File: ch12, Chapter 12: Statement of Cash Flows

Multiple Choice

1. Which of the following is incorrect about the statement of cash flows?

a) It is a fourth basic financial statement.
b) It provides information about cash receipts and cash payments of an entity during a period.
c) It reconciles the ending cash account balance to the balance per the bank statement.
d) It provides information about the operating, investing, and financing activities of the business.

Ans: c
Response A: The statement is a fourth basic financial statement in addition to the balance sheet, income
statement and statement of retained earnings.
Responses B: This is an accurate statement about the statement of cash flows.
Response C: Correct!
Response D: This is an accurate statement about the statement of cash flows.

2. The statement of cash flows classifies cash receipts and cash payments by these activities:
a) operating and nonoperating.
b) investing, financing, and operating.
c) financing, operating, and nonoperating.
d) investing, financing, and nonoperating.

Ans: b
Response A: Operating, investing, and financing are the three classifications of cash payments and cash
receipts used in the statement of cash flows.
Response B: Correct!
Response C: Operating, investing, and financing are the three classifications of cash payments and cash
receipts used in the statement of cash flows.
Response D: Operating, investing, and financing are the three classifications of cash payments and cash
receipts used in the statement of cash flows.

3. Which is an example of a cash flow from an operating activity?

a) Payment of cash to lenders for interest.
b) Receipt of cash from the sale of capital stock.
c) Payment of cash dividends to the company’s stockholders.
d) None of the above.

Ans: a
Response A: Correct!
Response B: Receipt of cash from the sale of capital stock is a financing activity.
Response C: Payment of cash dividends to the company’s stockholders is a financing activity.
Response D: Since answer a is correct, this answer cannot be correct.

4. Which is an example of a cash flow from an investing activity?

a) Receipt of cash from the issuance of bonds payable.
b) Payment of cash to repurchase outstanding capital stock.
c) Receipt of cash from the sale of equipment.
d) Payment of cash to suppliers for inventory.

Ans: c
Response A: The receipt of cash from the issuance of bonds payable is a financing activity.
Response B: Payment of cash to repurchase outstanding capital stock is a financing activity.
Response C: Correct!
Response D: Payment of cash to suppliers for inventory is a cash flow from an operating activity.

5. Cash dividends paid to stockholders are classified on the statement of cash flows as:
a) operating activities.
b) investing activities.
c) a combination of a) and b).
d) financing activities.

Ans: d
Response A: Payment of cash dividends to stockholders is classified as a financing activity, not an
operating activity on the statement of cash flows.
Response B: Payment of cash dividends to stockholders is classified as a financing activity, not an
investing activity on the statement of cash flows.
Response C: Payment of cash dividends to stockholders is classified as a financing activity on the
statement of cash flows.
Response D: Correct!

6. Which is an example of a cash flow from a financing activity?

a) Receipt of cash from sale of land.
b) Issuance of debt for cash.
c) Purchase of equipment for cash.
d) None of the above

Ans: b
Response A: The receipt of cash for the sale of land is an investing activity.
Response B: Correct!
Response C: The purchase of equipment for cash is an investing activity.
Response D: Since letter b is correct, this answer cannot be correct.

7. Which of the following is incorrect about the statement of cash flows?

a) The direct method may be used to report cash provided by operations.
b) The statement shows the cash provided (used) for three categories of activity.
c) The operating section is the last section of the statement.
d) The indirect method may be used to report cash provided by operations.

Ans: c
Response A: When preparing the operating section of the statement of cash flows, either the direct or
indirect method may be used.
Response B: This is a true statement about the statement of cash flows.
Response C: Correct!
Response D: When preparing the operating section of the statement of cash flows, either the direct or
indirect method may be used.

8. During the introductory phase of a company’s life cycle, one would normally expect to see:
a) negative cash from operations, negative cash from investing, and positive cash from financing.
b) negative cash from operations, positive cash from investing, and positive cash from financing.
c) positive cash from operations, negative cash from investing, and negative cash from financing.
d) positive cash from operations, negative cash from investing, and positive cash from financing.

Ans: a
Response A: Correct!
Response B: During the introductory phase of a company’s life cycle, the company will most likely
finance its operations and investing through borrowing or the issuance of stock. This means negative
cash from operations and investing and positive cash from financing.
Response C: During the introductory phase of a company’s life cycle, the company will most likely
finance its operations and investing through borrowing or the issuance of stock. This means negative
cash from operations and investing and positive cash from financing.
Response D: During the introductory phase of a company’s life cycle, the company will most likely
finance its operations and investing through borrowing or the issuance of stock. This means negative
cash from operations and investing and positive cash from financing.

9. In regard to the indirect method only, net income is $132,000, accounts payable increased $10,000
during the year, inventory decreased $6,000 during the year, and accounts receivable increased $12,000
during the year. Under the indirect method, what is net cash provided by operations?
a) $102,000.
b) $112,000.
c) $124,000.
d) $136,000.

Ans: d
Response A: Net cash provided by operating activities is computed by adjusting net income for the
changes in the three current asset/current liability accounts listed. An increase in accounts payable and a
decrease in inventory are added to net income and an increase in accounts receivable is subtracted from
net income. The result is as follows: $132,000 + $10,000 + $6,000 - $12,000 = $136,000.
Response B: Net cash provided by operating activities is computed by adjusting net income for the
changes in the three current asset/current liability accounts listed. An increase in accounts payable and a
decrease in inventory are added to net income and an increase in accounts receivable is subtracted from
net income. The result is as follows: $132,000 + $10,000 + $6,000 - $12,000 = $136,000.
Response C: Net cash provided by operating activities is computed by adjusting net income for the
changes in the three current asset/current liability accounts listed. An increase in accounts payable and a
decrease in inventory are added to net income and an increase in accounts receivable is subtracted from
net income. The result is as follows: $132,000 + $10,000 + $6,000 - $12,000 = $136,000.
Response D: Correct!

10. Items that are added back to net income in determining cash provided by operations under the
indirect method do not include:
a) depreciation expense.
b) an increase in inventory.
c) amortization expense.
d) loss on sale of equipment.

Ans: b
Response A: Depreciation expense is an example of a noncash charge that is added back to net income
in determining cash provided by operations under the indirect method.
Response B: Correct!
Response C: Amortization expense is an example of a noncash charge that is added back to net income
in determining cash provided by operations under the indirect method.
Response D: A loss on the sale of equipment is an example of a noncash charge that is added back to net
income in determining cash provided by operations under the indirect method.

11. The statement of cash flows should not be used to evaluate an entity’s ability to:
a) earn net income.
b) generate future cash flows.
c) pay dividends.
d) meet obligations.

Ans: a
Response A: Correct!
Response B: The statement of cash flows should be used in an evaluation of an entity’s ability to
generate future cash flows.
Response C: The statement of cash flows should be used in an evaluation of an entity’s ability to pay
dividends.
Response D: The statement of cash flows should be used in an evaluation of an entity’s ability to meet
obligations.

12. Free cash flow provides an indication of a company’s ability to:

a) generate net income.
b) generate cash to pay dividends.
c) generate cash to invest in new capital expenditures.
d) both b) and c).

Ans: d
Response A: Other measures besides free cash flow provide the best measure of a company’s ability to
earn net income.
Response B: Free cash flow does provide an indication of a company’s ability to generate cash to pay
dividends, but d is a better answer.
Response C: Free cash flow does provide an indication of a company’s ability to generate cash to invest
in new capital expenditures, but d is a better answer.
Response D: Correct!

*13. In regard to the direct method only, the beginning balance in accounts receivable is $44,000, the
ending balance is $42,000, and sales during the period are $129,000. What are cash receipts from
customers?
a) $127,000.
b) $129,000.
c) $131,000.
d) $141,000.

Ans: c
Response A: The ending balance of accounts receivable should be subtracted from sales because while
sales have occurred, the cash has not yet been collected. The beginning balance of accounts receivable
should be added to sales since it represents cash collected that is not included in sales This results in
cash collections of $129,000 - $42,000 + $44,000 = $131,000.
Response B: The ending balance of accounts receivable should be subtracted from sales because while
sales have occurred, the cash has not yet been collected. The beginning balance of accounts receivable
should be added to sales since it represents cash collected that is not included in sales This results in
cash collections of $129,000 - $42,000 + $44,000 = $131,000.
Response C: Correct!
Response D: The ending balance of accounts receivable should be subtracted from sales because while
sales have occurred, the cash has not yet been collected. The beginning balance of accounts receivable
should be added to sales since it represents cash collected that is not included in sales This results in
cash collections of $129,000 - $42,000 + $44,000 = $131,000.

*14. Which of the following items is reported on a cash flow statement prepared by the direct method?
a) Loss on sale of building.
b) Increase in accounts receivable.
c) Depreciation expense.
d) Cash payments to suppliers.

Ans: d
Response A: Loss on the sale of a building is reported in the operating activities section of the statement
of cash flows when the indirect method is used.
Response B: An increase in accounts receivable is reported in the operating activities section of the
statement of cash flows when the indirect method is used.
Response C: Depreciation expense is reported in the operating activities section of the statement of cash
flows when the indirect method is used.
Response D: Correct!