Question 1

The indirect method of presenting the investing activities section of the statement of cash flows reconciles net income to net cash provided by investing activities.

Accepted Answer

The indirect method of presenting the investing activities section of the statement of cash flows reconciles changes in non-cash current assets and liabilities to net cash provided by investing activities, not net income.

Question 2

When a company uses the indirect method to present the statement of cash flows, a gain on the sale of a long-term asset must be added to net income to reconcile to net cash provided by operating activities.

Accepted Answer

When using the indirect method, a gain on the sale of a long-term asset is subtracted from net income to reconcile to net cash provided by operating activities because the gain is included in the net income calculation but does not affect cash.

Question 3

The indirect method of presenting the investing activities section of the statement of cash flows reconciles net income to net cash provided by financing activities.

Accepted Answer

The indirect method of presenting the investing activities section of the statement of cash flows reconciles net income to net cash provided by operating activities, not financing activities.

Question 4

When a company uses the indirect method to present the statement of cash flows, an increase in a current liability must be subtracted from net income to reconcile to net cash provided by operating activities.

Accepted Answer

When using the indirect method to present the statement of cash flows, an increase in a current liability is added to net income to reconcile to net cash provided by operating activities, as it represents cash that has been received but not yet earned, or expenses that have been incurred but not yet paid.

Question 5

When using the indirect method in the statement of cash flows, the company would subtract the net change in a current liability account if the balance increased over time.

Accepted Answer

When using the indirect method in the statement of cash flows, an increase in a current liability account (such as accounts payable) would be added to net income to adjust it because the increase indicates that the company held onto cash longer or did not spend cash that would have otherwise reduced its cash balance.

Question 6

When using the indirect method in the statement of cash flows, the company would add the net change in a current asset account if the balance increased over time.

Accepted Answer

When using the indirect method in the statement of cash flows, an increase in a current asset account would be subtracted, not added, to adjust net income to the cash provided by operating activities.

Question 7

A company uses the indirect method to prepare the statement of cash flows. Which of the following items would be subtracted from net income to determine the net cash flow from operating activities on the statement of cash flows?

Accepted Answer

A gain on the sale of equipment is subtracted from net income in the indirect method because it is a non-cash item that increased net income, but did not affect cash flows from operating activities.

Question 8

When a company uses the indirect method to present the statement of cash flows, cash received from the sale of a long-term asset increases the amount of net cash provided by investing activities.

Accepted Answer

When using the indirect method, cash received from the sale of a long-term asset is reported as a cash inflow under the investing activities section of the statement of cash flows. Therefore, it would increase the amount of net cash provided by investing activities.

Question 9

If a company uses the indirect method to prepare the statement of cash flows, how will the adjustment to reflect the amount of cash paid for interest be presented on the statement of cash flows?

Accepted Answer

The adjustment to reflect the amount of cash paid for interest will be for the increase or decrease in interest payable during the period and will adjust net income in the operating activities section in the statement of cash flows. This adjustment reconciles the non-cash expenses (such as depreciation and amortization) included in net income to the actual cash flows from operations.

Question 10

A company uses the indirect method to prepare the statement of cash flows. How can amortization be presented on the statement of cash flows?

Accepted Answer

Amortization expense is a non-cash expense. In the indirect method of preparing the statement of cash flows, non-cash expenses are added back to net income in the operating activities section to adjust for the cash flow impact of these non-cash transactions.

Question 11

If a company uses the indirect method to prepare the statement of cash flows, how would the adjustment to reflect the amount of cash payments to employees be presented on the statement of cash flows?

Accepted Answer

The adjustment to reflect the amount of cash payments to employees would be for the increase or decrease in wages payable during the period and will adjust net income in the operating activities section in the statement of cash flows. This adjustment would represent the portion of the net income that relates to wages paid in cash during the period, which is not reflected in the net income amount reported in the income statement.

Question 12

If a company uses the indirect method to prepare the statement of cash flows, which of the following items would be added to net income to determine the net cash flow from operating activities?

Accepted Answer

A decrease in accounts receivable is added back to net income in the indirect method because it represents cash that was collected, increasing cash flow, but was previously recorded as revenue, not affecting net income at the time of sale.

Question 13

When using the indirect method in the statement of cash flows, the company would subtract the net change in a current asset account if the balance increased over time.

Accepted Answer

This is true. When using the indirect method, an increase in a current asset account (such as accounts receivable or inventory) is subtracted from net income to adjust for the fact that the increase represents cash that was not received or used in the current period.

Question 14

If a company uses the indirect method to prepare the statement of cash flows, how will the adjustment to reflect the amount of cash payments to suppliers be presented on the statement?

Accepted Answer

The adjustment to reflect the amount of cash payments to suppliers will be for the increase or decrease in accounts payable during the period and will adjust net income in the operating activities section in the statement of cash flows. This is because the indirect method starts with net income and then adjusts for non-cash items and changes in working capital. The change in accounts payable is a working capital adjustment that reflects the amount of cash paid to suppliers during the period.

Question 15

If a company uses the indirect method to prepare the statement of cash flows, how can depreciation be presented on the statement of cash flows?

Accepted Answer

Depreciation expense is a non-cash charge that reduces net income but does not affect cash flow. In the indirect method of preparing the statement of cash flows, it is added back to net income in the operating activities section to adjust for the fact that it does not consume cash.

Question 16

When using the indirect method in the statement of cash flows, the company would add the net change in a current liability account if the balance increased over time.

Accepted Answer

This is true. The indirect method starts with net income and adjusts for non-cash items and changes in current asset and liability accounts to arrive at cash flow from operating activities. An increase in a current liability account would reflect an outflow of cash, so it would need to be added back to net income in the operating activities section.

Question 17

When a company uses the indirect method to present the statement of cash flows, depreciation expense must be subtracted from net income to reconcile to net cash provided by operating activities.

Accepted Answer

In the indirect method, depreciation expense is added back to net income because it is a non-cash expense that reduced net income but did not affect cash.

Question 18

If a company uses the indirect method to prepare the statement of cash flows, how will a loss from the sale of equipment be presented on the statement of cash flows?

Accepted Answer

A loss from the sale of equipment is added back to net income in the operating activities section when using the indirect method because it is a non-cash expense that reduced net income on the income statement.

Question 19

A company uses the indirect method to prepare the statement of cash flows, how will a gain from the sale of equipment be presented on the statement of cash flows?

Accepted Answer

When using the indirect method to prepare the statement of cash flows, a gain from the sale of equipment is deducted from net income in the operating activities section. This adjustment is made because the gain is included in the net income calculation but does not involve an actual cash inflow from operating activities. The cash flow from the sale of the equipment itself is reflected in the investing activities section.

Question 20

If a company uses the indirect method to prepare the statement of cash flows, how will the adjustment to reflect the amount of cash received from customers be presented on the statement?

Accepted Answer

The adjustment to reflect the amount of cash received from customers will be for the increase or decrease in accounts receivable during the period and will adjust net income in the operating activities section on the statement of cash flows. This is because the indirect method starts with net income, which includes revenues earned but not necessarily received in cash. The adjustment for changes in accounts receivable reflects the fact that if accounts receivable is increasing, then revenue was earned but cash was not received, and if accounts receivable is decreasing, then cash was received but revenue was not earned.

Quiz 13: Statement of Cash Flows