The Statement of Cash Flows

MULTIPLE CHOICE

1. A gain on the sale of a plant asset in the ordinary course of business should be presented in a
statement of cash flows prepared using the indirect method as
a. a cash inflow from investing activities.
b. a cash inflow from financing activities.
c. an addition to net income.
d. a deduction from net income.

2. In a statement of cash flows prepared using the direct method, if wages payable increased during the
year, the cash paid for wages would be
a. the same as salary expense.
b. salary expense plus wages payable at the beginning of the year.
c. salary expense plus the increase in wages payable from the beginning to the end of
the year.
d. salary expense less the increase in wages payable from the beginning to the end of
the year.

3. In a statement of cash flows using the direct method, which of the following would increase reported
cash flows from operating activities?
a. Dividends received from investments
b. Gain on sale of equipment
c. Gain on sale of a business segment
d. Sale of treasury stock

4. In a statement of cash flows, payments to acquire debt instruments of other entities would typically be
classified as cash outflows for
a. financing activities.
b. investing activities.
c. operating activities.
d. equity activities.

5. In a statement of cash flows, if equipment is sold at a gain, the amount shown as a cash inflow from
investing activities equals the carrying amount of the equipment
a. with no addition or subtraction.
b. plus the gain and less the amount of tax attributable to the gain.
c. plus both the gain and the amount of tax attributable to the gain.
d. plus the gain only.
6. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash
inflows from
a. brokerage activities.
b. financing activities.
c. investing activities.
d. operating activities.

7. When preparing a statement of cash flows using the indirect method, the amortization of trademarks
should be reported as a(n)
a. increase in cash flows from investing activities.
b. reduction in cash flows from investing activities.
c. increase in cash flows from operating activities.
d. reduction in cash flows from operating activities.

8. A loss on the sale of machinery in the ordinary course of business should be presented in a statement
of cash flows (indirect method) as
a. a deduction from net income.
b. an addition to net income.
c. an inflow and outflow of cash.
d. an outflow of cash

9. When preparing a statement of cash flows using the direct method, amortization of goodwill is
a. shown as an increase in cash flows from operating activities.
b. shown as a reduction in cash flows from operating activities.
c. included with supplemental disclosures of noncash transactions.
d. not reported in the statement of cash flows or related disclosures.

10. In preparing a statement of cash flows (indirect method), cash flows from operating activities
a. is calculated as the difference between revenues and expenses plus the beginning
cash balance.
b. is always equal to the sum of cash flows from investing activities and cash flows from
financing activities.
c. can be calculated by appropriately adding to or deducting from net income those
items in the income statement that affect cash and accruals for current assets and
current liabilities.
d. can be calculated by appropriately adding to or deducting from net income those
items in the income statement that do not affect cash.

11. In preparing a statement of cash flows, which of the following transactions would be considered an
investing activity?
a. Sale of a business segment
b. Issuance of bonds payable at a discount
c. Purchase of treasury stock
d. Sale of capital stock

12. In a statement of cash flows (indirect method), depreciation is treated as an adjustment to reported
net income because depreciation
a. reduces the reported net income but does not involve an outflow of cash.
b. reduces the reported net income and involves an inflow of cash.
c. is an inflow of cash to a reserve account for asset replacement.
d. usually represents a significant portion of operating expenses.
13. Cash equivalents would not include short-term investments in
a. money market funds.
b. available-for-sale securities.
c. commercial paper.
d. certificates of deposit.

14. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be
classified as a(n)
a. transfer activity.
b. operating activity.
c. investing activity.
d. financing activity.

15. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified
as cash inflows from
a. liquidating activities.
b. operating activities.
c. investing activities.
d. financing activities.

16. A decrease in accounts receivable should be presented in a statement of cash flows (indirect method)
as
a. an inflow and outflow of cash.
b. an outflow of cash.
c. a deduction from net income.
d. an addition to net income.

17. Which of the following statements regarding cash equivalents is correct?

a. A one-year Treasury note could not qualify as a cash equivalent.
b. All investments meeting the FASB's criteria for cash equivalents must be reported as
such.
c. The date a security is purchased determines its "original maturity" for cash
equivalent classification purposes.
d. Once established, management's policy for classifying items as cash equivalents
cannot be changed.
18. Using the indirect method, cash flows from operating activities would be increased by which of the
following?
a. Gain on sale of investments
b. Increase in prepaid expenses
c. Decrease in accounts payable
d. Decrease in accounts receivable

19. Cash inflows from investing result from

a. decreases in liabilities.
b. increases in liabilities.
c. decreases in noncash assets.
d. increases in noncash assets

20. In a statement of cash flows, proceeds from the sale of a company's own bonds or mortgages should be
classified as cash inflows from
a. leveraging activities.
b. operating activities.
c. investing activities.
d. financing activities.

21. Which of the following would not be classified as an operating activity?

a. Interest income
b. Income tax expense
c. Dividend income
d. Payment of dividends

22. Cash flows from investing activities would be decreased by which of the following?
a. Issuance of bonds
b. Issuance of common stock
c. Purchase of long-term investments
d. Payment of dividends

23. In a statement of cash flows, payments to acquire bonds or mortgages of other entities should be
classified as cash outflows for
a. lending activities.
b. operating activities.
c. investing activities.
d. financing activities.

24. In a statement of cash flows (indirect method), an increase in inventories should be presented as
a. an inflow of cash.
b. an inflow and outflow of cash.
c. an addition to net income.
d. a deduction from net income from continuing operations.

25. Patriot Corporation purchased a 3-month U.S. Treasury bill. In preparing Patriot's statement
of cash flows, this purchase would
a. have no effect.
b. be treated as an outflow from operating activities.
c. be treated as an outflow from investing activities.
d. be treated as an outflow from financing activities.
26. Which of the following would be an addition to net income when using the indirect method to derive
net cash flows from operating activities?
a. Payment of cash dividends
b. Decrease in accounts payable
c. Increase in merchandise inventory
d. Loss on sale of machinery and equipment

27. Which of the following would be an example of an investing activity?

a. Issuance of long-term bonds
b. Issuance of common stock
c. Payment of cash dividends
d. Sale of plant assets

28. In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
a. borrowing activities.
b. operating activities.
c. investing activities.
d. financing activities.

29. In a statement of cash flows, which of the following would increase reported cash flows from operating
activities using the direct method?
a. Collection of a note receivable
b. Dividends received from investments
c. Gain on purchase of treasury stock
d. Gain on sale of equipment

30. Which of the following would be subtracted from net income when using the indirect method to derive
net cash flows from operating activities?
a. Decrease in salaries and wages payable
b. Loss on sale of investments
c. Decrease in net accounts receivable
d. Depreciation expense
31. Cash flows from financing activities would be reduced by which of the following?
a. Purchase of inventory
b. Repayment of long-term debt
c. Purchase of machinery
d. Payment of interest

32. Noncash investing and financing activities, if material, are

a. reported in the statement of cash flows under the "all-financial-resources concept."
b. reported in the statement of cash flows only if the indirect method is used.
c. disclosed in a note or separate schedule accompanying the statement of cash flows.
d. not reported or disclosed because they have no impact on cash.

33. Supplemental disclosures required only when the statement of cash flows is prepared using the
indirect method include
a. a schedule reconciling net income with net cash provided by (used in) operating
activities.
b. amounts paid for interest and taxes.
c. amounts deducted for depreciation and amortization.
d. significant noncash investing and financing activities.

34. The most likely situation in which reported earnings are positive, but operations are consuming rather
than generating cash would be:
a. a rapidly growing company.
b. a company reporting large noncash expenses.
c. a company using very conservative accounting standards
that lower earnings.
d. a company paying large cash dividends to its shareholders.

35. Which of the following is true?

a. The FASB requires dividends paid to be classified as an operating activity.
b. The FASB requires interest paid to be classified as a financing activity.
c. The FASB allows dividends paid to be classified as an operating activity or as a
financing activity.
d. The IASC allows dividends paid to be classified as an operating activity or as a
financing activity.

36. Which of the following is true?

a. The IASC requires eight cash flow categories.
b. The Accounting Standards Board of the United Kingdom requires eight cash flow
categories.
c. The IASC does not specifically require a fixed number of cash flow categories.
d. The Accounting Standards Board of the United Kingdom requires three cash flow
categories.

37. Cotton Corp. reported net income of $420,000 for 2005. Changes occurred in several balance sheet
accounts as follows:

Equipment ................................. $35,000 increase

Accumulated depreciation .................. 56,000 increase
Note payable .............................. 42,000 increase
 Additional information:
· During 2005, Cotton sold equipment costing $35,000, with accumulated
depreciation of $16,800, for a gain of $7,000.
· In December 2005, Cotton purchased equipment costing $70,000 with $28,000
cash and a 12% note payable of $42,000.
· Depreciation expense for the year was $72,800.

In Cotton's 2005 statement of cash flows, net cash used in investing activities should be
a. $2,800.
b. $16,800.
c. $30,800.
d. $49,000.

38. The following information was taken from the 2005 financial statements of Winchester Corporation:

Accounts receivable, January 1, 2005 ................. $ 108,000

Accounts receivable, December 31, 2005 ............... 152,000
Sales on account and cash sales ...................... 2,190,000
Uncollectible accounts ............................... 5,000

No accounts receivable were written off or recovered during the year. If Winchester prepares a
statement of cash flows using the direct method, what amount should be reported as collected from
customers in 2005?
a. $2,239,000
b. $2,234,000
c. $2,146,000
d. $2,141,000

39. Rose Corporation reported net income of $420,000 for 2005. Changes occurred in several balance
sheet accounts as follows:

Equipment ................................. $35,000 increase

Accumulated depreciation .................. 56,000 increase
Note payable .............................. 42,000 increase

Additional information:
· During 2005, Rose sold equipment costing $35,000, with accumulated
depreciation of $16,800, for a gain of $7,000.
· In December 2005, Rose purchased equipment costing $70,000 with $28,000
cash and a 12% note payable of $42,000.
· Depreciation expense for the year was $72,800.

In Rose's 2005 statement of cash flows, net cash provided by operating activities should be
a. $476,000.
b. $485,800.
c. $492,800.
d. $499,800.

40. In its accrual basis income statement for the year ended December 31, 2005, Nelson Company
reported revenue of $3,500,000. Additional information is as follows:
 Accounts receivable--December 31, 2004 ............... $ 750,000
Net income for 2005 .................................. 140,000
Accounts receivable--December 31, 2005 ............... 1,010,000

Nelson should report cash collected from customers in its 2005 statement of cash flows (direct
method) in the amount of
a. $3,240,000.
b. $3,100,000.
c. $3,380,000.
d. $3,760,000.

41. Dicksen Company's income statement for the year ended December 31, 2005, reported net income of
$360,000. The financial statements also disclosed the following information:

Amortization ......................................... $ 20,000

Depreciation ......................................... 60,000
Increase in accounts receivable ...................... 140,000
Increase in inventory ................................ 48,000
Decrease in accounts payable ......................... 76,000
Increase in salaries payable ......................... 28,000
Dividends paid ....................................... 120,000
Purchase of equipment ................................ 150,000
Increase in long-term note payable ................... 300,000

Net cash provided by operating activities for 2005 should be reported as

a. $84,000.
b. $204,000.
c. $234,000.
d. $324,000.

42. The following information is available from the financial statements of Worthington Corporation for
the year ended December 31, 2005:

Net income .......................................... $396,000

Depreciation expense ................................ 102,000
Decrease in accounts receivable ..................... 126,000
Increase in inventories ............................. 90,000
Increase in accounts payable ........................ 24,000
Payment of dividends ................................ 54,000
Purchase of available-for-sale securities ........... 22,000
Decrease in income taxes payable .................... 16,000

What is Worthington Corporation's net cash flow from operating activities?

a. $440,000
b. $466,000
c. $520,000
d. $542,000

43. The following information is available from Ram Corporation's accounting records for the year ended
December 31, 2005:
Cash paid to suppliers and employees ................ $1,020,000
Cash dividends paid ................................. 60,000
Cash received from customers ........................ 1,740,000
Rent received ....................................... 20,000
Taxes paid .......................................... 220,000
 Net cash flow provided by operating activities for 2005 was
a. $440,000.
b. $460,000.
c. $500,000.
d. $520,000.

44. Detmer Company's prepaid rent was $40,000 at December 31, 2005, and $15,000 at December 31,
2004. Detmer's income statement for 2005 reported rent expense as $10,000. What amount of cash
disbursements for rent would be reported in Detmer's net cash flows from operating activities for
2005 presented on a direct basis?
a. $10,000
b. $20,000
c. $35,000
d. $45,000

45. Pecan Company sold a computer for $50,000. The computer's original cost was $250,000, and the
accumulated depreciation at the date of sale was $180,000. The sale of the computer should appear on
Pecan's annual statement of cash flows (indirect method) as
a. a reduction in cash flows from operating activities of $20,000 and an increase in cash
flows from investing activities of $50,000.
b. an increase in cash flows from operating activities of $20,000 and an increase in cash
flows from investing activities of $50,000.
c. a reduction in cash flows from operating activities of $20,000 and an increase in cash
flows from investing activities of $70,000.
d. an increase in cash flows from operating activities of $20,000 and an increase in cash
flows from investing activities of $70,000.

46. Hale Inc. declared and paid cash dividends of $100,000 on common stock and $75,000 on preferred
stock. How would these dividends be presented in Hale's statement of cash flows?
a. As a $100,000 reduction in cash flows from investing activities.
b. As a $175,000 reduction in cash flows from investing activities.
c. As a $100,000 reduction in cash flows from financing activities.
d. As a $175,000 reduction in cash flows from financing activities.

47. During 2005, Lewis Corp. acquired buildings for $325,000, paying $75,000 cash and signing a 10%
mortgage note payable in 10 years for the balance. How should the transaction be shown in the cash
flow statement for Lewis in 2005?
a. As a $325,000 reduction in cash flows from investing activities and a $250,000
increase in cash flows from financing activities.
b. As a $325,000 reduction in cash flows from investing activities.
c. As a $75,000 reduction in cash flows from investing activities.
d. As a $250,000 increase in cash flows from financing activities.

48. Stiggins Corporation had the following account balances for 2005:

December 31 January 1
Accounts Payable ...................... $67,200 $58,200
Prepaid Rent Expense .................. 24,600 37,200
Accounts Receivable (net) ............. 84,000 66,600
 Stiggins' 2005 net income is $450,000. What amount should Stiggins include as net cash provided by
operating activities in its 2005 statement of cash flows?
a. $436,200
b. $445,200
c. $453,600
d. $454,200

49. Chow Company's 2005 income statement reported cost of goods sold as $135,000. Additional
information is as follows:

December 31, 2005 December 31, 2004

Inventory ................. $30,000 $22,500
Accounts Payable .......... 13,000 19,500

If Chow uses the direct method, what amount should Chow report as cash paid to suppliers in its 2005
statement of cash flows?
a. $121,000
b. $134,000
c. $136,000
d. $149,000

50. Frye Company uses the direct method to prepare its statement of cash flows. The company had the
following cash flows during 2005:

Cash receipts from the issuance of common stock ......... $400,000

Cash receipts from customers ............................ 200,000
Cash receipts from dividends on long-term investments ... 30,000
Cash receipts from repayment of loan made to another 220,000
company ...............................................
Cash payments for wages and other operating expenses .... 120,000
Cash payments for insurance ............................. 10,000
Cash payments for dividends ............................. 20,000
Cash payments for taxes ................................. 40,000
Cash payment to purchase land ........................... 80,000

The net cash provided by (used in) operating activities is

a. $60,000.
b. $40,000.
c. $30,000.
d. $(20,000).

51. Frye Company uses the direct method to prepare its statement of cash flows. The company had the
following cash flows during 2005:

Cash receipts from the issuance of common stock ......... $400,000

Cash receipts from customers ............................ 200,000
Cash receipts from dividends on long-term investments ... 30,000
Cash receipts from repayment of loan made to another 220,000
company ...............................................
Cash payments for wages and other operating expenses .... 120,000
Cash payments for insurance ............................. 10,000
Cash payments for dividends ............................. 20,000
Cash payments for taxes ................................. 40,000
Cash payment to purchase land ........................... 80,000
 The net cash provided by (used in) investing activities is
a. $220,000.
b. $140,000.
c. $60,000.
d. $(80,000).

52. Frye Company uses the direct method to prepare its statement of cash flows. The company had the
following cash flows during 2005:

Cash receipts from the issuance of common stock ......... $400,000

Cash receipts from customers ............................ 200,000
Cash receipts from dividends on long-term investments ... 30,000
Cash receipts from repayment of loan made to another 220,000
company ...............................................
Cash payments for wages and other operating expenses .... 120,000
Cash payments for insurance ............................. 10,000
Cash payments for dividends ............................. 20,000
Cash payments for taxes ................................. 40,000
Cash payment to purchase land ........................... 80,000

The net cash provided by (used in) all activities is

a. $580,000.
b. $410,000.
c. $380,000.
d. $(60,000).