Chapter 17
Statement of Cash Flows
True-False
1. Accrual accounting involves subjective judgments that can introduce measurement errors and
uncertainty into reported earnings.
2. The statement of cash flows provides relevant information to lenders, investment bankers, and
investors to help them analyze a company’s cash flows from its operating, investing, and
financing activities.
3. The direct method and the indirect method are two alternative presentations for cash flows
from investing activities.
4. A cash collection from a customer pertaining to a sale from the prior year will result in cash
flow being reported in this year’s statement of cash flows.
5. Both the direct method and indirect method will arrive at the same amount for cash flow from
operating activities.
6. For a firm using the indirect method to prepare cash flows from operating activities, a decrease
in a company’s pension liability account should be deducted from net income to arrive at cash
flow from operating activities.
7. An increase in cash flows from financing activities will occur when a company distributes a
stock dividend.
8. The FASB addressed simultaneous financing and investing activities by requiring they be
ignored.
9. For a firm using the indirect method, changes in inventories due to acquisition of another
company are not included as part of the inventory adjustment to accrual-basis income.
10. A significant increase in capital expenditures reported in the investing section of the cash
flow statement that coincides with a significant decrease in operating expenses as a percentage of
sales may be an indication that the firm is improperly capitalizing costs that should be expensed.
11. If Firm A and Firm B are identical in every sense except that Firm A has a finance lease as
defined under ASC 842 and Firm B an operating lease, the operating cash flows for Firm A will
be greater than those for Firm B.
12. Delaying the payment of accrued expenses until a later period is a technique that
management can use to manipulate the current year’s cash flow from operating activities.
13. Under IFRS, firms that use bank overdrafts repayable on demand as part of their normal cash
management activities must include those overdrafts as part of financing activities.
14. IFRS encourages firms to use the direct method. The result is that firms that follow IFRS
rarely use the indirect method of presenting cash flows from operating activities.
15. Under IFRS rules, if a firm uses the direct method, a reconciliation of net income to cash
flows from operating activities is not required.
Multiple-Choice Questions
16. Accrual accounting net income can differ from operating cash flows for all of the following
reasons except
a. dividend declaration and payment dates.
b. useful lives of assets.
c. future pension and healthcare benefits.
d. estimates of uncollectible accounts.
17. GAAP mandates that firms provide a
a. working capital statement.
b. cash flow statement.
c. statement showing inflows and outflows of current assets and current liabilities.
d. statement reporting changes in current operations.
18. Cash flows arising from the purchase or sale of productive assets are cash flows from
a. investing activities.
b. operating activities.
c. financing activities.
d. research activities.
19. Cash flows arising from the acquisitions and divestitures of other companies are cash flows
from
a. investing activities.
b. operating activities.
c. financing activities.
d. research activities.
20. Cash flows arising from the payment of dividends are cash flows from
a. investing activities.
b. operating activities.
c. financing activities.
d. research activities.
21. Cash flows arising from the issuance of company bonds are cash flows from
a. investing activities.
b. operating activities.
c. financing activities.
d. research activities.
22. Which of the following is not correct with respect to the difference between accrual
accounting and cash flow reporting?
a. Accrual accounting uses subjective judgment which can introduce measurement errors.
b. Cash flow reporting uses subjective judgment which can introduce errors and uncertainty.
c. Accrual accounting uses subjective judgment which can introduce uncertainty into reported
earnings.
d. Accrual income can be manipulated by postponing discretionary expenses.
23. The statement of cash flows is used by outside parties in all but which of the following ways?
CHAPTER 17 Statement of Cash Flows
a. To assess equity values since the firm’s value is dependent on the discounted present value of
its expected future cash flows.
b. To assess if the proper amount of income taxes is reported and can be paid from current
funds.
c. To assess credit risk, as cash flows provide the resources for periodic interest and principal
repayment.
d. To assess whether to underwrite an issue of debt or equity securities, using the firm’s
expected operating cash flows in the analysis.
24. Which of the following would be reported in the cash flow from operating activities section
of the cash flow statement under the direct method?
a. Increase in taxes payable.
b. Interest and dividends received.
c. Issuance of common stock.
d. Cash payments made on short-term notes.
25. The method of preparing the statement of cash flows used by the majority of firms is the
a. direct method.
b. indirect method.
c. revenue method.
d. dividend method.
26. Which of the following adjustments is commonly made to the cash flow from operating
activities under the indirect method because it does not cause cash to increase or decrease?
a. Change in receivables
b. Depreciation expense
c. Change in fixed assets
d. Change in cash
27. Some analysts prefer the indirect method for the preparation of the cash flow statement
because the size and direction of the items reconciling net income to net operating cash flow
provide a yardstick for measuring the
a. current ratio.
b. return on assets.
c. quality of earnings.
d. rate of dividends.
28. The FASB decided that the allocation of income taxes paid to operating, financing, and
investing activities would be complex and arbitrary, and relied on which one of the following
justifications for its decision?
a. Materiality constraint
b. Historical cost
c. Cost-benefit constraint
d. Revenue recognition principle
29. Under U.S. GAAP, which of the following is not included in net cash flow from operating
activities under the direct method?
a. Cash collected from customers (including lessees and licensees)
b. Interest and dividends received.
c. Cash paid for cost of goods sold
d. Cash dividends paid
30. Analysts’ preferences regarding use of the direct method or indirect method may be based on
all except which of the following reasons?
a. The direct method facilitates cash flow projections.
b. The indirect method provides a means to evaluate the quality of earnings.
c. The reconciliation between accrual earnings and operating cash flows for firms using the
direct method enhances the comparability of operating cash flows to those of firms using the
indirect method.
d. The indirect method facilitates cash flow projections.
31. Which of the following is not an accurate description of the direct method?
a. It is easier to implement because it relies exclusively on data already available in the accrual
accounts.
b. It requires the presentation of major classes of gross receipts and disbursements.
c. It requires a reconciliation of net income to net cash provided by operating activities.
d. The guidance provides a list of the minimum specific categories of cash inflows and outflows
to include.
Use the following to answer questions 32 and 33:
REFERENCE: Ref. 17_01
The following data is for the Matt Company for 2018:
Loss on sale of equipment $ 4,000
Purchase of Ithaca Corp. bonds (face value $400,000) 375,000
Proceeds from sale of machinery 200,000
Dividends paid 25,000
Proceeds from sale of treasury stock 100,000
[QUESTION]
REFER TO: Ref. 17_01
32. The amount reported as net cash from investing activities is
a. $ (175,000).
b. $ (150,000).
c. $ 87,500.
d. $ 575,000.
33. The amount reported as net cash from financing activities is
a. $(25,000).
b. $ 30,000.
c. $ 75,000.
d. $ 80,000.
34. Bruce Company reported net income for 2018 of $100,000. The company reported
depreciation expense of $17,500 and amortization of $5,000. The company also reported a loss
on the sale of equipment of $2,500. Based only on this information, the company would report
cash flow from operating activities of
a. $117,500.
b. $120,000.
c. $127,500.
d. $125,000.
35. Pipe Corporation reported cost of goods sold of $250,000 for 2018. It also reported an
increase in inventory for the year of $30,000, and an increase in accounts payable of $24,000.
Pipe would report cash paid to suppliers in 2018 under the direct method for cash flows of
a. $250,000.
b. $256,000.
c. $280,000.
d. $304,000.
36. A decrease in accounts receivable of $16,000 for the year
a. decreases cash flow from operating activities by $8,000.
b. increases cash flow from operating activities by $8,000.
c. decreases cash flow from operating activities by $16,000.
d. increases cash flow from operating activities by $16,000.
37. An increase in inventory of $7,000 for the year
a. decreases cash flow from operating activities by $7,000.
b. increases cash from operating activities by $7,000.
c. decreases cash flow from operating activities by $14,000.
d. increases cash flow from operating activities by $14,000.
38. A decrease in prepaid expenses of $8,000 for the year
a. decreases cash flow from operating activities by $8,000.
b. increases cash flow from operating activities by $8,000.
c. decreases cash flow from operating activities by $16,000.
d. increases cash flow from operating activities by $16,000.
39. An increase in accounts receivable of $6,000 for the year
a. decreases cash flow from operations by $3,000.
b. increases cash flow from operations by $3,000.
c. decreases cash flow from operations by $6,000.
d. increases cash flow from operations by $6,000.
CHAPTER 17 Statement of Cash Flows
Use the following to answer questions 40 and 41:
REFERENCE: Ref. 17_02
The following data is for the Kris Company for 2018:
Gain on sale of equipment $ 8,000
Purchase of First Corp. bonds (face value $250,000) 275,000
Proceeds from sale of machinery 300,000
Dividends paid 50,000
Proceeds from sale of treasury stock 200,000
40. The amount reported as net cash provided by investing activities is
a. $ 25,000.
b. $ 50,000.
c. $275,000.
d. $300,000.
41. The amount reported as net cash provided by financing activities is
a. $ 25,000.
b. $ 30,000.
c. $150,000.
d. $200,000.
42. Which of the following statements does not correctly describe an adjustment to net income in
determining cash flows from operating activities when using the indirect method?
a. A decrease in accounts receivable will be added to net income.
b. An increase in inventory will be added to net income.
CHAPTER 17 Statement of Cash Flows
c. An increase in accounts payable will be added to net income.
d. Amortization of bond premium will be deducted from net income.
43. For a firm using the indirect method, which of the following statements does not correctly
describe an adjustment to net income when determining cash flows from operating activities?
a. An increase in wages payable will be added to net income.
b. A decrease in accrued interest payable will be deducted from net income.
c. Amortization of bond discount will be added to net income.
d. Patent amortization expense will be deducted from net income.
44. Under the indirect method, the gain on sale of equipment should be
a. added back to net income to arrive at cash flow from operating activities.
b. subtracted from net income to arrive at cash flow from operating activities.
c. a source of funds from financing activities.
d. a source of funds from investing activities.
CHAPTER 17 Statement of Cash Flows
Use the following to answer questions 45 – 47:
REFERENCE: Ref. 17_03
The cash flow statement of the United Company is in process for 2019. The United Company is
reporting the following balances:
12/31/18 12/31/19
Equipment $ 100,000 $ 170,000
Loss on sale of equipment 0 10,000
Accumulated depreciation—equipment 75,000 95,000
During 2019, United sold equipment costing $30,000 for $12,000 and made several purchases
of new equipment for cash.
[QUESTION]
REFER TO: Ref. 17_03
45. Depreciation expense for 2019 is
a. $ 8,000.
b. $20,000.
c. $18,000.
d. $28,000.
46. Equipment purchases in 2019 were
a. $ 30,000.
b. $ 70,000.
c. $100,000.
d. $120,000.
47. If these were the only investing activities, the cash flow from investing activities is a net
cash
a. outflow of $12,000.
b. inflow of $12,000.
c. outflow of $88,000.
d. inflow of $88,000.
48. The following information has been provided to you by your controller:
Net income $100,000
Decrease in accounts payable $38,000
Decrease in inventory $7,500
Increase in accounts receivable $8,000
Decrease in bonds payable $75,000
Amortization of bond discount $9,400
Depreciation expense $20,000
Increase in income taxes payable $6,000
What is the net cash flow from operating activities?
a. $ 96,900
b. $ 97,900
c. $112,900
d. $ 94,100
49. The following information has been provided to you by Watts Corporation:
Net income
$175,300
Increase in accounts payable
18,500
Increase in inventory
17,500
Increase in accounts receivable
9,700
Increase in bonds payable
75,000
Amortization of bond premium
5,400
Depreciation expense
21,300
Decrease in income taxes payable
7,300
What is Watts Corporation’s net cash flow from operating activities?
a. $186,000
b. $175,200
c. $138,200
d. $210,200
50. Under the indirect method, a loss on the sale of equipment should be
a. added back to net income to arrive at cash flow from operating activities.
b. subtracted from net income to arrive at cash flow from operating activities.
c. a source of funds in the financing activities.
d. a source of funds in the investing activities.
Use the following to answer questions 51 – 57:
REFERENCE: Ref. 17_04
Changes in the balance sheet accounts at June 30, 2018 and 2019 for the Poker Company are
presented below:
Increase
Assets (Decrease)
Cash $ 480,000
Accounts receivable 200,000
Inventory 300,000
Long-term investments 200,000
Equipment (200,000)
Accumulated depreciation (60,000)
Liabilities and Stockholders’ Equity
Accounts payable $ (40,000)
Dividends payable 400,000
Notes payable—Current (200,000)
Notes payable—Long-term 400,000
Common stock, $1.00 par 300,000
Additional paid-in capital 100,000
Retained earnings 80,000
Additional Information for 2019:
Net income was $480,000 and dividends of $400,000 were declared.
Common stock was issued for cash.
A new long-term investment was acquired for $360,000.
A long-term investment was sold for $160,000.
Equipment that cost $600,000 was sold for $200,000. The book value of those assets was
$150,000.
[QUESTION]
REFER TO: Ref. 17_04
51. The gain on the sale of equipment for 2019 is
a. $ 50,000.
b. $ 70,000.
CHAPTER 17 Statement of Cash Flows
c. $100,000.
d. $150,000.
52. The depreciation expense for 2019 is
a. $300,000.
b. $390,000.
c. $400,000.
d. $450,000.
53. The net cash flow from operating activities for 2019 is a
a. $200,000 outflow.
b. $280,000 inflow.
c. $280,000 outflow.
d. $400,000 inflow.
54. The purchase of equipment during 2019 is
a. $250,000.
b. $270,000.
c. $300,000.
d. $400,000.