash flows prepared using the
indirect method because it:
B. is a cash inflow.
C. is a revenue.
D. is a valuation concept.
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Difficulty: 1 Easy
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
77. Depreciation Expense is $20,000 and the beginning and ending Accumulated Depreciation
balances are $150,000 and $155,000, respectively. What is the cash paid for depreciation?
A. $20,000
B. $5,000
D. $25,000
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-35
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78. Which of the following statements about calculation of cash flows from operating activities
under the indirect method is correct?
A. When the indirect method is used, changes in current liabilities are subtracted while
changes in current assets are added to convert net income to net cash flow from operating
activities.
in the process of calculating net cash flow provided by operating activities.
C. When the indirect method is used, changes in long-term assets are added to convert net
income to net cash flow provided by operating activities.
D. When the indirect method is used, changes in long-term liabilities are subtracted to convert
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
79. When the indirect method is used, if accounts receivable increases during the accounting
period, the change in accounts receivable is:
A. added to the change in the cash account.
C. added to net income.
D. subtracted from the change in the cash account.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-36
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80. When the indirect method is used, if a prepaid expense account decreases during the
accounting period, the change in the prepaid expense account is:
A. added to the change in the cash account.
B. subtracted from net income.
D. subtracted from the change in the cash account.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
81. Assume a company uses the indirect method to prepare its statement of cash flows. If the
Supplies account increases and Salaries and Wages Payable decreases during an accounting
period, what does the company do with the changes in these accounts to calculate cash flows
from operating activities?
A. Both are added to net income.
B. The change in Salaries and Wages Payable is added to net income; the change in
Supplies is subtracted from net income.
D. The change in Supplies is added to net income; the change in Salaries and Wages
Payable is subtracted from net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
12-37
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Topic: Determining Operating Cash Flows Using the Indirect Method
82. Brighton, Inc. uses the indirect method to determine its net cash flows from operating
activities. During the course of the year, the company's Accounts Receivable increased by
$10,000 and its Accounts Payable decreased by $5,000. If these are the only two adjustments
required to convert net income to net cash provided by operating activities, the combined
effect will be a(n):
A. subtraction of $5,000.
B. addition of $5,000.
C. addition of $15,000.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
83. Using the indirect method, which of the following would be added to net income?
B. An increase in Prepaid Insurance
C. A decrease in Salaries and Wages Payable
D. An increase in Equipment
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-38
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84. Assume a company uses the indirect method to prepare its statement of cash flows. If
Inventory decreases and Unearned Revenue increases during an accounting period, what
does the company do with the changes in these accounts to calculate cash flows from
operating activities?
B. The change in inventory is added to net income; the change in unearned revenue is
subtracted.
C. Both are subtracted from net income.
D. The change in unearned revenue is added to net income; the change in inventory is
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
85. Chino Company reported net income of $20,000 for the current year. During the year,
Inventory decreased by $7,000, Accounts Payable decreased by $8,000, Depreciation
Expense was $10,000, and Accounts Receivable increased by $6,500. If the indirect method is
used, what is the net cash provided by operating activities?
A. $10,500
C. $38,500
D. $51,500
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Difficulty: 3 Hard
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
86. Consider the following information:
Net income $20,000
Depreciation 3,000
Increase in accounts receivable 1,000
Decrease in prepaid rent (400)
Increase in accrued liabilities 900
Cash paid to purchase office equipment 4,000
What is the net cash provided by operating activities?
A. $17,500
B. $18,500
C. $21,500
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-40
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87. The following additional information is available from the financial statements of Hitchens
Company:
Amortization Expense $18,000
Purchase of building for cash 135,000
Depreciation Expense 54,000
Increase in Accounts Receivable 15,000
Increase in Bonds Payable 250,000
Increase in Common Stock 60,000
Increase in Inventory 43,000
Decrease in Accounts Payable 68,000
Increase in Salaries and Wages Payable 25,000
Cash dividends paid 100,000
Net income 292,000
What is the net cash provided by operating activities?
B. $285,000
C. $396,000
D. $368,000
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-41
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88. A company's income statement for the year shows a net loss of $90,000. Additional
information for the year follows:
Depreciation Expense $40,000
Increase in Accounts Receivable 72,000
Decrease in Inventory 25,000
Decrease in Prepaid Rent 9,000
Decrease in Accounts Payable 11,000
What is the net cash provided by (used in) operating activities?
B. $27,000
C. $13,000
D. ($45,000)
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-42
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89. Brighton, Inc. uses the indirect method to determine its cash flow from operations. During the
course of the year, Brighton, Inc.'s Accounts Receivable increased by $10,000 and its
Accounts Payable decreased by $5,000. As a result of these two items, the net addition (or
subtraction) to convert net income to cash flow from operations equals:
A. $5,000.
B. ($5,000).
C. $15,000.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-43
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90. The information below was obtained from the financial statements of Faraday Corp. Based on
this information, what was the amount of the net cash provided by operating activities during
the current year?
Prior
Year
Current
Year
Net Income $500,000 $655,000
Depreciation Expense 60,000 72,000
Accounts Receivable 89,000 78,000
Inventory 116,000 142,000
Accounts Payable 120,000 117,000
Salaries and Wages Payable 56,000 68,000
A. $713,000
C. $661,000
D. $637,000
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
91. The starting point for preparing the operating activities section using the indirect method is:
A. current assets.
B. current liabilities.
D. ending cash balance.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
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Topic: Determining Operating Cash Flows Using the Indirect Method
92. Which of the following statements best describes the reason Depreciation Expense is added to
net income when preparing the statement of cash flows?
A. Depreciation expense originally reduced net income, but it actually represents a cash
inflow for the company.
paying cash.
C. Depreciation expense originally reduced net income, but it actually represents a cash
outflow for the company.
D. Depreciation expense is not included in net income and, so, its cash effect must be
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
93. When preparing the statement of cash flow using the indirect method, Depreciation Expense
is:
B. subtracted from net income under the operating activities section.
C. subtracted net income under the financing activities section.
D. added back to net income under the financing activities section.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
94. In arriving at cash from operating activities, adding a decrease in Supplies to net income
eliminates the effect of recording adjusts net income for transactions that:
A. increased net income, but has not been paid in cash this period.
B. decreased net income, but has not been paid in cash this period.
D. flow this period increased net income and increased cash flow this period.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
12-47
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95. When the indirect method is used to determine net cash provided by (used in) operating
activities, subtracting an increase in Accounts Receivable from net income eliminates the
effect of recording revenue that:
B. decreased net income, but did not impact cash.
C. increased net income and increased cash flow.
D. decreased net income and decreased cash flow.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
96. Subtracting a decrease in Unearned Revenue from net income eliminates the effect of
recording revenue that:
B. decreased net income, but did not impact cash this period.
C. increased net income and increased cash flow this period.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
12-48
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97. In arriving at cash from operating activities, subtracting a decrease in Salaries and Wages
Payable from net income includes the cash effects of transactions that:
A. increased cash, but did not affect net income.
B. increased cash and increased net income.
D. decreased cash and decreased net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
98. When the indirect method is used to determine net cash provided by (used in) operating
activities, adding an increase in Interest Payable to net income eliminates the effect of
recording expenses that:
A. increased net income, but did not impact cash.
C. increased net income and increased cash flow.
D. decreased net income and decreased cash flow.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
12-49
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99. Assume that the indirect method is used to determine net cash provided by (used in) operating
activities and that Accounts Receivable balance decreased by $10 million during the year. That
$10 million should be:
B. subtracted from net income.
C. added to investing activities.
D. subtracted from investing activities.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
100. Assume that the indirect method is used to determine net cash provided by (used in) operating
activities and that Prepaid Insurance decreased during the year. That decrease is added to net
income because:
A. the company paid additional premiums this period in excess of the Insurance Expense
recorded on the income statement.
decrease in net income, but it does not involve cash so it is added back to net income.
C. it includes the impact of increasing cash and increasing net income.
D. it accounts for purchasing more insurance during the period than has been expensed.
The income statement reports expenses of the period, but cash flow from operating activities
must reflect the cash payments. Cash prepayments increase the balance in prepaid expenses,
and recording of expenses decreases the balance in prepaid expenses. A decrease in Prepaid
Expenses means that cash prepayments this period were less than expenses. These extra
cash prepayments must be added to net income.
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Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Source: LearnSmart
Topic: Determining Operating Cash Flows Using the Indirect Method
12-50
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101. Two years ago, your company bought $40,000 in bonds from another company. This month, it
sold half of those bonds for $20,640 and purchased the common stock of another company for
$1,000. On the statement of cash flows for this accounting period, your company would report
a net cash:
A. outflow of $19,640 from investing activities.
C. inflow of $20,640 from investing activities.
D. outflow of $20,640 from investing activities.
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Difficulty: 3 Hard
Learning Objective: 12-03 Report cash flows from investing activities.
Topic: Under Armour's Investing Cash Flow Calculations
102. In determining cash flows related to investing activities, which accounts are analyzed?
A. Inventory and accounts receivable.
B. Loans payable and common stock.
C. Short-term investments and prepaid expenses.
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Difficulty: 1 Easy
Learning Objective: 12-03 Report cash flows from investing activities.
Topic: Under Armour's Investing Cash Flow Calculations
12-51
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103. Braden and Sons, Inc. paid cash to purchase equipment costing $342,000 this year. Also this
year, the company sold for $70,000 cash, equipment that originally cost $230,000 five years
ago. How should these transactions be listed in the statement of cash flows?
A. Braden can combine the transactions and show a decrease to cash for $112,000.
B. Braden can combine the transactions and show a decrease to cash for $272,000.
C. The purchases and the sales of equipment must be shown separately as a decrease to
cash for $572,000 (purchase) and an increase of $70,000 (sale).
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Difficulty: 1 Easy
Learning Objective: 12-03 Report cash flows from investing activities.
Source: LearnSmart
Topic: Under Armour's Investing Cash Flow Calculations
104. Dover Co.'s comparative balance sheet indicated that the Equipment account increased by
$40,000. Upon further investigation of the account changes, it is determined that Dover
purchased equipment totaling $70,000 for the year. It also sold equipment with an original cost
of $30,000 for $8,000 cash. Assuming these are the only transactions affecting the investing
activities, Dover will report net cash flows provided by (used in) investing activities of:
A. ($40,000).
B. ($70,000).
C. ($32,000).
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Learning Objective: 12-03 Report cash flows from investing activities.
Source: LearnSmart
Topic: Under Armour's Investing Cash Flow Calculations
12-52
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105. To determine net cash provided by or used in financing activities, one must analyze the:
A. Notes Receivable and Bonds Payable accounts.
B. Cash account.
D. Interest Expense and Dividend Income accounts.
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
106. Which of the following are used to determine cash flows from financing activities?
A. Short-term debt, Accrued Liabilities, Common Stock, and Notes Payable
C. Short-term debt, Accrued Liabilities, Retained Earnings, and Bonds Payable
D. Long-term debt, Notes Payable, Interest Expense, and Bonds Payable
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-53
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107. Which of the following represent cash outflows from financing activities?
A. Distributing a stock dividend
C. Issuing long-term bonds at a discount
D. Paying interest on promissory notes
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
108. Which of the following represents a cash inflow from financing activities?
A. Issuing stock in exchange for another company's stock.
B. Paying a bond's face value at maturity.
D. Receiving interest on promissory notes.
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-54
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109. A company took out $665,000 of new debt this year and repaid $1,000,000 of older debt in the
same year. The company also issued stock for $442,000 cash and paid dividends of $99,000
for the year. The company's financing cash flows appearing the statement of cash flows will
show:
A. Net cash used in financing activities of $434,000
B. Net cash used in financing activities of $335,000
D. Net cash provided by financing activities of $107,000
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Difficulty: 3 Hard
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
110. A company reported that its bonds with a face value of $50,000 and a carrying value of
$53,000 are retired for $56,000 cash. The amount to be reported under cash flows from
financing activities is:
A. ($53,000).
B. ($3,000).
D. $0; this is an operating activity.
The cash outflow from financing activities is $56,000, the amount of cash paid to retire the
bonds payable.
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-55
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111. When the indirect method is used, details from which of the following balance sheet accounts
are used in calculating both operating and financing cash flows?
A. Bonds Payable
B. Taxes Payable
D. Common Stock
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Under Armour's Financing Cash Flow Calculations
112. The Retained Earnings account has a beginning balance of $321,975 and an ending balance
of $356,413. Net income is $40,251. Which of the following statements is correct?
B. $40,251 would be added when determining cash flows from financing activities.
C. $34,438 would be added when determining cash flows from financing activities.
D. $321,975 would be added when determining cash flows from operating activities.
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-56
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113. A corporation had a net increase in Retained Earnings of $65,000 for the year. The corporation
also paid $20,000 of cash dividends that had been declared in the previous year. This year,
the corporation declared $18,000 of dividends but has not paid them as of year-end. Given this
information, the net income for the current year must have been:
A. $63,000
B. $85,000
C. $65,000
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Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
114. Cash flows from financing activities:
A. includes all cash inflows and outflows associated with a company's lending activities.
C. are always negative because of the payments of cash dividends as well as interest and
principal on debt.
D. are always positive unless the company is experiencing serious financial trouble.
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Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 12-04 Report cash flows from financing activities.
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-57
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115. A corporation prepared its statement of cash flows for the year. The following information is
taken from that statement:
Net cash provided by operating activities $14,500
Net cash provided by investing activities 4,200
Cash balance, beginning of year 5,800
Cash balance, end of year 9,100
What is the amount of net cash provided by (used in) financing activities?
A. $15,400
B. ($3,300)
D. $3,300
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
116. A company issues $1 million of new stock and pays $200,000 in cash dividends during the
year. In addition, the company took advantage of falling interest rates to borrow $1.5 million in
a new bond issue and paid off existing bonds with a face value of $2 million. The company
bought 500 of another company's $1,000 bonds at a $100,000 premium. The net cash flow
provided by financing activities is:
A. An inflow of $500,000.
B. An outflow of $200,000.
C. An outflow of $100,000.
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
117. Company X paid Company Y $1.35 million for a new plant. During the same accounting
period, Company X experienced the following changes in its balance sheet: Cash decreased
by $350,000, Accounts Receivable increased by $321,300, Inventory increased by $275,800,
Property, Plant, and Equipment increased by $752,900, and Bonds Payable increased by $1
million. The net cash flow provided by financing activities is:
A. An inflow of $1.35 million.
B. An outflow of $350,000.
D. An inflow of $752,900.
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
118. Net income $7,000
Cash dividends paid to stockholders 2,000
Cash proceeds from sale of land 3,000
Cash proceeds from bank loan 5,000
Cash payment (principal) on bank loan 1,000
Cash paid to purchase equipment 4,000
The company would report net cash provided by (used in) financing activities of:
A. ($2,500).
C. $5,000.
D. $6,000.
12-59
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Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
119. Net income $7,000
Cash dividends paid to stockholders 2,000
Cash proceeds from sale of land 3,000
Cash proceeds from bank loan 5,000
Cash payment (principal) on bank loan 1,000
Cash paid to purchase equipment 4,000
The company would report net cash provided by (used in) investing activities of:
B. ($2,000).
C. $5,000.
D. $7,000.
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AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-03 Report cash flows from investing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-60
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120. Braden and Sons, Inc. borrowed $700,000 cash from Trenton Savings and Loan last year. In
addition, the company repaid a $450,000 note payable to First National Bank. How should
these transactions be listed in the Statement of Cash Flows?
A. Braden can combine the transactions and show an increase to cash of $250,000 in the
investing activities section of the statement.
B. Braden can combine the transactions and show an increase to cash of $250,000 in the
financing activities section of the statement.
C. A decrease to cash for $450,000 is listed in the investing activities section and an increase
of $700,000 is in the financing activities section.
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Source: LearnSmart
Topic: Under Armour's Financing Cash Flow Calculations
121. ABC Company issued 30,000 shares of common stock in January. In August, the company
repurchased 5,000 shares for the treasury. When reporting these transactions in the statement
of cash flows, ABC Company ______ combine them into one transaction in the ______
activities section.
A. can; financing
C. cannot; investing
D. can; investing
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Source: LearnSmart
Topic: Under Armour's Financing Cash Flow Calculations
12-61
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122. Repayments of loans will be reported as a:
B. positive cash flow under financing activities.
C. negative cash flow under investing activities.
D. positive cash flow under investing activities.
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Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Source: LearnSmart
Topic: Under Armour's Financing Cash Flow Calculations
123. Material noncash investing and financing transactions are:
A. reported within the body of the statement of cash flows.
C. not reported in any part of the financial statement because cash flow is not affected.
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Difficulty: 1 Easy
Learning Objective: 12-04 Report cash flows from financing activities.
Source: LearnSmart
Topic: Under Armour's Financing Cash Flow Calculations
12-62
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124. The net cash flow provided by operating activities is an inflow of $37,042, the net cash flow
used in investing activities is $16,831, and the net cash flow used in financing activities is
$26,397. If the beginning cash account balance is $11,283, what is the ending cash account
balance?
B. ($6,186)
C. $38,759
D. $27,476
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
125. A corporation prepared its statement of cash flows for the year. The following information is
taken from that statement:
Net cash provided by operating activities $14,500
Net cash provided by investing activities 4,200
Net cash flow used in financing activities (12,400)
Cash balance, end of year 9,100
What is the cash balance at the beginning of the year?
A. $5,600
C. $6,300
D. $15,400
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
12-63
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126. The direct exchange of debt for equipment would be shown:
A. on the statement of cash flows as an operating activity.
B. on the statement of cash flows as an investing activity.
C. on the statement of cash flows as a financing activity.
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Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
127. The purchase of $100,000 of equipment by issuing a note would be reported:
A. as a $100,000 investing inflow, and a $100,000 financing outflow.
B. as a$100,000 investing outflow, and a $100,000 financing inflow.
C. as a $100,000 operating inflow, and a $100,000 financing outflow.
D. in a supplementary schedule.
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
12-64
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128. A general rule for the relationship between operating, investing, and financing cash flows and
the financial statements is:
Operating
Cash Flows
Cause
Changes in:
Investing
Cash Flows
Affect:
Financing
Cash Flows
Affect:
A)
Noncurrent
liabilities and
stockholder’s
equity
Current assets
and current
liabilities
Noncurrent
assets
B)
Noncurrent
liabilities and
stockholder’s
equity
Noncurrent
liabilities and
stockholder’s
equity
Current assets
and current
liabilities
C) Noncurrent
assets
Current assets
and current
liabilities
Noncurrent
liabilities and
stockholder’s
equity
D)
Current assets
and current
liabilities
Noncurrent
assets
Noncurrent
liabilities and
stockholder’s
equity
A. Option A
B. Option B
C. Option C
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
12-65
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129. A company purchases a $300,000 building, paying $200,000 in cash and signing a $100,000
promissory note. What will be reported on the statement of cash flows as a result of this
transaction?
A. A $300,000 cash outflow from investing activities
B. A $200,000 cash outflow from investing activities and a $100,000 cash inflow from
financing activities
D. A $300,000 cash outflow from investing activities and a $100,000 cash inflow from
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
130. Supplemental disclosures required by companies using the indirect method include all of the
following except:
A. cash paid for interest.
B. cash paid for income tax.
D. noncash investing and financing activities.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Statement of Cash Flows
12-66
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131. Free cash flow is a positive cash flow from operating activities:
dividends.
B. across all three activity components of the statement of cash flows.
C. beyond what has been allotted for future property, plant, and equipment replacement and
expansion.
D. across both financing and investing activities.
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Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
132. Free cash flow may be used for all of the following except:
A. expanding the business.
B. paying off debt.
C. building up the cash balance.
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
12-67
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133. Negative operating cash flow may indicate all of the following except:
A. the company may not be able to replace property, plant and equipment.
B. stockholders may not receive a dividend.
C. the company may be in the introductory phase of its life cycle.
AICPA: BB Critical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
134. All of the following might be used to evaluate cash flow performance, except:
A. the absolute amount of cash flow.
B. whether cash flow is positive or negative.
C. the relationship between net income and cash flow.
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AICPA: FN Risk Analysis
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
135. A toy store with a calendar year-end is likely to have:
A. unpredictable fluctuations in cash flow from quarter to quarter.
B. the largest cash inflow from operating activities in the second and third quarters (April -
September).
C. a fairly stable cash flow across all four quarters.
March).
Seasonal variations in sales and inventory levels can cause net cash flows to fluctuate from
one quarter to the next, but this usually does not indicate trouble. This would be especially true
AICPA: BB Industry
12-68
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AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
136. An outdoor water park that has a calendar year-end and is located in an area of the country
that has warmer weather during April through September and colder weather during the rest of
the year is likely to have:
A. unpredictable fluctuations in cash flow from quarter to quarter.
through September).
C. a fairly stable cash flow across all four quarters.
D. the largest cash inflow from operating activities in the fourth and first quarters (October
AICPA: BB Industry
AICPA: FN Risk Analysis
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
137. A company has positive cash flow from investing and financing activities, but negative cash
flow from operating activities. The likely result is:
B. investors will continue to buy stock since the company's growth prospects are good.
C. Creditors will continue to lend money to the company.
D. Creditors will demand immediate repayment of all outstanding debt.
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Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
12-69
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138. The difference between net income and cash flow may be due to all of the following except:
B. the company being brand new.
C. fraudulent financial reporting.
D. seasonal variations in a company's operating activities.
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Evaluating Cash Flows
139. The cash flow statement should be evaluated by examining the cash flow pattern suggested
by the:
B. operating activities section since this section details the day to day operations of the
business.
C. change in cash regardless of which section had the biggest impact on the change.
D. financing section since this section details how much debt the company has incurred.
Unlike the income statement, which summarizes its detailed information in one number (net
income), the statement of cash flows does not provide a summary measure of cash flow
performance. Instead, it must be evaluated in terms of the cash flow pattern suggested by the
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Source: LearnSmart
Topic: Evaluating Cash Flows
12-70
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140. The introductory phase of a company's life cycle will most likely have net cash:
A. provided by investing activities.
B. used in financing activities.
D. provided by operating activities.
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Source: LearnSmart
Topic: Evaluating Cash Flows
141. Almost all U.S. companies have used the indirect method of preparing the statement of cash
flows:
A. because most users of the financial statements do not understand the direct method.
C. because it usually requires less space in the annual report.
D. so that stockholders cannot determine how much cash was spent on executives' salaries.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
Topic: Preparing the Statement of Cash Flows
12-71
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142. Which of the following statements about the reporting of operating cash flows using the direct
method is correct?
Standards Board (FASB) prefers the direct method of accounting for cash flows from
operating activities.
B. The FASB prefers the indirect method of calculating cash flows from operating activities
because it gives a more accurate calculation of cash provided by operating activities.
C. The direct method results in a larger amount of cash flow from operating activities than
does the indirect method.
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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
143. Which of the following statements about preparation of the statement of cash flows is correct?
A. GAAP allows the indirect method only.
B. GAAP allows the direct method only.
C. GAAP allows either the indirect or direct method.
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-72
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144. Which phrase below best describes the direct method for reporting operating cash flows?
A. A method that incorporates financing and investing activities into cash flows from
operations.
B. A method employing accrual-based accounting to convert cash flows to GAAP Net Income.
D. A series of adjustments to Net Income to arrive at operating cash flows.
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
145. The advantages of the direct method include all of the following except:
A. it allows for more detailed analysis of operating cash flows.
B. it provides more information than the indirect method to relate cash inflows and outflows.
C. it allows for more reliable prediction of future cash flows.
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-73
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146. When a company uses the direct method to determine the cash flows from operating activities,
cash flows from operating activities will:
B. be larger if there is a net cash inflow and smaller if there is a net cash outflow compared to
the amount reported using the indirect method.
C. always be larger than the amount reported using the indirect method.
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
147. Which of the following statements about the calculation of cash flows from operating activities
under the direct method is correct?
statement is individually examined to calculate the cash flows from operating activities.
B. Noncash revenues and expenses must be included in cash flows from operating activities
when preparing a statement of cash flows using the direct method.
C. Depreciation is reported as a cash inflow in the cash flows from operating activities when
the direct method is used.
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Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Operating Cash Flows Revisited (Direct Method)
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-74
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148. Which of the following items would be reported on a statement of cash flows using the indirect
method, but not on a statement prepared using the direct method?
A. Cash paid for dividends
B. Cash received from stock issuances
D. Cash paid for purchase of treasury stock
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Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
149. Assume a company uses the direct method to prepare its statement of cash flows. If the
company's Accounts Receivable increase during the accounting period, the change in
Accounts Receivable is:
A. added to the change in the Cash account to calculate cash collected from customers.
C. added to Sales Revenue to calculate the cash collected from customers.
D. subtracted from the change in the Cash account to calculate cash collected from
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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-75
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150. If a company's Sales Revenue was $171,356 and cash collected from customers was
$167,803, which of the following would be consistent with this difference?
A. Accounts Receivable could have decreased.
B. Cash payments could have been larger than the related expense accounts.
C. Accounts Receivable could have increased.
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
151. Allison Co. uses the direct method to determine its cash flow from operations. During the year,
it had sales revenue of $300,000. Its beginning Accounts Receivable balance was $30,000,
and its ending Accounts Receivable balance was $40,000. Its cash collected from customers
for the year was:
A. $300,000.
C. $310,000.
D. $370,000.
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AICPA: FN Reporting
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-76
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152. During the current year, Todd Electronics had $610,000 in cash sales and $2,220,000 in credit
sales. The Accounts Receivable balance was $530,000 at the beginning of the year and
$425,000 at the end of the year. What was the total cash collected from customers during the
year?
B. $2,830,000
C. $2,725,000
D. $2,325,000
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AICPA: FN Reporting
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
153. If Sales are $850,000 and the beginning and ending balances of Accounts Receivable are
$43,000 and $48,000, respectively, the cash collected from customers is:
A. $850,000.
B. $802,000.
D. $855,000.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-77
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154. If interest revenue for the period is $14,000 and the beginning and ending interest receivable
balances are $1,320 and $5,900, respectively, cash received for interest is:
A. $14,000.
C. $18,500.
D. $8,100.
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
155. Assume a company uses the direct method to prepare its statement of cash flows. If the
company's inventory and accounts payable both increase during the accounting period, how
would these changes affect cash flow calculations?
A. The changes in each account are both added to net income.
B. The change in inventory is subtracted from cost of goods sold and the change in accounts
payable is added to cost of goods sold to find the cash paid to suppliers.
C. The changes in each account are both subtracted from net income.
AICPA: BB Critical Thinking
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Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-78
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156. If Cost of Goods Sold is $145,000 and the beginning and ending Inventory balances are
$18,000 and $13,000, respectively, inventory purchases equal:
A. $145,000.
C. $150,000.
D. $132,000.
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AICPA: FN Measurement
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
157. The accounting records for the Helen Co. show that its cost of goods sold for the year was
$600,000. In addition, it had an increase in inventory of $10,000 and a decrease in accounts
payable of $12,000. As a result under the direct method, the amount of cash paid to suppliers
for the year was:
A. $602,000.
B. $610,000.
C. $612,000.
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-79
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158. If a company's Cost of Goods Sold is $158,000 for the period, beginning and ending Inventory
balances are $18,000 and $13,000, respectively, and the beginning and ending Accounts
Payable balances are $19,000 and $7,500, respectively, what is the amount of the cash paid
to suppliers?
A. $157,000
B. $163,500
D. $151,500
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
159. When the direct method is used to determine the cash flows from operating activities, other
operating expenses are converted into cash outflows by:
A. adding changes in prepaid expenses and accrued liabilities to other expenses.
B. subtracting increases in prepaid expenses and subtracting decreases in accrued liabilities
from other expenses.
expenses.
D. subtracting changes in prepaid expenses and accrued liabilities from other expenses.
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-80
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160. Ashley Co. uses the direct method in calculating its cash flow from operations. Which of the
following items will not have an effect on cash flow from operating activities?
A. Increase in inventory
C. Cash collections from customers
D. Payment of interest to lenders
AICPA: BB Industry
AICPA: FN Reporting
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Classifying Cash Flows
Topic: Operating Cash Flows Revisited (Direct Method)
161. If Insurance Expense is $7,000 and the beginning and ending balances of Prepaid Insurance
are $1,500 and $2,000, respectively, the cash paid for insurance is:
A. $7,000.
B. $6,500.
C. $5,000.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-81
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162. If Salaries and Wages Expense is $450,000 during the year and the beginning and ending
balances of Salaries and Wages Payable are $18,000 and $16,500, respectively, the cash
paid to employees is:
A. $450,000.
B. $433,500.
C. $448,500.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
163. When the direct method is used to determine the cash flows from operating activities, which of
the following adjustments must be made to interest expense to determine total interest
payments?
A. Add all changes in Interest Payable
C. Add increases in Interest Payable and subtract decreases in Interest Payable
D. Subtract all changes in Interest Payable
Interest Expense is directly converted to cash paid for interest by adding decreases in Interest
Payable or subtracting increases in Interest Payable.
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-82
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164. Which of the following would be reported on the statement of cash flows, using the direct
method, as a cash flow from operating activities?
B. Payment of cash dividends
C. Purchase of a building
D. Purchase of treasury stock
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
165. During the current year, a company paid $4,500 which it owed from its prior year income tax
liability and $30,000 for its current year tax liability. The company still owes $6,000 at the end
of the current year. How much should the company report as cash paid for income taxes on its
statement of cash flows for the current year?
B. $40,500
C. $30,000
D. $3,500
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-83
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166. St. Pierre Enterprises reported the following information in its financial statements:
Amounts are as of
or for the year ended
Prior
Year
Current
Year
Inventory $55,000 $80,000
Accounts Receivable 68,000 103,000
Accounts Payable 34,500 40,000
Sales Revenue 305,000 375,000
Cost of Goods Sold 203,000 250,000
What is the amount of cash payments made to suppliers during the current year?
A. $280,500
C. $394,500
D. $230,500
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-84
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167. St. Pierre Enterprises reported the following information in its financial statements:
Amounts are as of
or for the year ended
Prior
Year
Current
Year
Inventory $55,000 $80,000
Accounts Receivable 68,000 103,000
Accounts Payable 34,500 40,000
Sales Revenue 305,000 375,000
Cost of Goods Sold 203,000 250,000
What is the amount of cash collected from customers during the current year?
A. $350,000
B. $380,500
D. $410,000
AICPA: BB Legal
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
168. Penman Corporation showed Salaries and Wages Expense of $488,000 on its income
statement. If the Salaries and Wages Payable account was $54,000 at the beginning of the
year and $37,000 at the end of the year, how much cash was paid to employees?
A. $434,000
B. $451,000
D. $471,000
Cash was paid to employees = Salaries and Wages Expense + decrease in Salaries and
Wages Payable.
AICPA: BB Legal
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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-85
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169. When the direct method is used to determine the cash flows from operating activities, which of
the following adjustments must be made to income tax expense to determine total income tax
payments?
A. Add all changes in income taxes and income taxes payable.
C. Add increases in income taxes payable and subtract decreases in income taxes payable.
D. Subtract all changes in income taxes payable.
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
170. Which method of preparing the operating activities section of the statement of cash flows
consists of a summary of each component of operating transactions that result in either a debit
or a credit to cash?
B. Indirect
C. Accrual
D. Cash
AICPA: BB Industry
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Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Source: LearnSmart
Topic: Operating Cash Flows Revisited (Direct Method)
12-86
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171. Assume that the direct method is used to prepare the operating activities section of the
statement of cash flows. Which related balance sheet account will explain the difference
between revenues on the income statement and cash collected from customers?
A. Inventory
B. Accounts Payable
C. Cost of Goods Sold
AICPA: BB Resource Management
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Source: LearnSmart
Topic: Operating Cash Flows Revisited (Direct Method)
172. Assume that the direct method is used to prepare the operating activities section of the
statement of cash flows. Why is a decrease in Accounts Receivable decrease added to sales
revenue when computing cash collected from customers?
A. There were more cash sales than credit sales during the year.
year.
C. There were more credit sales than cash sales during the year.
D. There were more sales on account than collections of Accounts Receivable during the
AICPA: BB Industry
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Source: LearnSmart
Topic: Operating Cash Flows Revisited (Direct Method)
12-87
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173. Assume that the direct method is used to prepare the operating activities section of the
statement of cash flows. Which of the following statements is correct concerning a decrease in
Accounts Payable?
added to purchases to calculate cash payments to suppliers.
B. Since the cash payments were less than credit purchases, the decrease must be added to
purchases to calculate cash payments to suppliers.
C. Since the cash payments were more than credit purchases, the decrease must be
subtracted from purchases to cash payments to suppliers.
D. Since the cash payments were less than credit purchases, the decrease must be
subtracted from purchases to calculate cash payments to suppliers.
Typically, companies buy inventory on account from suppliers (as indicated by an Accounts
Payable balance on the balance sheet). Consequently, we need to consider more than just the
change in Inventory to convert Cost of Goods Sold to cash paid to suppliers. The credit
purchases and payments that are recorded in Accounts Payable must also be considered.
Credit purchases increase Accounts Payable and cash payments decrease it. In summary, to
convert Cost of Goods Sold to a cash basis, you must consider changes in both Inventory and
Accounts Payable. If Accounts Payable decreases, that means that the cash payments were
AICPA: BB Industry
AICPA: FN Reporting
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Source: LearnSmart
Topic: Operating Cash Flows Revisited (Direct Method)
174. Assume that the direct method is used to prepare the operating activities section of the
statement of cash flows. When Accrued Liabilities increase, it means that the company:
A. paid more cash than it recorded as operating expenses.
C. prepaid the operating expenses before they were incurred or recorded.
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
12-88
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Source: LearnSmart
Topic: Operating Cash Flows Revisited (Direct Method)
175. A company has a net cash inflow from operating activities of $789,000, a net cash outflow of
$50,000 from investing activities and a net cash inflow of $100,000 from financing activities.
The company paid $124,000 in interest, $186,500 in income taxes, and $200,000 in cash
dividends. Which of the following statements about the statement of cash flows is not correct?
from investing activities section.
B. Supplemental disclosures required for a company using the indirect method include the
amount of interest and the amount of income taxes paid.
C. The statement of cash flows will show a net increase in cash and cash equivalents of
$839,000.
D. If the direct method is used, the $124,000 of interest paid and the $186,500 of income
AICPA: BB Critical Thinking
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
Topic: Preparing the Statement of Cash Flows
Topic: Under Armour's Statement of Cash Flows
12-89
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176. Flynn Corporation had the following cash flows for the current year. The company uses the
direct method in preparing the statement of cash flows.
Cash receipts from issuance of stock $120,000
Bonds payable issued at face value 500,000
Cash dividends received from long-term
investments 9,000
Cash paid for wages 40,000
Cash paid for dividends 10,000
Cash received from customers 85,000
Cash paid for other operating expenses 39,000
Cash paid to purchase equipment 200,000
What is the net cash provided by (used in) operating activities?
B. $6,000
C. ($4,000)
D. ($75,000)
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-90
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177. Flynn Corporation had the following cash flows for the current year. The company uses the
direct method in preparing the statement of cash flows.
Cash receipts from issuance of stock $120,000
Bonds payable issued at face value 500,000
Cash dividends received from long-term
investments 9,000
Cash paid for wages 40,000
Cash paid for dividends 10,000
Cash received from customers 85,000
Cash paid for other operating expenses 39,000
Cash paid to purchase equipment 200,000
What is the net cash provided by (used in) investing activities?
B. $420,000
C. $410,000
D. ($190,000)
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-03 Report cash flows from investing activities.
Topic: Under Armour's Investing Cash Flow Calculations
12-91
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178. Flynn Corporation had the following cash flows for the current year. The company uses the
direct method in preparing the statement of cash flows.
Cash receipts from issuance of stock $120,000
Bonds payable issued at face value 500,000
Cash dividends received from long-term
investments 9,000
Cash paid for wages 40,000
Cash paid for dividends 10,000
Cash received from customers 85,000
Cash paid for other operating expenses 39,000
Cash paid to purchase equipment 200,000
What is the net cash flows provided by (used in) financing activities?
A. $620,000
B. $410,000
D. $490,000
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
12-92
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179. Flynn Corporation had the following cash flows for the current year. The company uses the
direct method in preparing the statement of cash flows.
Cash receipts from issuance of stock $120,000
Bonds payable issued at face value 500,000
Cash dividends received from long-term
investments 9,000
Cash paid for wages 40,000
Cash paid for dividends 10,000
Cash received from customers 85,000
Cash paid for other operating expenses 39,000
Cash paid to purchase equipment 200,000
If the cash balance at the beginning of the current year was $0, what is the amount of cash at
the end of the year?
A. $112,500
C. $737,500
D. $311,500
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Business Activities and Cash Flows
180. If a company uses the indirect method to determine cash flows from operating activities,
gains:
A. must be added to net income and losses subtracted from net income.
B. and losses must be added to net income.
D. and losses must be subtracted from net income.
AICPA: BB Critical Thinking
AICPA: FN Measurement
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Blooms: Analyze
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Difficulty: 2 Medium
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
181. Which of the following would not be added to net income in calculating cash flows from
operating activities on a statement of cash flows prepared using the indirect method?
A. Amortization Expense
B. A decrease in Accounts Receivable
C. An increase in Salaries and Wages Payable
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
182. A piece of equipment with a cost of $130,000 and accumulated depreciation of $85,000 is sold
for $50,000 cash. The amount that should be reported as a cash inflow from investing
activities is:
B. $5,000.
C. $45,000.
D. $0; this transaction is a financing activity.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
Topic: Under Armour's Investing Cash Flow Calculations
12-94
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183. Your company owned equipment with a book value of $120,000 that was sold during this
accounting period for $30,500 in cash, and purchased new equipment for cash of $148,000.
Your company would record a debit of:
A. $148,000 and a credit of $30,500 to the cash account for a net cash inflow of $117,500.
B. $148,000 and a credit of $89,500 to the cash account for a net cash inflow of $58,500.
D. $89,500 and a credit of $148,000 to the cash account for a net cash outflow of $58,500.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
184. A company bought $250,000 of equipment with an expected life of ten years and no residual
value. After six years the company sold the equipment for $94,000. If the company uses
straight-line depreciation and the indirect method is used to determine cash flows from
operating activities, which of the following reflects how the sale of the equipment would be
reported in the statement of cash flows?
A. $94,000 is recorded as a cash inflow from investing activities and no other sections of the
statement are affected.
convert net income to net cash flow provided by operating activities.
C. $94,000 is recorded as a cash inflow from investing activities and $6,000 is subtracted to
convert net income to net cash flow provided by operating activities.
D. $94,000 is recorded as a cash inflow from operating activities.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-95
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185. Equipment, beginning of year $170,000
Equipment, end of year 210,000
Accumulated depreciation, beginning of
year 95,000
Accumulated depreciation, end of year 92,000
Equipment with a cost of $10,000 and a book value of $3,000 was sold during the year for
cash of $9,000. Additional equipment was purchased during the year for cash.
What was the amount of cash paid for purchases of equipment during the year?
A. $40,000
B. $43,000
D. $31,000
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-96
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186. Equipment, beginning of year $170,000
Equipment, end of year 210,000
Accumulated depreciation, beginning of
year 95,000
Accumulated depreciation, end of year 92,000
Equipment with a cost of $10,000 and a book value of $3,000 was sold during the year for
cash of $9,000. Additional equipment was purchased during the year for cash.
The company uses the indirect method in preparing the statement of cash flows. What is the
amount of depreciation expense that will be reported in the operating activities section of the
statement?
B. $11,000
C. $7,000
D. $10,000
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-97
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187. The following information is taken from the income statement of Muir Company:
Depreciation Expense $30,000
Amortization Expense 5,000
Loss on Sale of Equipment 3,000
Gain on Sale of Building 9,000
Net Income 105,000
Based on this information, what is the amount of net cash flow provided by operating
activities?
A. $149,000
B. $140,000
C. $146,000
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
188. The T-account approach:
A. may be used with the direct method.
changes in the cash account.
C. shows cash provided as credits and cash used as debits.
D. does not determine the change in each balance sheet account.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.
Topic: T-account Approach (Indirect Method)
12-98
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189. Using the T-account approach:
B. Payment of long-term debt appears on the debit side of the Cash account under financing
activities.
C. Purchase of equipment appears on the credit side of the Cash account under operating
activities.
D. An increase in Accounts Receivable appears on the debit side of the Cash account under
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.
Topic: T-account Approach (Indirect Method)
190. When using the T-account approach to preparing the indirect method of the statement of cash
flows, which of the following would be associated with amounts entered on the credit side of
the Cash T-account?
B. Decrease in Accounts Receivable
C. Decrease in Inventory
D. Increase in Accrued Liabilities
AICPA: BB Resource Management
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.
Source: LearnSmart
Topic: T-account Approach (Indirect Method)
12-99
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Essay Questions
191. Identify whether each of the following list of items is an operating activity cash flow (O), an
investing activity cash flow (I), a financing activity cash flow (F), or none of these (None).
_____ Proceeds from sale of equipment
_____ Cash collected from customers
_____ Payments to suppliers
_____ Stock repurchases
_____ Repayment of bond principal
_____ Payment of income tax
_____ Purchases of bonds from other companies
_____ Purchases of equipment financed with a note
_____ Interest and cash dividends received
_____ Payment of cash dividends
I, O, O, F, F, O, I, None, O, F
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Topic: Classifying Cash Flows
12-100
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192. Assume that a company chooses the indirect method to determine net cash flows from
operating activities.
Required:
Part a. Explain why net income is the starting point when the indirect method is used to
determine cash flows from operating activities.
Part b. Briefly explain why a company's net income is most likely different in amount than its
cash flows from operating activities.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-101
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193. Complete the last two columns in the following table by indicating whether each transaction
would be reported:
Part a. In the operating (O), investing (I), or financing (F) activities section of the statement of
cash flows or if the transaction would be reported instead as a noncash investing and/or
financing transaction (Noncash).
Part b. As a cash inflow (+) or a cash outflow (-) on the statement of ash flows. (Leave this cell
blank if you entered "Noncash" for part a.)
Transaction
Part a -
Reporting
(O, I, F, or
Noncash)
Part b -
Type of
Cash
Flow
(+ or -)
Payment of salaries and
wages
Proceeds from sale of
bonds for cash
Purchase of equipment for
cash
Purchase of office supplies
for cash
Cash interest payments
made to bondholders
Prepayment of insurance
for first six months of year
Payment of principal
amount due to bondholders
upon maturity of bonds
Cash sales to customers
Purchase of long-term
investment for cash
Payment of cash dividends
Receipt of cash upon
signing long-term
note payable
Issuance of common stock
for cash
Payment of interest due on
note payable
Issuance of common stock
in exchange for land
Purchase of treasury stock
for cash
Payment of principal
amount due on a long-
term note payable
Acquisition of land in
exchange for a
note payable
Receipt of cash dividends
Proceeds from the sale of
long-term investment
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AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
194. Choose the appropriate letter to match the account balance change with the type of
adjustment made to net income when using the indirect method to determine net cash flow
provided by operating activities.
Account Balance Change
_____ Decrease in Property, Plant, and Equipment
_____ Increase in Accounts Receivable
_____ Decrease in Inventory
_____ Decrease in Prepaid Expenses
_____ Increase in Accounts Payable
_____ Decrease in Accrued Liabilities
_____ Decrease in Income Tax Payable
_____ Increase in Dividends Payable
_____ Gain on Sales of Property, Plant and Equipment
_____ Depreciation
Type of Adjustment
A - Add item to net income
S - Subtract item from net income
N - No adjustment necessary
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-105
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195. Indicate whether each of the following would be added to or subtracted from net income when
using the indirect method to reconcile net income to cash flows from operating activities.
Item Required to Convert
Net Income to Cash Flows From
Operating Activities
Added to or
Subtracted
From
Increase in Accounts Receivable
Decrease in Accounts Payable
Decrease in Inventory
Increase in Accrued Expenses
Depreciation Expense
Increase in Prepaid Expenses
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-106
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196. Consider the following information:
Amortization Expense $12,000
Increase in Accounts Receivable 14,000
Increase in Accounts Payable 32,000
Decrease in Accrued Liabilities 16,000
Decrease in Inventory 35,000
Decrease in Prepaid Expenses 5,000
Net income 500,000
Required:
Use the indirect method to compute the amount of net cash flows provided by (used in)
operating activities.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-107
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197. Selected balance sheet information and the income statement for Fountainhead Corporation
for the current year are presented below.
Selected Balance Sheet Accounts
Prior
Year
Current
Year
Accounts Receivable $15,000 $10,000
Merchandise Inventory 20,000 22,000
Prepaid Rent 1,000 0
Accounts Payable 11,000 14,000
Salaries and Wages Payable 2,000 3,000
Income Statement
Sales Revenue $300,000
Expenses:
Cost of Goods Sold 180,000
Depreciation Expense 20,000
Salaries Expense 30,000
Rent Expense 12,000
Insurance Expense 12,000
Interest Expense 11,000
Utilities Expense 10,000
Net Income $25,000
Required:
Prepare the cash flows from operating activities section of the statement of cash flows using
the indirect method.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Topic: Determining Operating Cash Flows Using the Indirect Method
12-110
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198. Consider the following information:
Proceeds from sale of bonds for cash $1,000,000
Cash interest payments to bondholders 25,000
Conversion of bonds into preferred
stock 1,000,000
Purchase of long-term investment for
cash 300,000
Payment of cash dividends to
stockholders 75,000
Proceeds from long-term note payable 500,000
Issuance of common stock for cash 5,000,000
Payment of interest due on long-term
note payable 50,000
Issuance of common stock for land 250,000
Repurchase of common stock on open
market for cash 125,000
Payment of principal amount due on
long-term note payable 250,000
Acquisition of land in exchange for note
payable 900,000
Receipt of cash dividend income on
long-term investments 40,000
Proceeds from sale of building 525,000
Proceeds from sale of long-term
investment 2,500,000
Purchases of equipment 125,000
Required:
Part a. Compute the cash provided by (used in) investing activities.
Part b. Compute the cash provided by (used in) financing activities.
Part c. If you did not use any of the items listed in parts a or b, explain why, and indicate, if
appropriate, how each item would be reported on the statement of cash flows.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
12-113
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199. The management team of Wickersham Brothers Inc. is preparing its annual financial
statements. The statements are complete except for the statement of cash flows. The
completed comparative balance sheets and income statements are summarized.
Current
Year
Prior
Year
Balance Sheet
Assets
Cash $50,000 $72,000
Accounts Receivable 80,000 70,000
Merchandise Inventory 60,000 65,000
Property And Equipment 110,000 60,000
Less: Accumulated
Depreciation (30,000) (15,000)
Total Assets $270,000 $252,000
Liabilities:
Accounts Payable $10,000 $12,000
Salaries and Wages
Payable 2,000 1,000
Notes Payable, Long-Term 50,000 60,000
Stockholders’ Equity:
Common Stock 100,000 80,000
Retained Earnings 108,000 99,000
Total Liabilities and
Stockholders’ Equity $270,000 $252,000
Income Statement
Sales $200,000
Cost of Goods Sold 110,000
Depreciation Expense 15,000
Other Expenses 50,000
Net Income $25,000
Other information from the company's records includes the following:
• Bought equipment for cash, $50,000.
• Paid $10,000 on long-term note payable.
• Issued new shares of common stock for $20,000 cash.
• Cash dividends of $16,000 were declared and paid to stockholders.
• Accounts Payable arose from inventory purchases on credit.
• Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of
both years and are included in Other Expenses.
Required:
Part a. Prepare the statement of cash flows using the indirect method. Include any
supplemental disclosures.
Part b. Interpret the statement of cash flows by explaining the main sources and uses of cash
during the year.
12-115
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AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Blooms: Apply
Blooms: Create
Difficulty: 2 Medium
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Evaluating Cash Flows
Topic: Preparing the Statement of Cash Flows
Topic: Relationship to Other Financial Statements
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
12-117
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200. Condensed financial data of Monopoly Corporation appear below:
Monopoly Corporation
Comparative Balance Sheet
December 31
Current
Year
Prior
Year
Assets
Cash $44,000 $28,000
Accounts receivable A 32,000
Inventories B 70,000
Prepaid rent 2,500 2,000
Property, plant, and
equipment 224,000 200,000
Accumulated depreciation (55,000) (40,000)
Total assets $341,500 $292,000
Liabilities and Stockholders’
Equity
Accounts payable $38,000 $34,000
Accrued liabilities 10,000 12,000
Notes payable (long-term) 130,000 150,000
Contributed capital 50,000 25,000
Retained earnings 113,500 71,000
Total liabilities and
stockholders’ equity $341,500 $292,000
Monopoly Corporation
Income Statement
Year Ended December 31
Sales $477,500
Expenses
Cost of goods sold $290,000
Selling, general, and
administrative expenses 94,000
Depreciation expense C
Interest expense 9,000
Income taxes D 425,000
Net income $52,500
Monopoly Corporation
Cash Flow Statement
Year End December 31
Cash Flows from Operating Activities
Net income $52,500
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 15,000
Changes in current assets and current
liabilities:
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Accounts Receivable (4,000)
Inventories (20,000)
Prepaid Expenses E
Accounts Payable 4,000
Accrued Liabilities F
Net cash provided by (used in) operating
activities G
Cash flows from investing activities
Purchase of property, plant, and
equipment (24,000)
Net cash provided by (used in) investing
activities (24,000)
Financing activities
Additional capital contributed by
stockholders H
Payments on long-term debt (20,000)
Payment of cash dividends I
Net cash provided by (used in) financing
activities J
Increase in cash and cash equivalents 16,000
Cash and cash equivalents, beginning of
period 28,000
Cash and cash equivalents, end of period $44,000
A cash dividend was declared and paid in full to stockholders during the year.
Required:
Solve for the missing numbers and summarize your answers in the table below. Be sure to
indicate in parentheses ( ) if the missing number is negative (that is, a cash outflow).
A C E G I
B D F H J
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
12-120
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Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Preparing the Statement of Cash Flows
Topic: Relationship to Other Financial Statements
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
201. Match each item with the correct letter below to indicate how each revenue or expense
account on the income statement is adjusted when using the direct method to determine net
cash flow provided by operating activities.
Account Balance Change
_____ Increase in Accrued Expenses
_____ Decrease in Accounts Receivable
_____ Decrease in Unearned Income
_____ Increase in Prepaid Expenses
_____ Decrease in Accounts Payable
_____ Increase in Long-Term Notes Payable
_____ Decrease in Prepaid Insurance
_____ Increase in Inventory
_____ Increase in Interest Payable
_____ Increase in Accumulated Depreciation
Type of Adjustment
A - Add item to related revenue or expense account balance
S - Subtract item from related revenue or expense account balance
N - No adjustment necessary
S, A, S, A, A, N, S, A, S, N
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-121
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202. Consider the following information:
Income Statement
Information: Other Information:
Net Sales
Revenue $200,000
Increase in
Accounts
Receivable
$200
Cost of Goods
Sold 60,000 Decrease in
Inventory 600
Gross Margin 140,000 Increase in
Prepaid Expense 700
Salary
Expense 60,000
Decrease in
Accounts
Payable
2,200
Depreciation
Expense 30,000
Decrease in
Accrued
Liabilities
800
Other Expense 20,000
Increase in
Income Taxes
Payable
1,900
Net Income
Before Tax 30,000 Reduction of
Long-Term Debt 13,700
Income Tax
Expense 9,000 Purchases of
Equipment 29,000
Net Income $21,000
Required:
Use the direct method to compute the amount of net cash flows provided by (used in)
operating activities.
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Analyze
Difficulty: 3 Hard
12-122
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Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Operating Cash Flows Revisited (Direct Method)
12-123
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203. The Extra Surplus Company's Balance Sheet for December 31, 2015 and the Income
Statement for 2016 are shown below.
Extra Surplus Company
Balance Sheet
December 31, 2015
Assets
Cash $10,000
Accounts Receivable 5,000
Inventory 12,000
Property and Equipment, Net 20,000
$47,000
Liabilities and Stockholders’; Equity
Accounts Payable $10,000
Note Payable, Long-Term 5,000
Common Stock 20,000
Retained Earnings 12,000
$47,000
Extra Surplus Company
Income Statement
For the Year Ended December 31, 2016
Sales $13,000
Cost of Goods Sold 3,000
Salaries and Wage Expense 3,000
Interest Expense 1,000
Other Expenses 500
Net Income $5,500
Additional data:
• Sales were $13,000; $8,000 in cash was received from customers.
• Bought new land for cash, $10,000.
• Sold other land for its book value of $5,000.
• Paid $1,000 principal on the long-term note payable and $1,000 in interest.
• Issued new shares of stock for $10,000 cash.
• Cash dividends of $1,000 were declared and paid to stockholders.
• Paid $5,500 on accounts payable.
• No inventory purchases were made; other expenses were incurred on account.
• All wages were paid in cash.
• Other expenses were on account.
Required:
Part a. Prepare a balance sheet at December 31, 2016.
Part b. Prepare the statement of cash flows using the direct method.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Blooms: Create
Difficulty: 3 Hard
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Preparing the Statement of Cash Flows
Topic: Relationship to Other Financial Statements
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
12-127
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204. Equipment with a cost of $80,000 and accumulated depreciation of $75,000 is sold for $12,000
cash.
Required:
Part a. Prepare the journal entry to record this transaction.
Part b. Explain how this transaction would be reported on the statement of cash flows
prepared using the indirect method.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: BB Industry
AICPA: FN Measurement
AICPA: FN Reporting
Blooms: Taxonomy Apply
Difficulty: 3 Hard
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-128
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205. A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for
$35,000 cash.
Required:
Part a. Prepare the journal entry to record this transaction.
Part b. Explain how this transaction would be reported on the statement of cash flows
prepared using the indirect method.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: BB Industry
AICPA: FN Measurement
AICPA: FN Reporting
Blooms: Taxonomy Apply
Difficulty: 3 Hard
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
12-129
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McGraw-Hill Education.
12-130
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McGraw-Hill Education.
206. The management team of Wickersham Brothers Inc. is preparing its annual financial
statements. The statements are complete except for the statement of cash flows. The
completed comparative balance sheets and income statements are summarized.
Current
Year
Prior
Year
Balance Sheet
Assets
Cash $50,000 $72,000
Accounts Receivable 80,000 70,000
Merchandise Inventory 60,000 65,000
Property and Equipment 110,000 60,000
Less: Accumulated
Depreciation (30,000) (15,000)
Total Assets $270,000 $252,000
Liabilities:
Accounts Payable $10,000 $12,000
Salaries and Wages
Payable 2,000 1,000
Notes Payable, Long-Term 50,000 60,000
Stockholders’ Equity:
Common Stock 100,000 80,000
Retained Earnings 108,000 99,000
Total Liabilities and
Stockholders’ Equity $270,000 $252,000
Income Statement
Sales $200,000
Cost of Goods Sold 110,000
Depreciation Expense 15,000
Other Expenses 50,000
Net Income $25,000
• Other information from the company's records includes the following:
• Bought equipment for cash, $50,000.
• Paid $10,000 on long-term note payable.
• Issued new shares of common stock for $20,000 cash.
• Cash dividends of $16,000 were declared and paid to stockholders.
• Accounts Payable arose from inventory purchases on credit.
• Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of
both years and are included in Other Expenses.
Required:
Prepare a schedule summarizing operating, investing, and financing cash flows using the T-
account approach
12-131
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AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 12-S2 Use the T-account approach for preparing an indirect method statement of cash flows.
Topic: T-account Approach (Indirect Method)
207. Choose the appropriate letter to match the term and the definition. Not all definitions will be
used.
Term
_____ Operating Activities
_____ Indirect Method
_____ Working Capital
_____ Cash Equivalents
_____ Investing Activities
_____ Supplemental Disclosures
_____ Direct Method
_____ Financing Activities
Definition
Cash inflows and outflows related to components of net income.
Include assets that are very liquid and are purchased by the entity within three months of
maturity.
These activities include only purchases made with borrowed funds.
Reports the components of cash flows from operating activities as gross receipts and gross
payments.
This ratio uses net income instead of operating cash flow to analyze a company's ability to
finance the cost of its debt.
Measures the ability of a company to finance its interest payments with its operating cash flow
before taxes and interest.
A measure of the amount by which current assets exceed current liabilities.
These activities include money lent by a company as well as money borrowed by a company.
Must include cash paid for interest and income tax in a separate schedule.
Cash inflows and outflows related to the sale or purchase of investments and long-lived
assets.
Cash inflows and outflows related to financing sources external to the company (owners and
lenders).
Presents the operating activities section of the cash flow statement by adjusting net income to
compute cash flows from operating activities.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-03 Report cash flows from investing activities.
Learning Objective: 12-04 Report cash flows from financing activities.
Learning Objective: 12-06 Report and interpret cash flows from operating activities, using the direct method.
Topic: Business Activities and Cash Flows
Topic: Classifying Cash Flows
12-134
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Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Operating Cash Flows Revisited (Direct Method)
Topic: Under Armour's Financing Cash Flow Calculations
Topic: Under Armour's Investing Cash Flow Calculations
Topic: Under Armour's Statement of Cash Flows
208. Choose the appropriate letter to match the term and the definition. Not all definitions will be
used.
Term
_____ Cash Inflow
_____ Property, Plant, and Equipment
_____ Comparative Balance Sheet
_____ Free Cash Flow
_____ Noncash Investing and Financing Activities
_____ Net Income
_____ Statement of Cash Flows
_____ Cash Outflow
Definition
A financial statement that tracks the flow of cash into and out of a company according to the
three types of activities that generate the flows.
Cash flows in excess of net income.
Reported as supplement disclosures or in the notes section to the financial statements rather
than within the body of the statement of cash flows.
Results from activities such as sales of goods and assets, receipt of cash dividends, and
receipts of interest.
Cash a company receives that is not subject to income tax.
Purchases and sales of this are classified as investing activities.
The starting point for calculating operating cash flows with the direct method.
Cash flows from operations in excess of amount paid to replace property, plant and equipment
and to pay cash dividends to stockholders.
The percent of a company's net cash flow that comes from investing and financing activities.
An adjustment made when using the indirect method of calculating cash flows from operating
activities.
The starting point for calculating operating cash flows with the indirect method.
Purchases and sales of this are classified as operating activities.
A balance sheet that shows the starting and ending balance of the different accounts; it is used
to calculate the net cash flow provided by operating activities.
Results from activities such as purchases of goods and assets, payment of debt, payment of
cash dividends, and payment of taxes.
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Identify cash flows arising from operating, investing, and financing activities.
Learning Objective: 12-02 Report cash flows from operating activities, using the indirect method.
Learning Objective: 12-04 Report cash flows from financing activities.
Learning Objective: 12-05 Interpret cash flows from operating, investing, and financing activities.
Learning Objective: 12-S1 Report cash flows from PPE disposals using the indirect method.
12-135
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McGraw-Hill Education.
Topic: Business Activities and Cash Flows
Topic: Classifying Cash Flows
Topic: Determining Operating Cash Flows Using the Indirect Method
Topic: Evaluating Cash Flows
Topic: Relationship to Other Financial Statements
Topic: Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
Topic: Under Armour's Statement of Cash Flows
12-136
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McGraw-Hill Education.
