609
Chapter 13—Statement of Cash Flows
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal
(s)
Level of
Difficulty
AACSB
Tag
1
1
Easy
Analytic
Reporting
31
2
Moderate
Analytic
2
1
Easy
Analytic
Reporting
32
2
Difficult
Analytic
3
1
Moderate
Analytic
Measure
33
2
Difficult
Analytic
4
1
Moderate
Analytic
Measure
34
2
Difficult
Analytic
5
1
Easy
Analytic
Reporting
35
2
Difficult
Analytic
6
1
Easy
Analytic
Reporting
36
2
Moderate
Analytic
7
1
Easy
Analytic
Reporting
37
2
Moderate
Analytic
8
1
Easy
Analytic
Reporting
38
2
Moderate
Analytic
9
1
Moderate
Analytic
Reporting
39
2
Difficult
Analytic
10
1
Moderate
Analytic
Reporting
40
2
Difficult
Analytic
11
1
Easy
Analytic
Reporting
41
2
Difficult
Analytic
12
1
Easy
Analytic
Reporting
42
2
Difficult
Analytic
13
1
Easy
Analytic
Reporting
43
2
Moderate
Analytic
14
1
Moderate
Analytic
Reporting
44
2
Moderate
Analytic
15
1
Moderate
Analytic
Reporting
45
2
Difficult
Analytic
16
1
Easy
Analytic
Reporting
46
3
Difficult
Analytic
17
1
Moderate
Analytic
Reporting
47
3
Difficult
Analytic
18
1
Moderate
Analytic
Reporting
48
3
Difficult
Analytic
19
1
Moderate
Analytic
Reporting
49
3
Difficult
Analytic
20
1
Easy
Analytic
Reporting
50
3
Difficult
Analytic
21
1
Easy
Analytic
Reporting
51
3
Difficult
Analytic
22
1
Easy
Analytic
Reporting
52
3
Difficult
Analytic
23
1
Moderate
Analytic
Reporting
53
3
Difficult
Analytic
24
1
Moderate
Analytic
Reporting
54
4
Easy
Analytic
25
2
Easy
Analytic
Reporting
55
4
Moderate
Analytic
26
2
Easy
Analytic
Measure
56
4
Easy
Analytic
27
2
Easy
Analytic
Reporting
57
4
Difficult
Analytic
28
2
Moderate
Analytic
Measure
58
3
Easy
Analytic
29
2
Moderate
Analytic
Measure
59
4
Moderate
Analytic
30
2
Difficult
Analytic
Measure
610 ♦ Chapter 13
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Moderate
Analytic
2
1
Moderate
Analytic
3
1
Moderate
Analytic
4
1
Moderate
Reflective
5
1
Moderate
Analytic
6
1
Moderate
Analytic
7
3
Moderate
Analytic
8
1
Moderate
Analytic
9
1
Moderate
Analytic
10
1
Moderate
Reflective
11
2
Moderate
Analytic
12
2
Moderate
Analytic
13
2
Moderate
Analytic
14
2
Moderate
Analytic
15
2
Moderate
Analytic
16
2
Difficult
Analytic
17
3
Moderate
Analytic
18
3
Moderate
Analytic
19
3
Difficult
Analytic
20
3
Moderate
Analytic
21
3
Moderate
Analytic
22
3
Moderate
Analytic
23
3
Moderate
Analytic
24
3
Moderate
Analytic
25
3
Moderate
Analytic
Problem
(s)
Learning
Goal
(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Analytic
Reporting
2
1
Moderate
Analytic
Measure
3
2
Difficult
Analytic
Measure
4
1,2
Difficult
Reflective
Reporting
5
1,2
Difficult
Analytic
Measure
6
1,2,3
Difficult
Analytic
Measure
7
1,2,3
Moderate
Analytic
Reporting
8
2
Difficult
Analytic
Reporting
9
2
Moderate
Analytic
Measure
10
2
Difficult
Analytic
Reporting
11
2
Difficult
Analytic
Reporting
12
2
Difficult
Analytic
Reporting
13
2
Difficult
Analytic
Reporting
Case
Learning
Goal
(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1,2
Difficult
Analytic
Reporting
2
1,2
Difficult
Analytic
Reporting
3
1,2
Moderate
Analytic
Reporting
4
4
Difficult
Analytic
Measure
Difficulty Ratings Guide:
Easy
Taken nearly verbatim
from the text
Moderate
Using different expression
or application of concept
Difficult
Several reasoning steps
Statement of Cash Flows ♦ 611
MULTIPLE CHOICE
1. The statement of cash flows reports a firm’s major __________.
a.
Cash increases for the year
b.
Cash decreases for the year
c.
Cash inflows (increases) and outflows (decreases) for a period
d.
Cash to accrual analysis
2. Which of the following is NOT one of the three major types of cash flow activities?
a.
Cash flows from operating activities
b.
Cash flows from investing activities
c.
Cash flows from financing activities
d.
Cash to accrual conversion
3. Which of the following would be a financing activity?
a.
Sale of land for a gain
b.
Purchase of equipment
c.
Depreciation expense
d.
Issuance of stock for cash
4. Which part of the statement of cash flows generally reports cash from transactions that have an
effect on net income?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
Stockholders’ equity
612 ♦ Chapter 13
5. Which part of the statement of cash flows generally reports activities that affected stockholders’
equity transactions during the year?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
6. Which part of the statement of cash flows generally reports activities that affected long-term asset
transactions during the year?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
7. Which part of the statement of cash flows reports the retiring of debt securities?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
8. Which part of the statement of cash flows reports the purchase and sale of merchandise by a
retailer?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
9. Where do activities from transactions that affect net income appear on the statement of cash
flows?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
Stockholders’ equity
Statement of Cash Flows ♦ 613
10. The statement of cash flows provides useful information about a firm’s ability to __________.
a.
Pay dividends
b.
Generate cash from operations
c.
Meet financial obligations
d.
Each of the above is correct
11. The statement of cash flows is useful to managers in __________.
a.
Evaluating past operations
b.
Planning future investing activities
c.
Planning future financing activities
d.
Each of the above is correct
12. Which part of the statement of cash flows generally reports activities that affected long-term
liability transactions during the year?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
13. Cash flows from investing activities are cash flows from transactions that affect __________.
a.
Investments in noncurrent assets
b.
Investments in current assets
c.
Investments in human resources
d.
Investments in treasury stock
14. The total from operating , investing, and financing activities is __________.
a.
Net income
b.
Increase/decrease in cash for the period
c.
Accrual based income
d.
None of the above
15. Which method of preparing the statement of cash flows begins with net income and adjusts from
there?
a.
Indirect method
b.
Direct method
c.
International Standards method
d.
GAAP method
614 ♦ Chapter 13
16. Which method of preparing the statement of cash flows is normally less costly to use?
a.
Indirect method
b.
Direct method
c.
International Standards method
d.
GAAP method
17. Cash flows from investing activities normally does NOT arise from __________.
a.
Selling fixed assets
b.
Investments
c.
Intangible assets
d.
Depreciation expense
18. Cash flows from financing activities would involve all of the following except __________.
a.
Issuing debt
b.
Interest expense
c.
Retiring debt
d.
Issuing stock
19. Which of the following is an example of a noncash investing and financing activity?
a.
Issuing stock for cash
b.
Purchasing equipment with cash
c.
Purchasing equipment with stock
d.
None of the above
20. Purchasing treasury stock would be a __________.
a.
Cash outflow reported in operating activities
b.
Cash outflow reported in investing activities
c.
Cash outflow reported in financing activities
d.
None of the above
21. Cash dividends paid from the current cash account are reported where on the statement of cash
flows?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
Statement of Cash Flows ♦ 615
22. Which of the following parts of the statement of cash flows is reported in a separate schedule?
a.
Operating Activities
b.
Investing Activities
c.
Financing Activities
d.
Noncash Investing and Financing Activities
23. If a long-term asset is “purchased” by issuing stock, which section of the statement of cash flows
is affected?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
None of the above
24. Which of the following transactions would appear in the schedule of noncash transactions?
a.
Purchased land for cash
b.
Issuing bonds payable
c.
Purchased land by issuing common stock
d.
None of the above
25. What percentage of companies (approximate) use the indirect method of cash flows?
a.
Less that 50%
b.
50%
c.
75
d.
Over 90%
26. To focus on the cash account, the accounting equation is rewritten as __________ .
a.
Cash = liabilities + stockholders’ equity – noncash assets
b.
Cash = liabilities + stockholders’ equity + noncash assets
c.
Cash = liabilities – stockholders’ equity – noncash assets
d.
None of the above
27. If the cash account changes, there must also be a change in which of the following?
a.
Liability
b.
Stockholders’ entity
c.
Noncash asset account
d.
Any of the above
616 ♦ Chapter 13
28. Using the indirect method, which of the following adjustments to net income are NOT added to
net income in the operating activities section of the statement of cash flows?
a.
Depreciation expense
b.
Gains on disposal of assets
c.
Losses on disposal of assets
d.
Decreases in current assets
29. Using the indirect method, which of the following adjustment to net income would be subtracted
from net income in the operating activities section of the statement of cash flows?
a.
Decreases in current liabilities
b.
Increases in current liabilities
c.
Losses on disposal of assets
d.
Depreciation expense
30. Using the indirect method, which of the following adjustment affects noncurrent accounts but
NOT cash and is added back to net income?
a.
Decrease in current liabilities
b.
Increase in current assets
c.
Decrease in current assets
d.
Depreciation expense
31. Using the indirect method, if accumulated depreciation has a beginning balance of $10,000 and an
ending balance of $25,000 (both credits), what adjustment is made to net income on the statement
of cash flows for depreciation expense?
a.
Add back $10,000
b.
Add back $25,000
c.
Add back $15,000
d.
Subtract $15,000
32. Refer to Indirect Method Instruction. Prepaid insurance increased by $210,000. What adjustment
is made to net income in the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $210,000
c.
Subtract $210,000
d.
No adjustment to net income, this goes in financing activities
Statement of Cash Flows ♦ 617
33. Refer to Indirect Method Instruction. Accounts payable increased by $20,000. What adjustment is
made to net income in the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $20,000
c.
Subtract $20,000
d.
No adjustment to net income, this goes in financing activities
34. Refer to Indirect Method Instruction . Accrued expenses payable decreased by $10,000. What
adjustment is made to net income in the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $10,000
c.
Subtract $10,000
d.
No adjustment to net income, this goes in financing activities
35. Refer to Indirect Method Instruction. Income tax expense is listed separately on the income
statement. If income tax payable increased by $10,000, what adjustment is made to net income in
the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $10,000
c.
Subtract $10,000
d.
No adjustment to net income, this goes in financing activities
36. Using the indirect method, accounts receivable (net) increased by $10,000. What adjustment is
made to net income in the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $10,000
c.
Subtract $10,000
d.
No adjustment to net income, this goes in financing activities
37. Using the indirect method, if inventory increased by $10,000, what adjustment is made to net
income in the statement of cash flows?
a.
No adjustment, this does not impact cash flow
b.
Add $10,000
c.
Subtract $10,000
d.
No adjustment to net income, this goes in financing activities
618 ♦ Chapter 13
38. Using the indirect method , a net increase in accounts receivable usually means that __________.
a.
Sales on account for the year are less than collections from customers
b.
Sales on account for the year are more than collections from customers
c.
Sales on account for the year are equal to collections from customers
d.
None of the above.
39. Refer to Indirect Method Instruction. A company sells land with a carrying value of $50,000 for
$75,000. What dollar amount, if any, is included in the investing activities section?
a.
No inclusion
b.
Add in $75,000 for cash received
c.
Subtract out $50,000 for cash paid
d.
Add in $25,000 for cash received
40. Refer to Indirect Method Instruction. A company sells equipment that cost $100,000 with
accumulated depreciation of $90,000 for $20,000. What dollar adjustment, if any, is made to net
income in the statement of cash flows?
a.
No inclusion
b.
Subtract out $10,000
c.
Add $20,000
d.
Add $100,000
41. Refer to Indirect Method Instruction. A company sells land with a carrying value of $50,000 for
$75,000. What adjustment is made to net income on the statement of cash flows?
a.
No adjustment this is part of investing activities
b.
Add $25,000
c.
Add $75,000
d.
Subtract $25,000
Statement of Cash Flows ♦ 619
42. Refer to Indirect Method Instruction. Dividends were declared of $20,000 and in addition,
dividends were paid of $10,000. What is the impact of these events on the statement of cash
flows?
a.
Subtract $20,000 in financing activities section
b.
Subtract $10,000 in financing activities section
c.
Subtract $30,000 in financing activities section
d.
None of the above
43. Refer to Indirect Method Instruction. A payment of dividends is a cash outflow that is reported
where in the statement of cash flows?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
Stockholders’ equity
44. Refer to Indirect Method Instruction. If 1,000 shares of $10 par common stock is sold for $25 per
share, what is the impact in the financing section of the statement of cash flows?
a.
$25 increase
b.
$10,000 increase
c.
$25,000 increase
d.
$15,000 increase
45. Refer to Indirect Method Instruction. If the bonds payable account decreased by $50,000 and this
was the only transaction in this account, what impact would there be in the statement of cash
flows?
a.
A subtraction in the financing section of $50,000
b.
A subtraction in the investing section of $50,000
c.
A subtraction in the operating section of $50,000
d.
None of the above
620 ♦ Chapter 13
Direct Method Instruction
The following questions generally relate to the direct method of preparing the statement of cash
flows.
46. Refer to Direct Method Instruction. If total sales for the year are $55,000, and accounts receivable
decreased by $15,000, how much is reported on the statement of cash flows as cash received from
customers?
a.
$55,000
b.
$15,000
c.
$40,000
d.
$70,000
47. Refer to Direct Method Instruction. $650,000 is reported in the income statement for cost of goods
sold. There was also a decrease in inventory of $10,000 on the balance sheet, and a decrease of
$20,000 in accounts payable. How much is the cash payment for merchandise?
a.
$680,000
b.
$660,000
c.
$620,000
d.
$630,000
48. Refer to Direct Method Instruction. $650,000 is reported in the income statement for cost of goods
sold. There was also a decrease in inventory of $10,000 on the balance sheet and an increase of
$20,000 in accounts payable. How much is the cash payment for merchandise?
a.
$680,000
b.
$660,000
c.
$620,000
d.
$630,000
49. Refer to Direct Method Instruction. If there is $10,000 of depreciation expense on the income
statement, how much is reported under the direct method?
a.
$10,000 subtraction
b.
$10,000 addition
c.
$20,000 addition
d.
Zero
Statement of Cash Flows ♦ 621
50. Refer to Direct Method Instruction. Under the direct method, if there is an increase in accrued
expenses, what is the effect on the statement of cash flows?
a.
No effect
b.
An increase
c.
A decrease
d.
Cannot determine from the information given
51. Refer to Direct Method Instruction. Under the direct method, if there is an increase in accrued
expenses, what is the effect on the cash payment for operating expenses?
a.
No effect
b.
An increase
c.
A decrease
d.
Cannot determine from the information given
52. Refer to Direct Method Instruction. Assume a corporation issued $100,000 of 10% bonds on
which interest is paid each June 30th and December 31st. What impact would this have on the
statement of cash flows?
a.
$10,000 outflow
b.
$5,000 outflow
c.
$10,000 inflow
d.
$5,000 inflow
53. Refer to Direct Method Instruction. If income tax expense on the income statement is $50,000,
and income taxes payable increased by $10,000 what is the impact on the statement of cash flows?
a.
$50,000 inflow
b.
$50,000 outflow
c.
$40,000 outflow
d.
$60,000 outflow
622 ♦ Chapter 13
54. One way to view noncash working capital efficiency is to view operations as a cycle from initial
purchase of inventory to the __________.
a.
Completion of finished goods
b.
Shipment of goods to customers
c.
Final collection upon sale
d.
None of the above
55. The number of days’ sales in accounts receivable + number of days’ sales in inventory + number of
days’ sales in accounts payable is __________.
a.
The supply chain
b.
Working capital efficiency
c.
Cash conversion cycle
d.
None of the above
56. “Free cash flow” is a measure of __________.
a.
Operating cash flow available for corporate purposes after providing sufficient fixed asset
additions to maintain current productive capacity and dividends.
b.
How much cash corporations rebate for purchase refunds
c.
The amount of cash in excess of the cost of capital
d.
The terminology for the amount of cash earned on short-term investments
57. A company had $250,000 cash flow from operating activities; invested in property, plant, and
equipment with $175,000; and paid $50,000 in dividends. How much was this company’s free cash
flow?
a.
$25,000
b.
$50,000
c.
$75,000
d.
$250,000
Statement of Cash Flows ♦ 623
58. When using the direct method of preparing the statement of cash flows, what else must be
prepared in a separate schedule?
a.
A reconciliation of the cash account to the bank account balance
b.
A reconciliation of income tax expense on the income statement to income tax expense on
the tax return
c.
A reconciliation of net income and net cash flow from operating activities
d.
None of the above
59. The cash conversion cycle and flow ratio measure the efficiency of using __________.
a.
Free cash flows
b.
Cash flow per share
c.
Noncash working capital for operations
d.
Noncash asset transactions
TRUE/FALSE
1. The statement of cash flows explains how a company generates and uses cash during an
accounting period.
2. The most important cash flows of a business often relate to operating activities.
3. The direct method of reporting cash flows from operating activities reports the sources of
operating cash and the uses of operating cash.
4. The primary advantage of the direct method is that the necessary data is readily available and easy
to gather for operating activities.
5. A major advantage of the indirect method is that it focuses on the differences between net income
and cash flows from operations.
624 ♦ Chapter 13
6. Cash flows from investing activities is different from the other sections in that cash outflows are
listed first.
7. The manner of reporting cash flows from investing and financing activities is the same under the
direct and indirect methods.
8. The indirect method of preparing the statement of cash flows is used by more companies than the
direct method.
9. When noncash investing and financing activities occur during a period, their effect is reported in a
separate schedule.
10. Cash flow per share is equal to the amount available for dividends.
11. It is usually more efficient to analyze the noncash balance sheet accounts in the reverse order in
which they appear on the balance sheet.
12. All changes in retained earnings will affect cash and be included on the statement of cash flows.
13. Under the direct method, one begins with net income and makes adjustments.
14. Some of the adjustments to net income for arriving at cash flow from operating activities are for
expenses that affect noncurrent accounts but NOT cash.
Statement of Cash Flows ♦ 625
15. Since income tax expense is a separate item on the income statement, income tax payable is NOT
an adjustment to net income on the statement of cash flows (indirect method).
16. When equipment is sold at a loss, the only impact on the statement of cash flows is in the
investing activity section if the indirect method is used.
17. The direct method of preparing the statement of cash flows reports cash flows from operating
activities by major classes of operating cash receipts and cash payments.
18. The direct method of preparing the statement of cash flows reports cash received from customers
in the operating activities by subtracting an increase in accounts receivable from sales.
19. The direct method of preparing the statement of cash flows reports cash payments for merchandise
in the operating activities by subtracting an increase in accounts payable and adding an increase in
inventories from the cost of goods sold.
20. Under the direct method a decrease in accounts payable indicates a cash outflow that is excluded
from cost of goods sold, and is added to the cost of merchandise sold in determining cash
payments.
21. The direct method of preparing the statement of cash flows reports cash payments for operating
expenses in the operating activities by subtracting an increase in accrued expenses from the
operating expenses other than depreciation on the income statement.
626 ♦ Chapter 13
22. The direct method of preparing the statement of cash flows reports gains by subtracting them in
the operating activities of the statement of cash flows.
23. The direct method of preparing the statement of cash flows adjusts interest expense by any
increase or decrease in interest payable in the operating activities of the statement of cash flows.
24. The direct method of preparing the statement of cash flows adjusts income tax expense by
subtracting a decrease in income taxes payable in the operating activities of the statement of cash
flows.
25. Using the direct method, the net change in cash would be $35,000 increase if cash received from
customers was $1,000,000, cash payments for merchandise was $750,000, cash payments for
operating expenses was $140,000, cash payments for interest was $2,000, and cash payments for
income taxes was 24,000, depreciation was $24,000, and a gain on the sale of land was $25,000.
Statement of Cash Flows ♦ 627
PROBLEM
1. Name the three primary areas in the statement of cash flows and their main purpose.
2. Describe the main differences between the direct and indirect methods of preparing the statement
of cash flows. Are there advantages or disadvantages to these approaches? If so, what are they?
628 ♦ Chapter 13
YeeHaw Corporation
YeeHaw Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash Flows from Operating Activities
Net Income
$111,000
Adjustments to Reconcile Net Income to Net
Cash Flows from Operating Activities
Depreciation Expense
$ 55,800
Gain on Sale of Furniture and Fixtures
(7,000)
Changes in Current Assets and
Current Liabilities
Decrease in Accounts Receivable
24,800
Decrease in Merchandise Inventory
103,000
Decrease in Prepaid Rent
1,000
Decrease in Accounts Payable
(57,000)
Decrease in Income Taxes Payable
(5,000)
115,600
Net Cash Flows from Operating Activities
$226,600
Cash Flows from Investing Activities
Sale of Furniture and Fixtures
$ 23,800
Purchase of Furniture and Fixtures
(39,600)
Net Cash Flows from Investing Activities
(15,800)
Cash Flows from Financing Activities
Repayment of Notes Payable
($ 30,000)
Issue of Notes Payable
54,000
Dividends Paid
(6,000)
Net Cash Flows from Financing Activities
18,000
Net Increase (Decrease) in Cash
$228,800
Cash at Beginning of Year
50,000
Cash at End of Year
$278,800
Schedule of Non-cash Investing and Financing Transactions:
Conversion of Bonds Payable into Common Stock
$200,000