Chapter 21 The Statement of Cash Flows
True/False Questions
1. Amounts held in cash equivalent investments must be reported separately from amounts held
as cash in the statement of cash flows.
2. If the direct method is used to report cash flows from operating activities in the body of the
statement of cash flows, a reconciliation of net income to net cash flows from operating
activities also is required.
3. Cash paid for taxes and interest must be disclosed on the face of the statement or in the
disclosure notes under both the direct and indirect methods of reporting cash flows from
operating activities.
4. Generally speaking, cash flows from operating activities include the elements of net income
reported on a cash basis.
Chapter 21 The Statement of Cash Flows
5. A decrease in cash dividends payable means that dividends declared were less than dividends
paid.
6. The purchase of treasury stock is an investing cash outflow.
7. Interest payments on debt are classified as cash outflows from financing activities.
8. Transactions that represent noncash investing and financing activities must be reported in the
statement of cash flows or in disclosure notes.
9. In using a spreadsheet to prepare the statement of cash flows, the summary entries duplicate
the actual journal entries used to record the transactions during the year.
10. When one enters a $50,000 credit entry to the Land account in a spreadsheet for the statement
of cash flows, it represents a negative change in that account and probably is due to selling
such assets.
Multiple Choice Questions
11. Which of the following financial statements is prepared as of a particular point in time rather
than for a period of time?
a. Statement of cash flows.
b. Income statement.
c. Statement of shareholders’ equity.
d. Balance sheet.
12. Which one of the following financial statements does not report amounts primarily on an
accrual basis?
a. Income statement.
b. Balance sheet.
c. Statement of cash flows.
d. Statement of shareholders’ equity.
13. Which of the following is not required by generally accepted accounting principles?
a. Cash flow per share.
b. Earnings per share.
c. Statement of cash flows.
d. Disclosure notes.
14. Which of the following never requires an outflow of cash?
a. Early extinguishment of debt.
b. Retirement of common stock.
c. Payment of dividends.
d. Amortization of patent.
15. Which of the following is not an inflow of cash?
a. Depletion.
b. Cash borrowed on a short-term note.
c. Sale of a computer.
d. Cash borrowed on a long-term note.
16. All of the following may qualify as cash equivalents except:
Chapter 21 The Statement of Cash Flows
a. Money market accounts.
b. Certificates of deposit.
c. U.S. Treasury bills.
d. Newly issued corporate bonds.
17. The primary objective of the statement of cash flows is to provide information about a
company’s:
a. Cash receipts and disbursements.
b. Noncash financing and investing activities.
c. Financial position.
d. Profitability.
18. How is the amortization of patents reported in a statement of cash flows that is prepared using
the direct method?
a. Not reported.
b. An increase in cash flows from operating activities.
c. A decrease in cash flows from operating activities.
d. A decrease in cash flows from investing activities.
19. When a transfer is made between cash and cash equivalents with no gain or loss, how is the
transaction treated in the statement of cash flows?
a. It is included as an operating activity.
b. It is included as a noncash financing activity.
c. It is included as an investing activity.
d. It is not reported.
Chapter 21 The Statement of Cash Flows
Chapter 21 The Statement of Cash Flows
20. Creditors and investors would generally find the statement of cash flows least useful for
assessing the:
a. Ability to generate future cash flows.
b. Ability to pay dividends.
c. Financial position at a point in time.
d. Quality of earnings.
21. A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75,
investing ($200), and financing $350. The beginning cash balance was $250. What was the
ending cash balance?
a. $875.
b. $ 25.
c. $475.
d. $125.
22. Cash equivalents generally would not include short-term investments in:
a. Commercial paper.
b. Certificates of deposit.
c. Held-to-maturity securities.
d. Money market funds.
23. Cash equivalents have each of the following characteristics except:
Chapter 21 The Statement of Cash Flows
a. Little risk of loss.
b. Highly liquid.
c. Maturity of at least three months.
d. Short-term.
24. When a company purchases a security it considers a cash equivalent, the cash outflow is:
a. Reported as an operating activity.
b. Reported as an investing activity.
c. Reported as a financing activity.
d. Not reported on a statement of cash flows.
25. When preparing a statement of cash flows using the direct method, accrual of payroll expense
is:
a. Reported as an operating activity.
b. Reported as an investing activity.
c. Reported as a financing activity.
d. None of these answer choices is correct.
26. A firm reported salary expense of $239,000 for the current year. The beginning and ending
balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of
cash paid for salaries?
a. $214,000.
b. $289,000.
c. $264,000.
d. $239,000.
Chapter 21 The Statement of Cash Flows
27. In a statement of cash flows in which operating activities are reported by the direct method,
which of the following would increase reported cash flows from operating activities?
a. Gain on sale of equipment.
b. Interest revenue.
c. Gain on early extinguishment of bonds.
d. Proceeds from sale of land.
28. Which of the following is reported as an operating activity in the statement of cash flows?
a. The payment of dividends.
b. The sale of office equipment.
c. The payment of interest on long-term notes.
d. The issuance of a stock dividend.
29. Which of the following is reported as an operating activity in the statement of cash flows?
a. The purchase of long-lived assets.
b. The acquisition of treasury stock.
c. The retirement of bonds.
d. The payment of prepaid insurance.
30. On December 31, 2016, Wellstone Company reported net income of $70,000 and sales of
$210,000. The company also reported beginning and ending accounts receivable at $20,000
and $25,000, respectively. Wellstone will report cash collected from customers in its 2016
statement of cash flows (direct method) in the amount of:
a. $215,000.
b. $285,000.
c. $135,000.
d. $205,000.
31. Lite Travel Company’s accounting records include the following information:
Payments to suppliers
$50,000
Chapter 21 The Statement of Cash Flows
Collections on accounts receivable
79,000
Cash sales
44,000
What is the amount of net cash provided by operating activities indicated by the amounts
provided?
a. $ 50,000.
b. $ 73,000.
c. $ 94,000.
d. $129,000.
32. Ludwig Company’s prepaid rent was $9,000 at December 31, 2015, and $13,000 at December
31, 2016. Ludwig reported rent expense of $19,000 on the 2016 income statement. What
amount would be reported in the statement of cash flows as rent paid using the direct method?
a. $15,000.
b. $19,000.
c. $23,000.
d. None of these answer choices is correct.
33. Pickering Company’s prepaid insurance was $8,000 at December 31, 2015, and $10,000 at
December 31, 2016. Pickering reported insurance expense of $15,000 on the 2016 income
statement. What amount would be reported in the statement of cash flows as insurance paid
using the direct method?
a. $13,000.
b. $17,000.
c. $15,000.
d. $23,000.
34. During the year, cash increased by $300 million. Investing and financing activities created
positive cash flow totaling $500 million. What were net cash flows from operating activities in
the statement of cash flows?
a. Inflow of $300 million.
b. Outflow of $200 million.
c. Outflow of $300 million.
d. Inflow of $600 million.
35. Dooling Corporation reported balances in the following accounts for the current year:
Beginning
Ending
Inventories
$600
$300
Chapter 21 The Statement of Cash Flows
Accounts payable
300
500
Cost of goods sold was $7,500. What was the amount of cash paid to suppliers?
a. $7,000.
b. $7,200.
c. $7,300.
d. $7,500.
36. If bond interest expense is $800,000, bond interest payable increased by $8,000 and bond
discount decreased by $2,000, cash paid for bond interest is:
a. $790,000.
b. $784,000.
c. $806,000.
d. $910,000.
37. Using the direct method, cash received from customers is calculated as sales:
a. On account.
b. On account plus cash sales.
c. Plus an increase in accounts receivable.
d. Plus a decrease in accounts receivable.
38. Cash paid to suppliers under the direct method is computed as:
a. Cost of goods sold plus a decrease in inventory and minus an increase in accounts
payable.
b. Cost of goods sold plus an increase in inventory and minus an increase in accounts
payable.
c. Cost of goods sold minus a decrease in inventory and plus an increase in accounts
payable.
d. Cost of goods sold minus an increase in inventory and plus an increase in accounts
payable.
39. Cost of goods sold as reported in the income statement will be less than cash paid to suppliers
if:
a. The increase in accounts payable is greater than the increase in inventory during the
period.
b. The decrease in accounts payable is equal to the increase in inventory during the period.
c. The decrease in accounts payable is less than the decrease in inventory during the period.
d. The increase in accounts payable is equal to the decrease in inventory during the period.
40. Bowers Corporation reported the following ($ in 000s) for the year:
Balance
Beginning
Ending
Accounts receivable
$600
$873
Chapter 21 The Statement of Cash Flows
Sales on account were $1,900 for the year. How much cash was collected from customers on
account?
a. $1,627.
b. $1,642.
c. $1,638.
d. $2,142.
Cash
41. Sneed Corporation reported balances in the following accounts for the current year:
Beginning
Ending
Income tax payable
$50
$30
Deferred tax liability
80
140
Income tax expense was $230 for the year. What was the amount paid for taxes?
a. $280.
b. $220.
c. $210.
d. $190.
42. Which of the following is not reported as an adjustment to net income when using the indirect
method of computing net cash flows from operating activities?
a. Cash dividends paid.
b. A change in accounts receivable.
c. Depreciation.
d. A change in a prepaid expense.
Chapter 21 The Statement of Cash Flows
43. Interest payments to creditors are reported in a statement of cash flows as:
a. An investing activity.
b. A borrowing activity.
c. A financing activity.
d. An operating activity.
44. Which of the following does not represent a cash flow relating to operating activities?
a. Cash dividends paid to stockholders.
b. Cash received from customers.
c. Interest paid to bondholders.
d. Cash paid for salaries.
45. Which of the following is not true regarding the statement of cash flows?
a. The indirect method derives cash flows indirectly by starting with sales revenue and
“working backwards” to convert that amount to a cash basis.
b. Noncash transactions sometimes are reported in conjunction with the statement.
c. Either the direct or the indirect method can be used to calculate and report the net cash
increase or decrease from operating activities.
Chapter 21 The Statement of Cash Flows
d. The statement of cash flows provides information about cash flows that the other
statements either do not provide or provide only indirectly.
46. On June 4, White Corporation issued $400 million of bonds for $386 million. During the same
year, $1 million of the bond discount was amortized. In a statement of cash flows prepared by
the indirect method, White Corporation should report:
a. A financing activity of $400 million.
b. An addition to net income of $1 million.
c. An investing activity of $386 million.
d. A deduction from net income of $1 million.
47. In determining cash flows from operating activities (indirect method), adjustments to net
income should not include:
a. An addition for depreciation expense.
b. An addition for bond discount amortization.
c. An addition for a gain on sale of equipment.
d. An addition for patent amortization.
48. S Company reported net income for 2016 in the amount of $400,000. The company’s financial
Chapter 21 The Statement of Cash Flows
statements also included the following:
Increase in accounts receivable $ 80,000
Decrease in inventory 60,000
Increase in accounts payable 200,000
Depreciation expense 104,000
Gain on sale of land 148,000
What is net cash provided by operating activities under the indirect method?
a. $432,000.
b. $536,000.
c. $580,000.
d. $832,000.
49. An analyst compiled the following information for U Inc. for the year ended December 31,
2016:
▪ Net income was $1,700,000.
▪ Depreciation expense was $400,000.
▪ Interest paid was $200,000.
▪ Income taxes paid were $100,000.
▪ Common stock was sold for $200,000.
▪ Preferred stock (8% annual dividend) was sold at par value of $250,000.
▪ Common stock dividends of $50,000 were paid.
▪ Preferred stock dividends of $20,000 were paid.
▪ Equipment with a book value of $100,000 was sold for $200,000.
Using the indirect method, what was U Inc.’s net cash flow from operating activities for the
year ended December 31, 2016?
a. $2,000,000.
b. $2,030,000.
c. $2,080,000.
d. $2,100,000.
50. A 10% stock dividend is reported in connection with a statement of cash flows as:
a. A financing activity.
b. An investing activity.
c. A noncash activity.
d. Not reported in the statement of cash flows.
51. How is the amortization of patents reported in a statement of cash flows that is prepared using
the indirect method?
a. A decrease in cash flows from investing activities.
b. An increase in cash flows from investing activities.
c. A deduction from net income in arriving at cash flows from operations.
d. An addition to net income in arriving at cash flows from operations.
52. When preparing the statement of cash flows using the indirect method for determining net
cash flows from operating activities, depreciation is added to net income because:
a. It was deducted as an expense on the income statement, but does not require cash.
b. It was deducted as an expense on the income statement and affects the amount of cash.
c. It is a significant portion of the year’s expenses.
d. It represents a source or inflow of cash.
53. The amortization of bond discount is included in the statement of cash flows (indirect method)
as:
a. A financing cash inflow.
b. An investing activity.
c. An addition to net income.
d. A deduction from net income.
54. Which of the following is reported as a deduction from net income when using the indirect
method to determine net cash flows from operating activities?
a. Depreciation expense.
b. Amortization of a patent.
c. Amortization of premium on bonds payable.
d. Dividends declared.
55. A loss on the sale of machinery should be reported in the statement of cash flows as:
a. An adjustment to net income under the indirect method.
b. An operating activity under the direct method.
c. An investing activity cash outflow.
d. A noncash investing activity.