Cash Flow Statement

Medium Test

Medium Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. The cash flow statement differs from the income statement in that

a. the indirect cash flow statement states net income
b. the cash flow statement considers whether revenues have been collected and expenses have been paid
c. non cash transactions are reported on the cash flow statement
d. the cash flow statement has 5 different types of activities

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B.  The cash flow statement shows cash received or paid.  The income statement is done on the accrual basis and when cash is paid or received is not considered.

Both statements give a number for net income (a.).  Non cash transactions are included on the income statement and not included in the cash flow statement.  The cash flow statement has 3 sections; operating, investing, and financing.

2. An investor would use the indirect cash flow statement to determine

a. how much cash the company spent for salaries
b. which supplier was paid the most during the year
c. how much cash was generated from day to day operations
d. the amount owed from customers at the end of the year

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C.  The indirect statement reconciles net income to cash from operations.  It does not provide the details of where cash comes from and what cash is paid for related to operations.  Cash from/paid for specific items is listed on the direct statement (a. & b.). (d) is reported on the balance sheet.

3. A negative change in accounts payable on an indirect cash flow statement tells an
investor

a. the amount that was paid to suppliers this year
b. the amount that was paid for inventory this year
c. the amount of cost of goods sold that was not paid for this year
d. the amount the cash payment was more than expenses during this year

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D.   A negative amount means that more cash was paid this year than the expense that is included in net income.   It is positive or negative in relation to the expense only and does not indicate the amount that was paid this year.

4. The cash flow statement will not show

a. total expenditures for long term assets
b. total payments made in repayment of long-term liabilities
c. total revenues for the company
d. cash generated from day to day business activities

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C.   The indirect statement shows total net income and does not show the components of income.  The direct statement shows cash from customers which is not the same as revenues earned. (a.) is shown on both statements in the investing section.   (b.) is shown on both statements in the financing section. (d). is the total change in cash from operating activities shown on both statements.

5. Non cash activities are

a. ignored on the cash flow statement
b. reported at the bottom of the cash flow statement after net change in cash
c. reported only on the direct cash flow statement
d. added to net income on the indirect cash flow statement

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B.   Non cash activities are reported at the bottom of the cash flow statement.  Non cash revenues and expenses (not the same as non cash activities) are reported on the indirect statement as a reconciliation to net income (d). 

6. Changes in fair market value of short-term investments held would be reported on which section of the direct cash flow statement?

a. operating
b. investing
c. financing
d. it is not reported on the direct cash flow statement

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D.  This is a non cash gain or loss.  Non cash revenues/expenses/gains/losses are not reported on the direct cash flow statement.  They are reported as a reconciling item to net income in the operating section of the indirect statement.

7.  The real difference in the indirect cash flow statement and the direct cash flow statement is

a.  the direct shows assets purchased and the indirect does not
b.  the indirect begins with net income and reconciles to cash and the direct shows where cash is generated from and what cash is paid for
c.  the direct begins with net income and considers change in non-cash revenues and expense and changes in current assets and current liabilities and the indirect states exactly what cash is paid for
d.  the financing section provides different information

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B.   The difference in the two is given in (b.).  Both show cash paid for assets purchased (a.)  (c.) is the opposite. The investing and financing sections are exactly the same for both the indirect and direct statement (d).

8. An increase to a current asset is

a. not reported on the indirect cash flow statement
b. is reported as a negative on the indirect cash flow statement
c. is reported as a positive on the indirect cash flow statement
d. is not considered when preparing the direct cash flow statement

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B.  An increase to a current asset means that less cash was collected than sales or that more assets were paid for than was used and expensed.  Less cash received than revenues, or more cash paid than expense, is negative on the indirect cash flow statement. The change is current assets is considered when computing the amounts reported on the direct cash flow statement (d).

9. A decrease to a current liability is

a. not reported on the indirect cash flow statement
b. is reported as a negative on the indirect cash flow statement
c. is reported as a positive on the indirect cash flow statement
d. is not considered when preparing the direct cash flow statement

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B.  A decrease to a current liability means that more cash was paid than the expense that is included in net income.  Since more cash was paid, the amount must be subtracted when determining cash generated. The change in current liabilities is considered when computing the amount of cash paid reported for each item on the direct cash flow statement (d.)

10. When preparing an indirect cash flow statement, non current deferred tax expense not paid is

a. not reported on the indirect cash flow statement
b. reported as a negative on the indirect cash flow statement
c. reported as a positive on the indirect cash flow statement
d. considered when preparing the direct cash flow statement

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C.  This is a non cash expense; an expense on the income statement that was not paid this period.  Non cash expenses are added to net income on the indirect statement to get to cash generated. Non cash expenses are not considered when preparing the direct statement (d.)

11. The company had the following information available:

Change in accounts receivable 5,000 decrease
Change in inventory 1,000 increase
Change in prepaid insurance 2,500 increase
Change in accounts payable 1,000 decrease
Change in salaries payable 4,000 increase
Change in income taxes payable 1,100 increase
Change in interest payable 2,000 decrease

 

Sales 878,000
Cost of Goods Sold 328,000
Salary Expense 34,000
Insurance Expense 6,000
Depreciation Expense 12,000
Gain from Sale of Land 30,000
Interest Expense 5,000
Income Tax Expense 110,000

During the year, the company had the following transactions:

Purchased $24,000 of equipment for $14,000 cash and financed the balance
Paid cash dividends of $2,000
Purchased treasury stock for $18,800
Sold land costing $90,000 for $120,000

Prepare a direct statement of cash flows for the current year.

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Cash from customers 883,000
Cash paid to suppliers (330,000)
Cash paid to employees (30,000)
Cash paid for insurance (8,500)
Cash paid for interest (7,000)
Cash paid for income taxes (108,900)
Cash from operating activities: 398,600
Investing:
Purchase Equipment (14,000)
Proceeds from sale of land 120,000
Cash from investing activities: 106,000
Financing:
Paid dividends (2,000)
Purchase of treasury stock (18,800)
Cash used in financing activities 20,800
Total Change in Cash 483,800

Non cash activity:  Purchased $10,000 equipment with a note payable.

Important:  All current assets and liabilities must be matched with cash revenues and expenses.

Non cash revenues and expenses are not reported on the direct statement:

Ignore depreciation expense and the gain on the sale of land

Investing and Financing sections:  Only the cash part of the transaction is reported

The $10,000 borrowed to finance the equipment purchase is a non cash activity;

No cash was received, 

Equipment was received which is not cash.

12.  Using the information provided in problem 11., prepare the operating section for the company using the indirect method.

Check Your Answer
Net Income 413,000
+ Depreciation 12,000
– Gain on sale (30,000)
Change in C.A & C.L.
Accounts receivable 5,000
Inventory (1,000)
Prepaid Insurance (2,500)
Accounts payable (1,000)
Salaries payable 4,000
Tax payable 1,100
Interest payable (2,000)
Cash from Operating Activities 398,600

Current Assets –  
Increases are negative        
Decreases are positive

Current Liabilities – 
Increases are positive      
Decreases are negative


Total cash from operating activities must be the same for the indirect method and the direct method.   The same components of revenues, expenses, current assets and current liabilities are used for both.

Direct – 
“Directly” matches revenues and expenses with the corresponding current asset and current liability

Indirect – 
Nets all revenues and expenses to start with net income, considers the non cash revenues and expenses, and then just lists the current assets and current liabilities.

13.  The following information related to accounts was provided by a company:

Current Year Prior Year
Sales 196,000 184,000
Cost of Goods Sold 123,000 111,000
Salary Expense 21,000 19,000
Interest Expense 3,000 1,000
Rent Revenue 8,000 9,000
Accounts Receivable 29,000 37,000
Inventory 32,000 31,000
Equipment, purchased with cash 38,000 33,000
Accumulated Depreciation 19,000 29,000
Salaries Payable 2,500 3,200
Accounts Payable 8,900 10,100
Interest Payable 800 400
Unearned Rent Revenue 3,500 6,500
Notes Payable 10,000 15,000
Retained Earnings 36,000 22,000

Sold Equipment with a cost of $34,000 and accumulated depreciation of $15,000 for $17,000

A. How much cash was paid for inventory purchases?
B. How much cash was paid for salaries?
C. How much cash was paid for interest?
D. How much cash was received for rent revenue?
E. How much cash was spent purchasing equipment?
F. What was depreciation expense?
G. What amount was paid for dividends?
H. Prepare the cash flow statement using the indirect method.
I. Prepare the cash flow statement using the direct method.

Check Your Answer

A.
Cost of Goods Sold                123,000
– Beg Inventory                      (31,000)
+ End Inventory                      32,000
+ Beg A/P                                  10,100
– End A/P                                 (8,900)
Cash paid to suppliers          125,200

B. 
Salary Expense                         21,000
+ Beg salary payable                 3,200
–  End salary payable               (2,500)
Cash paid                                   21,700

C. 
Interest Expense                         3,000
     + Beg interest payable             400
     –  End interest payable           (800)
     Cash paid                                  2,600

D. 
Rent Revenue                               8,000
– Beg unearned rev                    (6,500)
+ End unearned rev                    3,500
Rent cash collected                     5,000

E. 
Ending Equipment                     38,000
– Beginning Equipment            (33,000)
Change                                            5,000
+ Cost of equipment sold          34,000
Purchases of equipment           39,000

F. 
Ending A/D                                  19,000
– Beginning A/D                        (29,000)
Change in A/D                           (10,000)
+ Sold A/D                                   15,000
Depreciation Expense                 5,000

G. 
Ending R.E.                                36,000
– Beginning R.E.                      (22,000)
Difference                                   14,000
– Income                                    (50,000)
Dividends Paid                         (36,000)

 

H. 
Cash from customers                       204,000
Rent collections                                      5,000

Cash paid to suppliers                     (125,200)
Cash paid for salaries                        (21,700)
Cash paid for interest                         (2,600)

Cash from operating                           59,500

Investing Activities:
Purchase equipment                         (39,000)
Proceeds from sale of equipment     17,000
Cash from investing activities        (22,000)

Financing Activities:
Repayments on notes payable          (5,000)
Paid dividends                                   (36,000)
Cash from investing activities       ( 41,000)

Total Change in Cash                         (3,500)
                                                            =======

I.  Indirect Method

Net Income                                         50,000
Loss on sale                                           2,000
Depreciation expense                          5,000

Change in current assets and liabilities
Accounts Receivable                           8,000
Inventory                                             (1,000)
Salaries Payable                                    (700)
Accounts Payable                               (1,200)
Interest Payable                                      400
Unearned Rent Revenue                  (3,000)

Cash from operating activities:       59,500

Investing and Financing sections are same as above

Sales                                                 196,000
– CGS                                              (123,000)
Gross Profit                                      73,000
– Operating Expenses:
     Salary expense                           (21,000)
     Depreciation expense                (5,000)
= Income from operations            47,000
     Rent Income                                 8,000
     Interest Expense                        (3,000)
     Loss on sale                                 (2,000)
= Net Income                                   50,000