On the statement of cash flows, the cash flows from operating activities section would include:
receipts from the sale of investments.
payments for the acquisition of investments.
cash payments for salaries.
receipts from the issuance of capital stock.
cash payments for salaries.

Feedback: The operating activities section of the cash flow statement includes the day-to-day activities reported on the income statement. Salaries are a prime example of this type of activity.

Cash received through the sale of long-term investments would be reported in the statement of cash flows as a:
cash inflow in the financing activities section.
cash inflow in the investing activities section.
separate schedule.
cash inflow in the operating activities section.
cash inflow in the investing activities section.

Feedback: A sale of a long-term investment would be reported in the investing section of the statement of cash flows, and it would be an inflow.
Objective Association

Which of the following is included in what the statement of cash flows reports?
total assets
total changes in stockholders’ equity
changes in retained earnings
cash flows from investing activities
cash flows from investing activities

Feedback: The statement has three components—cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. The other items are found on other financial statements.

Which one of the following should be added to net income in calculating net cash flow from operating activities using the indirect method?
a decrease in accounts payable
a decrease in accrued liabilities
dividends paid on common stock
a loss on the sale of land
a loss on the sale of land

Feedback: Losses on sales of long-term assets must be added back to operating cash as the cash effect from long-term assets is an investing activity.

If a gain of $7,000 results from selling (for cash) office equipment having a book value of $55,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is
$7,000.
$55,000.
$62,000.
$48,000.
$62,000.

Feedback: Cash received on the sale of an asset is book value plus gain or book value minus loss. Thus, book value of $55,000 + gain of $7,000 = cash received of $62,000.

he net income reported on the income statement for the current year was $255,000. Depreciation recorded on fixed assets and amortization of patents for the year were $30,000 and $4,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:

End Beginning
Cash $50,000 $60,000
Accounts receivable 112,000 108,000
Inventories 105,000 93,000
Prepaid expenses 4,500 6,500
Accounts payable (merchandise creditors) 75,000 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
$317,000
$251,000
$261,000
$289,000

$261,000

Feedback: First, calculate the amount of change of the balance sheet items:

End Beginning Change
Cash $50,000 $60,000 $-10,000
Accounts receivable 112,000 108,000 +4,000
Inventories 105,000 93,000 +12,000
Prepaid expenses 4,500 6,500 -2,000
Accounts payable (merchandise creditors) 75,000 89,000 -14,000

An increase in a current asset and a decrease in current liabilities must be deducted from net income while the opposite is added. Noncash items must be added back to net income. This results in the following: Net income + depreciation + amortization – increase in accounts receivable – increase in inventory + decrease in prepaid expenses and – decrease in accounts payable = $255,000 + $30,000 + $4,000 – $4,000 – $12,000 + $2,000 – $14,000 = $261,000.

Which of the following should be subtracted from net income in calculating net cash flow from operating activities using the indirect method?
an increase in inventory
a decrease in prepaid expenses
an increase in accrued expenses
a decrease in inventory
an increase in inventory

Feedback: An increase in a current asset and a decrease to a current liability is shown as a decrease to operating cash flow.

The formula to calculate free cash flow is:
cash flows from financing activities + cash used to purchase fixed assets to maintain current production.
cash flows from operating activities – cash used to purchase fixed assets to maintain current production.
cash flows from financing activities – cash used to purchase fixed assets to maintain current production.
cash flows from operating activities + cash used to purchase fixed assets to maintain current production.
cash flows from operating activities – cash used to purchase fixed assets to maintain current production.

Feedback: The formula to calculate free cash flow is cash flows from operating activities minus cash used to purchase fixed assets to maintain current production.

If the free cash flow changed from $50,000 to $40,000, the change:
indicates a favorable trend.
is not indicative.
could indicate an unfavorable or favorable trend.
indicates an unfavorable trend.
indicates an unfavorable trend.

Feedback: If the free cash flow decreases, the change indicates an unfavorable trend

Which of the following statements are true regarding free cash flow?
Free cash flow is a valuable tool for evaluating net income.
Free cash flow ignores productive capacity.
None of these choices are true.
Free cash flow measures the operating cash flow of a company after the purchase of inventory.
None of these choices are true.

Feedback: Free cash flow measures the operating cash flow available to a company to use after purchasing the PP ; E necessary to maintain current productive capacity. Free cash flow is a valuable tool for evaluating cash flows.

Companies that must invest heavily in new equipment to remain competitive can significantly reduce free cash flow. Examples of these industries are
railroads.
telecommunications.
All of these choices are correct.
airlines.
All of these choices are correct.

Feedback: Industries such as airlines, railroads, and telecommunication companies must invest heavily in new equipment to remain competitive. Such investments can significantly reduce free cash flow.

When completing the spreadsheet to prepare the statement of cash flows, a decrease in retained earnings due to cash dividends declared would require an entry involving a:
credit to Operating Activities—Declared Cash Dividends.
debit to Financing Activities—Declared Cash Dividends.
debit to Retained Earnings.
debit to Operating Activities—Declared Cash Dividends.
debit to Retained Earnings.

Feedback: Correct

Step 1 of preparing a spreadsheet for the statement of cash flows is to:
analyze the change during the year in each noncash account and classify the change.
list the title of each balance sheet account in the Accounts column.
enter the balance of each balance sheet account.
add the column totals.
list the title of each balance sheet account in the Accounts column

Feedback: Correct.

Step 4 of preparing a spreadsheet for the statement of cash flows is to
list the title of each balance sheet account in the Accounts column.
add the column totals.
enter the balance of each balance sheet account.
analyze the change during the year in each noncash account and classify the change.
analyze the change during the year in each noncash account and classify the change.

Feedback: Correct.

A mortgage incurred in exchange for an office building would be reported in the statement of cash flows in
a separate section that appears at the bottom of the statement.
the cash flows from operating activities section.
the cash flows from financing activities section.
the cash flows from investing activities section.
a separate section that appears at the bottom of the statement.

Feedback: Cash flows from financing activities are the cash flows from transactions that affect the debt and equity of the company.

Which of the following should be shown on a statement of cash flows under the financing activity section?
purchase of a building
issuance of a long-term note to acquire land
sale of a long-term investment in exchange for the common stock of another company
payment of cash dividends on common stock
payment of cash dividends on common stock

Feedback: Dividends paid are a financing activity, whether on common or preferred stock

The net income reported on the income statement for the current year was $295,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $5,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are:

End Beginning
Cash $50,000 $60,000
Accounts receivable 112,000 108,000
Inventories 105,000 93,000
Prepaid expenses 4,500 6,500
Accounts payable (merchandise creditors) 75,000 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
$302,000
$208,000
$312,000
$368,000

$312,000

Feedback: All changes are not deducted to determine net cash flow from operating activities

Which of the following should be subtracted from net income in calculating net cash flow from operating activities using the indirect method?
a loss on a sale of equipment
a gain on a sale of a building
a decrease in accounts receivable
an increase in accounts payable
a gain on a sale of a building

Feedback: A decrease in a current asset and an increase to a current liability is shown as an increase to operating cash flow.

Dora Inc. reported the following on the company’s cash flow statement for 2016:

Net cash flow from operating activities $350,000
Net cash flow used for investing activities (100,000)
Net cash flow from financing activities (200,000)

Sixty-percent of the cash flow used for investing activities was used to replace existing capacity. What is the free cash flow for 2016?
$250,000
$150,000
$290,000
$410,000

$290,000

Feedback: Net cash flow from operating activities less net cash flow used for investing activities is not free cash flow.

When completing the spreadsheet to prepare the statement of cash flows, an increase in retained earnings due to net income would require an entry involving a
debit to Financing Activities—Net Income.
debit to Retained Earnings.
debit to Operating Activities—Net Income.
credit to Operating Activities—Net Income.
debit to Operating Activities—Net Income.
Cash received through the sale of long-term investments would be reported in the statement of cash flows as a
cash inflow in the financing activities section.
cash inflow in the investing activities section.
separate schedule.
cash inflow in the operating activities section
cash inflow in the investing activities section.

Feedback: Correct. A sale of a long-term investment would be reported in the investing section of the statement of cash flows, and it would be an inflow

Cash received for preferred stock dividends should be shown on the statement of cash flows under __________ activities.
financing
noncash investing and financing
operating
investing
operating

Feedback: The decision to use cash to purchase debt or equity securities is an investment decision. Once that decision has been made, the cash received from interest or dividends is used to operate the business.

The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed assets and amortization of patents for the year were $30,000 and $4,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are:

End Beginning
Cash $50,000 $60,000
Accounts receivable 102,000 108,000
Inventories 88,000 93,000
Prepaid expenses 8,500 6,500
Accounts payable (merchandise creditors) 95,000 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
$256,000
$324,000
$328,000
$306,000

$324,000

Feedback: Increases in current assets and decreases in current liabilities are deducted to determine net cash flow from operating activities.

Sanchez Inc. reported the following on the company’s cash flow statement for 2017:

Net cash flow from operating activities $500,000
Net cash flow used for investing activities (200,000)
Net cash flow from financing activities 150,000

Thirty percent of the cash flow used for investing activities was used to replace existing capacity. What is the free cash flow for 2017?
$440,000
$300,000
$650,000
$500,000

$440,000

Feedback: Net cash flow from operating activities less net cash flow used for investing activities is not free cash flow.

A company that has free cash flow struggles with
having financial flexibility.
retiring debt.
None of these choices are correct.
funding internal growth.
None of these choices are correct.

Feedback: A company that has free cash flow is able to retire debt.

When completing the spreadsheet to prepare the statement of cash flows, a decrease in retained earnings due to net loss would require an entry involving a
credit to Operating Activities—Net Loss.
debit to Financing Activities—Net Loss.
credit to Retained Earnings.
debit to Operating Activities—Net Loss.
credit to Operating Activities—Net Loss.
Which of the following is correct concerning the entries made on the spreadsheet used to prepare the statement of cash flows?
The entries are used in preparing the data on the spreadsheet.
The entries are used in summarizing the data on the spreadsheet.
All of these answers are correct.
The entries are not posted to the ledger.
All of these answers are correct.
Which of the following should be subtracted from net income in calculating net cash flow from operating activities using the indirect method?
an increase in accounts receivable
depreciation expense for the period
an increase in income taxes payable
an increase in accounts payable
an increase in accounts receivable
x

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