Cash Flow Statement
Easy Practice Test
Introduction to Accounting
Cash Flow Statement
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Dividends paid are reported in which section of the cash flow statement?
a. operating
b. investing
c. financing
d. investments
Check Your Answer
C. Dividends are paid to stockholders. Cash transactions impacting stockholders are reported as a financing activity.
2. The computation for cash collected from customers for the direct cash flow
statement is
a. cash received from customers plus current period sales
b. current period sales less cash received from customers
c. current period sales plus ending receivables less beginning receivables
d. current period sales plus beginning receivables less ending receivables
Check Your Answer
D. Beginning receivables were collected, all sales were collected and ending receivables are not collected. The computation begins with current period sales and then considers the change in accounts receivable. Sales not collected are reported as accounts receivable on the balance sheet.
3. Amortization expense is
a. reported on the indirect cash flow statement
b. not reported on the indirect cash flow statement
c. reported on the direct cash flow statement
d. none of the above
Check Your Answer
A. Amortization expense is a non cash expense. Non cash expenses are added to net income on the indirect cash flow statement. Non cash revenues and expenses are not reported on the direct cash flow statement.
4. Gains and losses from selling investments are
a. reported on the indirect cash flow statement in the investing section
b. not reported on the indirect cash flow statement
c. reported on the direct cash flow statement
d. reported on the indirect cash flow statement in the operating section
Check Your Answer
D. Gains and losses from selling investments are non cash items. Non cash expenses are added and non cash revenues are subtracted from net income on the indirect cash flow statement. The gain/loss is not equivalent to the cash received from the sale.
5. An investor would use the cash flow statement to determine
a. if the company has enough cash on hand to pay current liabilities
b. if the company can generate enough cash to pay future liabilities
c. the amount a company has the ability to borrow
d. how income was earned during the current period
Check Your Answer
B. The operating section of the cash flow statement gives an indication of the company’s ability to generate cash in the future. The cash flow statement does not give total current liabilities so one can not determine if there is enough cash (a.). The ability to borrow can only be determined by analyzing the company’s total financial position which is stated on the balance sheet (c.). The income statement is used to determine (d.)
6. Cash paid for long term marketable securities is reported in which section of the
indirect cash flow statement
a. operating
b. investing
c. financing
d. it is not reported on the indirect cash flow statement
Check Your Answer
B. Long term marketable securities are investments; a long term asset. Cash related to long term assets is reported in the investing section.
7. The difference in an expense and cash paid this period for that expense is
a. the amount incurred this period
b. the amount paid last period for the expense
c. the change in the liability account from the beginning of the year to the end of the year
d. the change in the receivables account from the beginning of the year to the end of the year
Check Your Answer
C. The liability account is the amount that has not yet been paid. Expenses that are not paid are reported as a liability. The change in the liability account is the difference in the expense incurred that is included in net income and cash actually paid for the expense this period.
8. Net income is reported on which statement of cash flows?
a. direct method
b. indirect method
c. it is considered non cash and not reported on the cash flow statement
d. both a. and b.
Check Your Answer
B. The indirect method begins with net income and reconciles net income to cash from operations.
9. Most public companies prepare report which type of cash flow statement
a. direct cash flow statement
b. indirect cash flow statement
c. both types of cash flow statements
d. it does not matter because the indirect statement gives the same information as the direct statement
Check Your Answer
B. More than 95% of all company’s report using the indirect cash flow statement. The indirect method is easier to prepare from accrual method general ledger accounts.
10. The amount of cash raised from issuing the company’s own common stock is
reported in the
a. operating section
b. investing section
c. financing section
d. it is not reported on the cash flow statement
Check Your Answer
C. Cash from issuing common stock is received from stockholders. Cash flow related to shareholders is reported in the financing section.
11. The following balance sheet and income statement is available:
| Prior Year | Current Year | |
| Cash | 100 | 130 |
| Accounts Receivable | 600 | 780 |
| Inventory | 1,300 | 1,690 |
| Plant & Equipment, net | 5,000 | 6,300 |
| Accounts Payable | 500 | 650 |
| Long-term debt | 4,000 | 5,000 |
| Common Stock (no par) | 1,000 | 1,400 |
| Retained Earnings | 1,500 | 1,850 |
| Sales Revenue | 10,000 | 13,000 |
| Cost of Goods Sold | 6,000 | 7,800 |
| Depreciation Expense | 1,000 | 1,000 |
| Interest Expenses | 400 | 500 |
| Income Tax Expense | 910 | 1,225 |
| Net Income | 1,690 | 2,475 |
The company had no non cash activities.
Prepare a statement of cash flows for the current year in proper format using the
indirect method.
Check Your Answer
| Net Income | 2,475 |
| Depreciation | 1,000 |
| Change in C.A. & C.L. | |
| Accounts Receivable | (180) |
| Inventory | (390) |
| Accounts Payable | 150 |
| Cash from Operating Activities | 3,055 |
| Investing: | |
| Purchase Equipment | (2,300) |
| Financing: | |
| Borrow L/T Debt | 1,000 |
| Issue Common Stock | 400 |
| Paid Dividends | (2,125) |
| Cash from Financing Activities | (725) |
| Total Change in Cash | 30 |
| ===== |
Write the format first – listing all the sections.
Get net income and all non cash revenues and expenses from the income statement – current year only.
List all the current assets and liabilities and the difference between years.
Then determine if the amount should be positive or negative using the rules.
Go through the balance sheet and get the difference for each long-term asset, liability and owner’s equity.
This difference must be reported on the cash flow statement in the investing section (assets) and the financing section (liabilities and owner’s equity).
VERY Important: You are only taking the difference as the cash because there is no other information that tells you otherwise. If other information is provided, DO NOT automatically take the difference in the cash as the difference in the account.
Plant and equipment is net. This means cost less accumulated depreciation:
| Prior Year | Current Year | Difference | |
| Cost | ? | ? | 2,300*** |
| Accumulated Depreciation ** | (1,000) | (2,000) | (1,000) |
| Net | 5,000 | 6,300 | 1,300 |
** You can use any numbers here, the difference must be 1,000 depreciation expense that increased accumulated depreciation
*** The change in cost must be 2,300 to get to the correct net change. An increase in assets is a negative, use of cash, on the cash flow statement
Long Term Debt increased this year, therefore, the company borrowed money.
Common Stock increased this year, therefore, the company issued common stock
The change in retained earnings is not equal to net income for the period, therefore a dividend was paid. Determine the amount:
Retained Earnings, beginning 1,500
Income 2,475
Dividends paid ( ?? )
Retained Earnings, ending 1,850
Dividends paid must be (2,125) to balance
12. The following balance sheet and income statement are available:
| Prior Year | Current Year | |
| Cash | 2,375 | 7,400 |
| Accounts Receivable | 3,000 | 1,875 |
| Inventory | 3,875 | 7,375 |
| Plant & Equipment | 5,000 | 9,625 |
| Accumulated Depreciation | (1,500) | (3,625) |
| Land | 3,500 | 500 |
| Total Assets | 16,250 | 23,150 |
| Accounts Payable | 2,000 | 2,400 |
| Notes Payable (Short Term) | 875 | 0 |
| Bonds Payable (L/T) | 0 | 2,500 |
| Common Stock (no par) | 11,250 | 12,750 |
| Retained Earnings | 2,125 | 5,500 |
| Total Liabilities & O.E. | 16,250 | 23,150 |
| Sales Revenue | 25,000 | |
| Cost of Goods Sold | 15,625 | |
| Depreciation Expense | 2,125 | |
| Other Expenses | 2,500 | |
| Loss on sale of Land | 750 | |
| Net Income | 4,000 |
Prepare a statement of cash flows for the current year in proper format using the direct method.
Check Your Answer
| Cash from customers` | 26,125 |
| Cash paid to suppliers | (18,725) |
| Cash paid for other expenses | (2,500) |
| Cash from operating activities: | 4,900 |
| Investing: | |
| Purchase property, Equipment | (4,625) |
| Proceeds from sale of land | 2,250 |
| Cash used in investing activities: | (2,375) |
| Financing: | |
| Repayment on notes payable | (875) |
| Borrowings on notes payable | 2,500 |
| Issue common stock | 1,500 |
| Pay dividends | (625) |
| Cash from financing activities: | 2,500 |
| Total Change in Cash | 5,025 |
Operating Section:
| Sales | 25,000 | Cost of Goods Sold | 15,625 | |
| + Beg A/R | 3,000 | – Beg Inventory | (3,875) | |
| – End A/R | (1,875) | + End Inventory | 7,375 | |
| Cash from Customers | 26,125 | – Beg A/P | 2,000 | |
| – End A/P | (2,400) | |||
| Cash paid to suppliers | 18,725 |
No payable is associated with “Other Expenses” so cash paid is equal to the expense of $2,500
Investing section:
The loss on sale of land indicates land was sold and you must determine how much cash was received from the sale:
Cash $2,250 plug
Loss on sale of land $750 income statement
Land $3,000 Acct. diff.
Report the cash received ONLY in the investing section.
The increase in plant & equipment indicates a purchase
Financing section:
The change in the long-term liabilities indicates repayment and borrowing of cash.
The change is the amount reported when there is no additional information.
The increase in common stock occurs with issuing of stock.
The change in retained earnings is not equal to net income for the period, therefore a dividend was paid. Determine the amount:
Retained Earnings, beginning 2,125
+ Income 4,000
– Dividends paid ( ?? )
Retained Earnings, ending 5,500
?? Must be (625) to balance
13. The balance sheet at the end of the previous year reported the following:
| Cash | $136,000 |
| Accounts Receivable | 199,000 |
| Land | 50,000 |
| Building | 170,000 |
| Equipment | 30,000 |
| Accumulated Depreciation | (33,000) |
| Goodwill | 70,000 |
| Accounts Payable | 24,000 |
| Long Term Debt | 100,000 |
| Common Stock | 10,000 |
| Retained Earnings | 488,000 |
The following additional information is available for the current year:
1) Income was $67,200
2) Equipment that cost $10,000 with accumulated depreciation of $4,000 was sold for $8,000
3) Depreciation expense was $6,400
4) Total current assets increased by $22,000
5) Total current liabilities increased by $31,000
6) Investments to be held long term were purchased for $50,000
7) Cash dividends of $20,000 were paid
Prepare an indirect cash flow statement.
Check Your Answer
| Net Income | 67,200 |
| + Depreciation | 6,400 |
| – Gain on Sale | (2,000) |
| Change in C.A. & C.L. | |
| Total current assets | (22,000) |
| Total current liabilities | 31,000 |
| Cash from Operating Activities: | 80,600 |
| Investing: | |
| Proceeds from sale of equipment | 8,000 |
| Purchase investments | (50,000) |
| Cash from investing activities: | 42,000 |
| Financing: | |
| Paid Dividends | (20,000) |
| Total Change in Cash: | 18,600 |
| ====== |
The ending balances of the balance sheet accounts is not useful information.
The difference between prior year and current year is useful information.
Gain or loss on the sale of equipment is reported in the operating section.
Only the cash received is reported in the investing section.
The change in the account is not used.
Cash 8,000
Accumulated depreciation 4,000
Equipment 10,000
Gain on sale 2,000 plug
The gain can also be computed as the difference in book value and cash received.
A gain is subtracted because it in included in income and is not received in cash.