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.
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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.
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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)
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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