Question 1

Acquisitions and sales of long-term assets belong in the financing section of a cash flow statement using the indirect method.

Accepted Answer

Acquisitions and sales of long-term assets belong in the investing section of a cash flow statement using the indirect method. The financing section includes activities like issuance or repurchase of stocks or bonds and payment of dividends.

Question 2

Which would be added back to net income in the operating section of an indirect cash flow statement?

Accepted Answer

Depreciation is a non-cash expense that reduces net income but does not affect cash flows. Therefore, it is added back to net income in the operating section of the indirect cash flow statement. A decrease in accounts payable, an increase in accounts receivable, and an increase in inventory all involve changes in the company's cash flows and are reflected in the operating section of the indirect cash flow statement but not added back to net income.

Question 3

Which would NOT be subtracted from net income in the operating section of an indirect cash flow statement?

Accepted Answer

An increase in Accounts Payable is a liability, which means that it represents money owed by the company to another party. Liabilities are not subtracted from net income in the operating section of an indirect cash flow statement. The other choices (A, C, and D) are all accounts that impact the company's cash balance and therefore would be subtracted from net income in the operating section.

Question 4

The cost of purchasing long-term assets, such as buildings and land, are:

Accepted Answer

The cost of purchasing long-term assets is considered an outflow in the investing activities section of the cash flow statement, so it is subtracted from investing activities.

Question 5

The sum of the net increases/decreases in the operating, investing and financing sections of the cash flow statement is equal to the change in cash over the period.

Accepted Answer

This statement is true. The cash flow statement provides information about the inflow and outflow of cash during a specific period. The net increases or decreases in operating, investing, and financing activities are presented in the cash flow statement, and the sum of these amounts should equal the change in cash over the same period. This equation provides a useful check to ensure that the cash flow statement is accurate and complete.

Question 6

The purchase of treasury stock is shown as a cash outflow in the investing section of the cash flow statement.

Accepted Answer

The purchase of treasury stock is shown as a cash outflow in the financing section of the cash flow statement, not the investing section.

Question 7

Cash receipts from the sale of long-term assets, such as equipment and vehicles, are:

Accepted Answer

Cash receipts from the sale of long-term assets are part of investing activities, as they represent a cash inflow from the disposal of a capital asset that is not part of the normal operations of the business. It is important to distinguish between operating and investing activities in the statement of cash flows, as they have different implications for the financial health and performance of the company.

Question 8

Gains and losses do not represent Cash Flows.

Accepted Answer

Gains and losses are accounting measures that do not directly affect cash flow. Cash flow reflects the actual inflows and outflows of cash in a business.

Question 9

Business transactions that do NOT involve the payment or receipt of cash are considered to be non-cash transactions.

Accepted Answer

Non-cash transactions can involve the exchange of other assets, such as equipment or stocks, or the assumption of liabilities, but they do not involve physical cash.

Question 10

Changes in long-term liabilities belong in the financing section of a cash flow statement using the indirect method.

Accepted Answer

Changes in long-term liabilities represent financing activities (such as borrowing or repaying loans) and therefore belong in the financing section of a cash flow statement using the indirect method.

Question 11

A transaction acquiring land by issuing a note for the full purchase price would not appear on the cash flow statement because no cash was involved, but it may be disclosed in a separate section.

Accepted Answer

Transactions that do not involve cash, such as acquiring land by issuing a note, do not appear in the cash flow statement but are often disclosed in a separate section or in the notes to the financial statements to provide a complete picture of financial activities.

Question 12

Changes in the long-term assets and long-term liabilities accounts must be analyzed to determine how they are presented in the operating section of a cash flow statement.

Accepted Answer

Changes in long-term assets and liabilities are typically analyzed for the investing and financing sections, not the operating section, of a cash flow statement.

Question 13

Changes in all current assets EXCEPT ________ are adjustments to net income in the operating section of an indirect cash flow statement.

Accepted Answer

Changes in cash are not adjusted for in the operating section of an indirect cash flow statement because the statement itself is a reconciliation of net income to net cash provided by operating activities. Changes in other current assets (like prepaid expenses, inventory, and notes receivable) are adjusted because they affect net income but do not involve cash movement during the period.

Question 14

Losses on the sale of long-term assets are:

Accepted Answer

Losses on the sale of long-term assets are added to operating activities in the cash flow statement to adjust the net income for non-cash items.

Question 15

Which would be subtracted from net income in the operating section of an indirect cash flow statement?

Accepted Answer

An increase in inventory would be subtracted from net income in the operating section of an indirect cash flow statement, as it indicates that more cash was used in purchasing inventory and less cash is available for other operating activities. A decrease in prepaid insurance would be added back, as it represents cash that was paid in advance and is now being utilized. A decrease in bonds payable and an increase in interest payable would not affect the operating section, but rather the financing section of the cash flow statement.

Question 16

Robbins Company distributed a 5% common stock dividend, this will be reported in the financing activity section of the cash flow statement.

Accepted Answer

Stock dividends do not involve the movement of cash; therefore, they are not reported in the cash flow statement at all. The cash flow statement only includes transactions that affect the company's cash position, categorized into operating, investing, and financing activities.

Question 17

A transaction that exchanged a building for shares of stock would be an investing activity and would appear on the cash flow statement.

Accepted Answer

Exchanging a building for shares of stock does not involve cash flow, so it would not appear on the cash flow statement. Investing activities typically involve cash inflows and outflows related to investments in assets.

Question 18

Even though depreciation, depletion and amortization are expenses, they are considered non-cash transactions and must be subtracted from net income in the operating activities section of an indirect method cash flow statement.

Accepted Answer

Depreciation, depletion, and amortization are non-cash expenses that are added back to net income in the operating activities section of an indirect method cash flow statement, not subtracted, because they reduce net income but do not involve an actual cash outflow.

Question 19

Gains on the sale of long-term assets are:

Accepted Answer

Gains on the sale of long-term assets are subtracted from operating activities because they are non-cash items that are included in net income but do not affect cash flow from operating activities.

Question 20

A decrease in a current liability causes an increase in cash.

Accepted Answer

A decrease in a current liability typically means that a company has paid off some of its debts or obligations, which would result in a decrease in cash, as cash is used to pay off the liability.

Quiz 11: The Statement of Cash Flows