Question 1

If accounts receivable increase during a period, then the amount of cash collected from customers will be less than the amount of sales reported on the income statement for the period.

Accepted Answer

This is because accounts receivable represents the amount of sales that have been made but not yet collected. If the amount of accounts receivable increases, it means that some sales have not been collected yet, so the amount of cash collected from customers will be less than the amount of sales reported on the income statement for the period.

Question 2

Which one of the following transactions should be classified as a financing activity on the statement of cash flows?

Accepted Answer

Purchase of the company's own stock is considered a financing activity.

Question 3

Which of the following would be considered a cash inflow in the financing activities section of the statement of cash flows?

Accepted Answer

Issuing bonds payable is considered a cash inflow in the financing activities section of the statement of cash flows because it represents funds the company receives from creditors in exchange for the bonds.

Question 4

Under the direct method of determining the net cash provided by (used in) operating activities on the statement of cash flows, an increase in accounts receivable would be added to sales revenue to convert revenue to a cash basis.

Accepted Answer

Under the direct method, an increase in accounts receivable would be subtracted from sales revenue to convert revenue to a cash basis, as it represents sales that have not yet been collected in cash.

Question 5

In a statement of cash flows, issuing bonds payable affects the:

Accepted Answer

Issuing bonds payable is considered a financing activity because it involves obtaining funds from external sources. The proceeds from the issuance of bonds payable are typically used to finance long-term investments, such as the purchase of property, plant, and equipment or to repay existing debt.

Question 6

When computing the net cash provided by operating activities under the indirect method on the statement of cash flows, a decrease in common stock would be subtracted from net income.

Accepted Answer

A decrease in common stock would not be included in the computation of net cash provided by operating activities using the indirect method on the statement of cash flows. It would be a financing activity and reflected in the financing section of the cash flow statement.

Question 7

Negative free cash flow suggests that the company generated enough cash flow from its operating activities to fund its capital expenditures and dividend payments.

Accepted Answer

Negative free cash flow means that a company's capital expenditures and dividend payments exceeded its cash flow from operating activities.

Question 8

In a statement of cash flows, a change in an income taxes payable account would be recorded in the:

Accepted Answer

A change in an income taxes payable account would be recorded in the operating activities section of the statement of cash flows because it relates to the company's cash flows from its main operating activities.

Question 9

Free cash flow decreases when a company issues common stock for cash.

Accepted Answer

When a company issues common stock for cash, it increases its cash balance but also increases the number of shares outstanding. This can lead to a decrease in free cash flow because the company has more shares to distribute dividends to and potentially more investments to make with the extra cash.

Question 10

The amount of depreciation added to net income equals the sum of the debits to the Accumulated Depreciation account.

Accepted Answer

The amount of depreciation added to net income equals the credits to the Accumulated Depreciation account, not the sum of the debits. Depreciation is a contra asset account, which means it has a credit balance. As depreciation is recorded, the Accumulated Depreciation account is credited, reducing the value of the asset on the balance sheet. This reduction in value is what is added back to net income to calculate cash flow from operations using the indirect method.

Question 11

In a statement of cash flows, which of the following would be classified as an investing activity?

Accepted Answer

The sale of equipment is a cash inflow from investing activities, as it involves the disposal of a long-term asset.

Option A is incorrect because the sale of common stock is a financing activity, as it involves the issuance of equity.

Option C is incorrect because interest paid to a lender is a cash outflow from operating activities or financing activities.

Option D is incorrect because the issuance of bonds payable is a cash inflow from financing activities.

Question 12

Which of the following would be classified as a financing activity on the statement of cash flows?

Accepted Answer

Repurchasing capital stock from owners is considered a financing activity because it involves transactions with the company's owners, affecting the equity section of the balance sheet. Financing activities include transactions related to borrowing from or repaying loans to creditors and transactions with the company's owners.

Question 13

Negative free cash flow does not automatically signal poor performance.

Accepted Answer

Negative free cash flow may occur in certain situations such as during a period of heavy investment or growth, or when a company is paying off debt. It is important to assess the reasons behind the negative free cash flow before concluding that it indicates poor performance.

Question 14

Under the direct method of determining the net cash provided by (used in) operating activities on the statement of cash flows, one step in adjusting selling and administrative expenses from an accrual to a cash basis is to subtract any increase in prepaid expenses.

Accepted Answer

Under the direct method, adjusting selling and administrative expenses from an accrual to a cash basis involves adding back any increase in prepaid expenses, not subtracting it, because the increase in prepaid expenses represents cash paid out that did not affect the current period's income statement.

Question 15

Free cash flow will increase if a company increases its accounts payable balance by delaying payments to suppliers.

Accepted Answer

By delaying payments to suppliers, the cash that would have been used to pay them can be used to invest in other parts of the business or kept on hand, increasing the company's free cash flow.

Question 16

Under the direct method of determining the net cash provided by (used in) operating activities on the statement of cash flows, a decrease in prepaid expenses would be added to selling and administrative expenses to convert selling and administrative expenses to a cash basis.

Accepted Answer

Under the direct method, a decrease in prepaid expenses is not added to selling and administrative expenses. Instead, it reflects a prior period expense now recognized, affecting cash flow from operating activities but not directly adjusting selling and administrative expenses.

Question 17

Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts receivable would be subtracted from net income.

Accepted Answer

An increase in accounts receivable represents a decrease in cash collected from customers, and is therefore subtracted from net income in the indirect method.

Question 18

Free cash flow is net cash provided by operating activities less capital expenditures.

Accepted Answer

The answer of Free cash flow is net cash provided...

Question 19

The direct method of preparing the statement of cash flows will show the same increase or decrease in cash as the indirect method.

Accepted Answer

The direct method and the indirect method both ultimately result in the same increase or decrease in cash, as they are both designed to reconcile the beginning and ending cash balance. The difference lies in how they arrive at that result, with the direct method showing each individual cash inflow and outflow, while the indirect method adjusts from net income.

Question 20

Which of the following items would not be classified as an operating activity on the statement of cash flows?

Accepted Answer

Dividends paid to the company's own stockholders would be classified as a financing activity on the statement of cash flows, not an operating activity. Operating activities generally include cash flows related to day-to-day business operations, such as cash received from customers, payments to suppliers, and payments to compensate employees.

Quiz 15: Statement of Cash Flows