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Cash Flow Statement (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Cash Flow Statement (Explanation).


For all questions assume that the indirect method is used.

There are four parts to the statement of cash flows (or cash flow statement):

  • Operating activities
  • Investing activities
  • Financing activities
  • Supplemental disclosures

For items 1-18, indicate which part will be affected.

1.

Depreciation Expense.

Operating

Right!
Depreciation is added back to net income in the operating activities section because the company's net income was reduced by the depreciation expense shown on the income statement; however, the company's cash was not reduced by depreciation expense. (Accordingly depreciation expense is referred to as a non-cash expense.)

Investing

Wrong.
Depreciation expense appears in the operating activities section.

Financing

Wrong.
Depreciation expense appears in the operating activities section.

Supplemental

Wrong.
Depreciation expense appears in the operating activities section.
2.

Proceeds from the sale of equipment used in the business.

Operating

Wrong.
The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Investing

Right!
The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Financing

Wrong.
Financing activities involve long-term liabilities and stockholders equity. The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Supplemental

Wrong.
The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.
3.

The Loss on the Sale of Equipment in Question #2.

Operating

Right!
The loss (computed as proceeds minus the book value) appeared on the income statement and reduced the company's net income. However, the company's cash did not decrease. (Actually the company's cash increased by the amount received for the asset.) You need to add back the loss that reduced net income on the income statement so that the amount reflects the cash from operating activities.

Investing

Wrong.
The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.

Financing

Wrong.
The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.
4.
Declaration and payment of dividends on company's stock.

Operating

Wrong.
Dividends declared/paid are shown in the financing activities section.

Investing

Wrong.
Dividends declared/paid are shown in the financing activities section.

Financing

Right!
Dividends cause stockholders' equity and cash to decrease. Changes in long-term liabilities and stockholders' equity are shown in the financing activities section of the statement of cash flows.

Supplemental

Wrong.
Dividends declared/paid are shown in the financing activities section.
5.
Gain on the Sale of Automobile formerly used in the business.

Operating

Right!
The gain (computed as proceeds minus the book value) appeared on the income statement and increased the company's net income. However, the entire proceeds from the sale of a company's assets are shown in the investing section. In order to avoid double-counting the gain, the gain must be subtracted from the net income amount appearing in the operating activities section of the statement of cash flows.

Investing

Wrong.
The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.

Financing

Wrong.
The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.

Supplemental

Wrong.
The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.
6.
The proceeds from the sale of the automobile in Item #5.

Operating

Wrong.
The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Investing

Right!
The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Financing

Wrong.
The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Supplemental

Wrong.
The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)
7.
An increase in the balance in a retailer's Merchandise Inventory.

Operating

Right!
Merchandise Inventory is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows. An increase in Merchandise Inventory will be shown as a deduction in the cash from the operating activities section.

Investing

Wrong.
Merchandise Inventory is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Financing

Wrong.
Merchandise Inventory is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
Merchandise Inventory is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.
8.
An increase in the balance in Accounts Payable.

Operating

Right!
Accounts Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows. An increase in Accounts Payable will be shown as an increase in the cash from operating activities.

Investing

Wrong.
Accounts Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.

Financing

Wrong.
Accounts Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
Accounts Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.
9.
Retirement of long-term Bonds Payable.

Operating

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Investing

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Financing

Right!
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section. A decrease in Bonds Payable will be shown as a decrease in cash from financing activities.

Supplemental

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.
10.
Purchase of Treasury Stock (company's own stock).

Operating

Wrong.
The purchase of treasury stock results in a decrease in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.

Investing

Wrong.
The purchase of treasury stock results in a decrease in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.

Financing

Right!
The purchase of treasury stock results in a decrease in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows. The purchase of Treasury Stock will cause a decrease in cash from financing activities.

Supplemental

Wrong.
The purchase of treasury stock results in a decrease in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.
11.
The purchase of a new delivery truck to be used in the business.

Operating

Wrong.
The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows.

Investing

Right!
The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows. The purchase of a delivery truck will cause a decrease in cash from investing activities.

Financing

Wrong.
The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows.

Supplemental

Wrong.
The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows.
12.
A decrease in the balance of Accounts Receivable.

Operating

Right!
Accounts Receivable is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows. A decrease in the Accounts Receivable will appear as an increase in cash from operating activities.

Investing

Wrong.
Accounts Receivable is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Financing

Wrong.
Accounts Receivable is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
Accounts Receivable is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.
13.
An increase in Bonds Payable (a long-term liability).

Operating

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Investing

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Financing

Right!
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section. An increase in Bonds Payable will be reported as a increase in cash from financing activities.

Supplemental

Wrong.
Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.
14.
A decrease in the current asset account Prepaid Insurance.

Operating

Right!
Prepaid Insurance is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows. A decrease in Prepaid Insurance will be reported as an increase in cash from operating activities.

Investing

Wrong.
Prepaid Insurance is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Financing

Wrong.
Prepaid Insurance is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
Prepaid Insurance is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows.
15.
A decrease in the current liability Income Taxes Payable.

Operating

Right!
Income Taxes Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows. A decrease in a current liability will be reported as a decrease in cash from operating activities.

Investing

Wrong.
Income Taxes Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.

Financing

Wrong.
Income Taxes Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.

Supplemental

Wrong.
Income Taxes Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows.
16.
The proceeds from issuing additional Common Stock.

Operating

Wrong.
The issuance of common stock results in an increase in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.

Investing

Wrong.
The issuance of common stock results in an increase in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.

Financing

Right!
The issuance of common stock results in an increase in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows. The proceeds from the issuance of common stock will be reported as an increase in cash from financing activities.

Supplemental

Wrong.
The issuance of common stock results in an increase in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows.
17.
The amortization of the cost of an intangible asset.

Operating

Right!
Amortization of the cost of an intangible asset is added back to net income in the operating activities section because the company's net income was reduced by the amortization expense shown on the income statement; however, the company's cash was not reduced by amortization expense. (Accordingly amortization expense is referred to as a non-cash expense.)

Investing

Wrong.
Amortization expense appears in the operating activities section.

Financing

Wrong.
Amortization expense appears in the operating activities section.

Supplemental

Wrong.
Amortization expense appears in the operating activities section.
18.
The exchange/conversion of long-term bonds into common stock.

Operating

Wrong.
The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Investing

Wrong.
The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Financing

Wrong.
The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Supplemental

Right!
The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

For items 19 – 30 indicate whether they will have a positive or negative EFFECT ON CASH.

A positive effect could also be thought of as a source of cash, an increase in cash, or a positive amount on the cash flow statement.

A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative amount on the cash flow statement.

19.
An increase in the balance of Prepaid Insurance.

Positive

Wrong.
Prepaid Insurance is a current asset. An increase in any asset account balance (other than Cash) is assumed to have used Cash or decreased Cash. Both of these are considered to have a negative effect on Cash.

Negative

Right!
Prepaid Insurance is a current asset. An increase in any asset account balance (other than Cash) is assumed to have used Cash or decreased Cash. Both of these are considered to have a negative effect on Cash.

[Because Prepaid Insurance is a current asset, the decrease in Cash appears in the operating activities section of the statement of cash flows.]
20.
A decrease in Supplies on hand.

Positive

Right!
Supplies (on Hand) is a current asset account. A decrease in any asset account balance (other than Cash) is assumed to be a source of Cash, provided Cash, increased Cash, or have used less Cash than the amount of Supplies Expense shown on the income statement. All of these are considered to have a positive effect on Cash.

[Because Supplies is a current asset, the increase in Cash will appear in the operating activities section of the statement of cash flows.]

Negative

Wrong.
Supplies (on Hand) is a current asset account. A decrease in any asset account balance (other than Cash) is assumed to be positive for the company's Cash account. Also see the Positive answer.
21.
The proceeds from the sale of equipment formerly used in the business.

Positive

Right!
Equipment is a long-term asset. A decrease in any asset account (other than Cash) is assumed to be a source of Cash, provided Cash, or increased Cash. All of these are positive effects on Cash.

[The entire proceeds from the sale of the equipment will be shown in the investing activities section of the statement of cash flows.]

Negative

Wrong.
Equipment is a long-term asset. A decrease in any asset account (other than Cash) is assumed to be a source of Cash, provided Cash, or increased Cash. All of these are positive effects on Cash.
22.
The Loss on the Sale of Equipment in the previous question.

Positive

Right!
The Loss on the Sale of Equipment caused a decrease to the net income amount on the income statement. However, there was no decrease in Cash for this loss. Therefore, we need to add back (show an increase) to the net income amount appearing in the operating activities section.

Negative

Wrong.
23.
An increase in the current liability Income Taxes Payable.

Positive

Right!
Income Taxes Payable is a current liability. An increase in any liability account (or in stockholders' equity) is assumed to increase Cash or at least be favorable from a Cash point of view. If Income Taxes Payable increased, the company did not pay the entire amount of Income Tax Expense shown on the income statement. Since the starting point in the operating activities section is net income, you add back the increase in Income Taxes Payable.

To assist in understanding the increase or decrease, you could substitute 'favorable effect on Cash' for increases in liabilities. (Substitute 'negative effect on Cash' for decreases in liabilities.) If a payable increases, it means the company did NOT pay all of the bills and that has a favorable effect on Cash.

Another way to remember the effect is that the effect on Cash will be the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount/effect on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount/effect on the SCF.

[Because Income Taxes Payable is a current liability, the change will be shown in the operating activities section of the SCF.]

Negative

Wrong.
Income Taxes Payable is a current liability. An increase in any liability account (or in stockholders' equity) is assumed to increase Cash or at least be favorable from Cash point of view. If Income Taxes Payable increased, the company did not pay the entire amount of Income Tax Expense shown on the income statement. Since the starting point in the operating activities section is net income, you add back the increase in Income Taxes Payable.

To assist in understanding the increase or decrease, you could substitute 'favorable effect on Cash' for increases in liabilities. (Substitute 'negative effect on Cash' for decreases in liabilities.) If a payable increases, it means the company did NOT pay all of the bills and that has a favorable effect on Cash.

Another way to remember the effect is: the effect on Cash will be the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.
24.
A decrease in Accounts Payable.

Positive

Wrong.
Accounts Payable is a current liability account. It is assumed that a company had to use or decrease Cash in order to decrease any liability. You could also think of negative amounts on the statement of cash flows as being unfavorable from a Cash point of view. Decreasing a liability is unfavorable or negative as far as Cash is concerned.

Another way to remember the effect is: the change in Cash will be in the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.

Negative

Right!
Accounts Payable is a current liability account. It is assumed that a company had to use or decrease Cash in order to decrease any liability. You could also think of negative amounts on the statement of cash flows as being unfavorable from a Cash point of view. Decreasing a liability is unfavorable or negative as far as Cash is concerned.

TIP: The change in Cash will be the SAME direction as a change in the LIABILITY account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.

[Because Accounts Payable is a current liability, the change will be shown in the operating activities section of the SCF.]
25.
An increase in Accounts Receivable.

Positive

Wrong.
Accounts Receivable is a current asset. An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. The change in Cash is the OPPOSITE sign of the change in the other ASSET'S balance.

Negative

Right!
Accounts Receivable is a current asset. An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. The change in Cash is the OPPOSITE sign of the change in the other ASSET'S balance.

[Because Accounts Receivable is a current asset, the change appears in the operating activities section.]
26.
An increase in the current liability Warranty Liability.

Positive

Right!
The change in Cash will be the SAME direction as the change in the balance of a LIABILITY account. In this case the Warranty Liability balance increased, so the effect on Cash shown on the statement of cash flows is also a positive amount.

[Because Warranty Liability is a current liability, the change will appear in the operating activities section.]

Negative

Wrong.
If a liability account increases, Cash is assumed to also increase. Recall that the effect on Cash is the same sign/direction as the change in the liability.
27.
Dividends declared and paid.

Positive

Wrong.
Dividends decrease the company's amount of Cash.

Negative

Right!
Dividends do decrease the company's Cash, which is a negative effect on Cash.

[Because dividends affect a stockholders' equity account, dividends will be shown in the financing activities section as a negative amount.]
28.
Proceeds from the issuance of Preferred Stock.

Positive

Right!
The proceeds received by the company for the new stock being issued will increase the company's Cash, a positive effect on Cash.

[Because the transaction involves stockholders' equity, the amount will appear in the financing activities section of the statement of cash flows.]

Negative

Wrong.
The company will be increasing its Cash by issuing new shares of stock. An increase to Cash is a positive effect.
29.
The Gain on the Sale of Equipment formerly used in the business.

Positive

Wrong.
The Gain on Sale of Equipment was an increase to the net income on the income statement. On the statement of cash flows we need to subtract the gain from the net income so that only the cash from operating activities appears in the operating activities section. This subtraction or decrease will also prevent the double counting of the gain, since the entire proceeds from the sale are reported in the investing activities section.

Negative

Right!
The Gain on Sale of Equipment was an increase to the net income on the income statement. On the statement of cash flows we need to subtract the gain from the net income so that only the cash from operating activities appears in the operating activities section. This subtraction or decrease will also prevent the double counting of the gain, since the entire proceeds from the sale are reported in the investing activities section.
30.
An increase in the long-term asset Investment in Another Company.

Positive

Wrong.
An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. An increase in any asset (other than Cash) is assumed to be a use of Cash or a decrease in Cash.

Negative

Right!
An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. It is assumed that Cash was used or decreased.
31.
For a recent year a corporation's financial statements reported the following:



Based on the above information, what amount will the corporation report as Net Cash Provided by Operating Activities on the cash flow statement?

$65,000

Right!
The solution is shown below.

$125,000

Wrong.
Try another answer.

$155,000

Wrong.
Try another answer.
32.
A corporation reported the following information for the past year:



Assuming these are the only facts, what amount will the corporation report as the Net Cash Provided by Operating Activities on the cash flow statement?

$225,000

Wrong.
Try another answer.

$235,000

Right!
The solution is shown below.

$253,000

Wrong.
Try another answer.
33.
Using the information in Question #32, what amount will be reported under Cash From Investing Activities?

$3,000

Wrong.
Try another answer.

$8,000

Right!
The entire proceeds from the sale of a long-term asset is reported under Cash from Investing Activities.

$13,000

Wrong.
Try another answer.
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Harold Averkamp

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