Accounting, 9e (Horngren)
Chapter 14 The Statement of Cash Flows
Learning Objective 14-1
1) Cash equivalents are assets that can be converted to cash within one year.
2) The statement of cash flows explains the difference between net income and the change in cash balance.
3) Investors and management use the statement of cash flows to evaluate a firm’s profitability.
4) For purposes of the statement of cash flows, cash includes cash on hand, cash in the bank and cash equivalents.
5) A statement of cash flows is generated to show:
A) the revenues the company has earned.
B) the expenses the company incurred during the time period.
C) the inflow and outflow of cash during the time period.
D) how profits were generated.
6) For anything to be considered a cash equivalent, the asset must be:
A) convertible to cash within 5 years.
B) convertible to cash within 3 months or less.
C) convertible to cash within 6 months or less.
D) convertible to cash within 1 year.
7) Which one of the following is a principal function of the statement of cash flows?
A) To predict future net income
B) To evaluate management decisions
C) To evaluate the company’s earnings per share
D) To predict the growth of company assets
8) Which one of the following is a principal function of the statement of cash flows?
A) To predict future profit growth
B) To calculate the turnover of inventory
C) To evaluate the level of debt and leverage of a company
D) To predict the ability to pay debts and dividends
9) Which of the following statements accurately describes the statement of cash flows?
A) It shows the relative proportion of debt and assets.
B) It shows the link between accrual based income and the cash reported on the balance sheet.
C) It indicates when long-term debt will mature.
D) It shows the link between book income and earnings per share.
10) Which of the following is NOT a true statement about the statement of cash flows?
A) It shows where cash came from and how it was spent.
B) It reports why cash increased or decreased.
C) It covers a specific span of time the same as the income statement.
D) It shows how the profits or losses of the company were generated.
11) The term cash as used on the statement of cash flows includes all of the following EXCEPT:
A) cash due from customers within 30 days.
B) cash on hand.
C) cash equivalents.
D) cash in bank.
Learning Objective 14-2
1) Operating activities include activities that affect long-term liabilities and stockholders’ equity.
2) The financing activities section of the statement of cash flows includes paying dividends and paying off loans.
3) Investing activities include activities that affect the long-term asset section of the balance sheet.
4) Financing activities include activities that affect current assets and liabilities on the balance sheet.
5) The financing activities section of the statement of cash flows reflects the cash flows that affect current assets and
liabilities.
6) The investing activities section of the statement of cash flows reflects the cash flows that increase or decrease
long-term assets.
7) Which of the following describes the operating activities as shown in the statement of cash flows?
A) Includes increases and decreases in long–term assets
B) Includes transactions affecting the capitalization of the business
C) Includes transactions that primarily impact current assets and current liabilities
D) Shows the beginning and ending balance of cash
8) Which of the following describes the financing activities as shown in the statement of cash flows?
A) Includes increases and decreases in long–term assets
B) Includes transactions affecting the capitalization of the business
C) Includes transactions that primarily impact current assets and current liabilities
D) Shows the beginning and ending balance of cash
9) Which of the following describes the investing activities as shown in the statement of cash flows?
A) Includes increases and decreases in long–term assets
B) Includes transactions affecting the capitalization of the business
C) Includes transactions that primarily impact current assets and current liabilities
D) Shows the beginning and ending balance of cash
10) Which of the following statements about the statement of cash flows is TRUE?
A) The indirect method and the direct method will both show the same end results.
B) The direct method begins with net income and adjusts to calculate operating cash flows.
C) The indirect method shows three types of cash flows, but the direct method does not.
D) The operating activities section of both the direct and the indirect method are the same.
11) Which of the following statements about the statement of cash flows is FALSE?
A) The indirect method and the direct method will produce the same amount of cash flow.
B) The indirect method begins with net income and adjusts to calculate operating cash flows.
C) Both the direct and indirect methods include 3 types of cash flows.
D) The operating activities section of both the direct and the indirect method are the same.
1) Issuing preferred stock to stockholders would be a financing activity.
2) Buying property, plant and equipment would be considered a cash outflow from financing.
3) The financing section of the statement of cash flows reflects transactions in the equity accounts only.
4) The financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term
liability accounts.
5) Interest expense incurred on a note payable would be included in the financing section of the statement of cash
flows.
6) The first section presented on the statement of cash flows is the operating activities section.
7) Sonesta Company owed one of its creditors $250,000, but did not have enough cash to repay the debt. Following
lengthy negotiations, the parties agreed that Sonesta would issue 100,000 shares of common stock to settle the debt.
This transaction would be reported in the financing section of the statement of cash flows.
8) Arturo Sales purchased some equipment for $12,000 by issuing a 6-month note payable. Because this was a
noncash transaction, it would not be shown in the main body of the statement of cash flows, but in a separate section
for noncash investing and financing activities.
9) Transnational Company just started in business and was looking for additional capital in order to purchase a
property to build their headquarters. They found an investor who was willing to sell them land worth $500,000 in
exchange for stock in the company. This transaction would be shown in the investing activities section of the
statement of cash flows.
10) Companies sometimes make investments that do NOT require cash. Such transactions are called noncash
investing activities and appear in a separate section of the cash flow statement.
11) Companies sometimes obtain financing other than cash. Although such transactions do not directly involve
cash, they still must be reported in the financing section of the cash flow statement.
12) Partisan Services purchased 10 delivery vehicles by issuing a 10-year installment note payable for $320,000.
This transaction would be shown in the investment section of the statement of cash flows.
13) In creating a statement of cash flows using the indirect method, depreciation expense is added back as an
adjustment to net income under operating activities.
14) In creating a statement of cash flows using the indirect method, a gain on the sale of plant assets must be shown
as an addition to Net income in the operating activities section.
15) In creating a statement of cash flows using the indirect method, we consider that a decrease in current liabilities
causes an increase in cash.
16) Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following
portion of the comparative balance sheet:
2014
2013
Increase/decrease
Common stock
$ 30,000
$ ,000
$28,000
Retained earnings
113,000
74,000
39,000
Treasury stock
(8,000)
(5,000)
(3,000)
Total equity
$135,000
$71,000
$64,000
Note: Net income for the year was $49,000.
Dividends of $10,000 will be shown as a positive cash flow in the financing section of the statement of cash flows.
17) Avatar Company uses the indirect method to prepare its statement of cash flows. The treasury stock account had
a debit balance of $5,000 at the beginning of the year, and a debit balance of $8,000 at the end of the year. No
treasury stock was sold during the year.
The financing section of the statement of cash flows will show a negative cash flow of $3,000 for purchases of
treasury stock.
18) In creating a statement of cash flows using the indirect method, we consider that an increase in current assets
causes a decrease in cash.
19) Selling property, plant and equipment would be considered a cash inflow from investing.
20) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Cash
$ 33,000
$ 18,000
Accounts receivable
22,000
35,000
Inventory
170,000
115,000
Total assets
$225,000
$168,000
The change in accounts receivable will be shown as a positive cash flow in the adjustments to Net income.
21) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Cash
$ 33,000
$ 18,000
Accounts receivable
22,000
35,000
Inventory
170,000
115,000
Total assets
$225,000
$168,000
The change in inventory will be shown as a positive cash flow in the adjustments to Net income.
22) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Accounts payable
$ 4,000
$ 6,000
Accrued liabilities
2,000
1,000
Long-term notes payable
84,000
90,000
Total liabilities
$90,000
$97,000
The change in accounts payable will be shown as a positive cash flow in the adjustments to Net income.
23) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Accounts payable
$ 4,000
$ 6,000
Accrued liabilities
2,000
1,000
Long-term notes payable
84,000
90,000
Total liabilities
$90,000
$97,000
The change in accrued liabilities will be shown as a positive cash flow in the adjustments to Net income.
24) Which of the following is the CORRECT order of the sections on a statement of cash flows?
A) Operating, financing, investing
B) Financing, investing, operating
C) Investing, operating, financing
D) Operating, investing, financing
25) Which of the following are the three major categories included on the statement of cash flows?
A) Investing, operating and financing activities
B) Investing, capital and financing activities
C) Investing, operating and contracting activities
D) Financial, operating and internal control activities
26) Which of the following are the activities that are included in the operating activities section of the statement of
cash flows?
A) Activities that obtain the cash needed to launch and sustain the business are included in the operating activities
section.
B) Activities that create revenue or expenses in the entity’s major line of business are included in the operating
activities section.
C) Activities that increase or decrease long-term assets are included in the operating activities section.
D) Activities that pertain to construction of new facilities are included in the operating activities section.
27) Which of the following sections from the statement of cash flows includes activities that create revenue,
expenses, gains and losses?
A) The investing section
B) The financing section
C) The operating section
D) The noncash investing and financing section
28) Which of the following sections from the statement of cash flows includes activities that affect net income on
the income statement?
A) The financing section
B) The operating section
C) The investing section
D) The noncash investing and financing section
29) Which of the following sections from the statement of cash flows includes activities that affect current assets
and current liabilities on the balance sheet?
A) The investing section
B) The financing section
C) The operating section
D) The noncash investing and financing section
30) Which of the following sections from the statement of cash flows includes activities that increase and decrease
long-term assets?
A) The financing section
B) The operating section
C) The investing section
D) The noncash investing and financing section
31) Which of the following sections from the statement of cash flows includes purchases and sales of long-term
assets?
A) The financing section
B) The operating section
C) The investing section
D) The noncash investing and financing section
32) Which of the following sections from the statement of cash flows includes activities that increase and decrease
long-term liabilities and stockholders’ equity?
A) The financing section
B) The operating section
C) The investing section
D) The noncash investing and financing section
33) Which of the following sections from the statement of cash flows includes the issuance of stock and the payment
of dividends?
A) The investing section
B) The financing section
C) The operating section
D) The noncash investing and financing section
34) Which of the following sections from the statement of cash flows includes the purchase and sale of treasury
stock?
A) The financing section
B) The operating section
C) The investing section
D) The noncash investing and financing section
35) Which of the following sections from the statement of cash flows includes borrowing money and paying off
loans?
A) The investing section
B) The operating section
C) The financing section
D) The noncash investing and financing section
36) Of the following, which is NOT a cash outflow from an investing activity?
A) Purchase of long-term investments, such as the stock of another company
B) Loans made to another party
C) Purchase of treasury stock
D) Purchase of land
37) Of the following, which is NOT a cash inflow from a financing activity?
A) Sell treasury stock
B) Issue common stock
C) Earn interest revenue
D) Borrow money on a long-term note
38) An outflow of cash from an investing activity would be:
A) purchasing treasury stock.
B) issuing notes payable.
C) paying cash dividends to stockholders.
D) making loans to third parties.
39) Cash borrowed on a mortgage note would be a(n) ________ activity.
A) operating
B) investing
C) financing
D) non-cash
40) Which of the following is NOT a cash outflow from an operating activity?
A) Payment of interest on a loan
B) Payment for purchasing inventory
C) Payment of dividends
D) Payments to the government for taxes
41) A payment of interest on a loan would be considered a:
A) cash outflow from operating activities.
B) cash outflow from investing activities.
C) cash outflow from financing activities.
D) noncash activity.
42) Cash received from selling merchandise would be considered a:
A) cash inflow from investing activities.
B) cash inflow from operating activities.
C) cash inflow from financing activities.
D) cash outflow from operating activities.
43) Creditor and stockholder transactions are considered ________ activities.
A) noncash
B) financing
C) operating
D) investing
44) Which of the following would be considered an operating activity on the statement of cash flows?
A) Dividends paid to stockholders
B) The sale of inventory
C) Payment to purchase equipment
D) The receipt of cash from sale of equipment
45) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Cash
$ 33,000
$ 18,000
Accounts receivable
22,000
35,000
Inventory
170,000
115,000
Total assets
$225,000
$168,000
How will the change in Accounts receivable be shown on the statement of cash flows?
A) Operating activities minus positive cash flow
B) Operating activities minus negative cash flow
C) Financing activities minus positive cash flow
D) Investing activities minus negative cash flow
46) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Cash
$ 33,000
$ 18,000
Accounts receivable
22,000
35,000
Inventory
170,000
115,000
Total assets
$225,000
$168,000
How will the change in Inventory be shown on the statement of cash flows?
A) Operating activities minus positive cash flow
B) Operating activities minus negative cash flow
C) Financing activities minus positive cash flow
D) Investing activities minus negative cash flow
47) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Accounts payable
$ 4,000
$ 6,000
Accrued liabilities
2,000
1,000
Long-term notes payable
84,000
90,000
Total liabilities
$90,000
$97,000
How will the change in Accounts payable be shown on the statement of cash flows?
A) Operating activities minus positive cash flow
B) Operating activities minus negative cash flow
C) Financing activities minus positive cash flow
D) Investing activities minus negative cash flow
48) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
section of the comparative balance sheet:
2014
2013
Accounts payable
$ 4,000
$ 6,000
Accrued liabilities
2,000
1,000
Long-term notes payable
84,000
90,000
Total liabilities
$90,000
$97,000
How will the change in Accrued liabilities be shown on the statement of cash flows?
A) Operating activities minus positive cash flow
B) Operating activities minus negative cash flow
C) Financing activities minus positive cash flow
D) Investing activities minus negative cash flow
49) Avatar Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
income statement:
Sales revenue
$240,000
Interest revenue
1,000
Gain on sale of plant assets
4,000
Total revenues and gains
$245,000
Cost of goods sold
110,000
Salary expense
45,000
Depreciation expense
12,000
Other operating expenses
23,000
Interest expense
1,000
Income tax expense
5,000
Total expenses
$196,000
Net income (loss)
$49,000
Other information provided:
Current assets other than cash increase by $24,000.
Current liabilities decrease by $1,000.
How much is the Net cash flow provided by operations?
A) $20,000 positive
B) $75,000 positive
C) $32,000 positive
D) $82,000 positive
50) Starfire Company uses the indirect method to prepare the statement of cash flows. Please refer to the following
income statement:
Sales revenue
$140,000
Interest revenue
5,000
Loss on sale of plant assets
(4,000)
Total revenues and gains
$141,000
Cost of goods sold
100,000
Salary expense
23,000
Depreciation expense
8,000
Other operating expenses
9,000
Interest expense
2,000
Income tax expense
5,000
Total expenses
$147,000
Net income (loss)
$(6,000)
Other information provided:
Current assets other than cash decrease by $4,000.
Current liabilities increase by $1,000.
How much is the Net cash flow provided by operations?
A) $11,000 positive
B) $11,000 negative
C) $23,000 positive
D) $1,000 negative
51) In creating a statement of cash flows using the indirect method, which of the following statements is TRUE
about depreciation expense?
A) It is added back as an adjustment to net income in the operating activities section.
B) It is shown as a negative cash flow in the investing activities section.
C) It is added back to purchases of plant assets under investing activities.
D) It is shown as a negative cash flow under operating activities.