Cash Flow Introduction & Direct Method CFO

Question 1

In 2022, Microsoft Corporation reported revenue of $200 billion and an increase in accounts receivable of $15 billion. The company’s beginning accounts receivable balance was $30 billion. Assuming all revenue was generated from credit sales, what was Microsoft’s cash collection from customers during 2022?

A) $185 billion
B) $200 billion
C) $215 billion
D) $170 billion

Answer Explanation:

Correct Answer: A) $185 billion
Calculation and Explanation:

Beginning accounts receivable = $30 billion

Ending accounts receivable = $30 billion + $15 billion = $45 billion

Cash collections = Revenue - Change in accounts receivable

Cash collections = $200 billion - ($45 billion - $30 billion) = $185 billion

Option B is incorrect because it assumes no change in accounts receivable, ignoring the accruals.

Option C incorrectly adds instead of subtracting the change in receivables.

Option D incorrectly estimates cash collections by miscalculating the change in receivables.

Question 2

In 2021, Amazon reported net income of $33 billion, but its cash flow from operations (CFO) was only $29 billion. Which of the following could explain the discrepancy between Amazon’s net income and its operating cash flows?

A) Amazon recorded significant non-cash depreciation and amortization expenses during the year.
B) Amazon’s accounts payable increased substantially, reducing cash outflows.
C) Amazon extended more credit to customers, increasing its accounts receivable.
D) Amazon received large advances from customers, increasing its unearned revenue balance.

Answer Explanation:

Correct Answer: C) Amazon extended more credit to customers, increasing its accounts receivable.
Explanation:

Extending more credit increases accounts receivable, reducing cash collections relative to net income, which explains the discrepancy.
Option A is incorrect because depreciation and amortization are non-cash charges that would increase CFO, not reduce it.
Option B would have increased CFO by deferring cash payments.
Option D would increase CFO since cash is received upfront, even if not yet recognized as revenue.

Question 3

Apple Inc. reported an increase in cash of $5 billion during 2022. The company’s cash flow from operating activities was $60 billion, cash flow used in investing activities was $50 billion, and it paid $15 billion in dividends. What was the cash flow from financing activities, excluding dividends?

A) $10 billion inflow
B) $15 billion inflow
C) $10 billion outflow
D) $15 billion outflow

Answer Explanation:

Correct Answer: A) $10 billion inflow
Calculation and Explanation:

Change in cash = CFO + CFI + CFF

$5 billion = $60 billion - $50 billion + CFF

CFF = $5 billion - $60 billion + $50 billion = $10 billion inflow

Excluding dividends, the $15 billion dividends were already accounted for in financing cash flow, confirming an inflow.

Option B misinterprets cash flows by including dividends paid as part of inflows.

Option C and D incorrectly assume cash outflows when inflows are positive.

Question 4

During 2022, Boeing Company’s income statement reported a net income of $10 billion. The statement of cash flows showed cash paid for new investments in PP&E of $8 billion and cash dividends paid of $2 billion. If Boeing’s beginning and ending cash balances were $3 billion and $5 billion, respectively, what was Boeing’s cash flow from operating activities for 2022?

A) $16 billion
B) $12 billion
C) $10 billion
D) $8 billion

Answer Explanation:

Correct Answer: A) $16 billion
Calculation and Explanation:

Ending Cash = Beginning Cash + CFO - Cash Outflows (Investing + Financing)

$5 billion = $3 billion + CFO - ($8 billion + $2 billion)

CFO = $5 billion - $3 billion + $8 billion + $2 billion = $16 billion

Option B miscalculates cash flows by not including all outflows.

Option C and D incorrectly simplify the relationship, leading to undervalued CFO estimations.

Question 5

Alphabet Inc.’s statement of cash flows reported cash flow from operations of $50 billion, investing cash outflows of $30 billion, and a net increase in cash of $5 billion. If Alphabet repurchased $10 billion worth of stock and paid no dividends, what were the cash inflows from other financing activities?

A) $15 billion
B) $20 billion
C) $25 billion
D) $10 billion

Answer Explanation:

Correct Answer: A) $15 billion
Calculation and Explanation:

Change in Cash = CFO + CFI + CFF

$5 billion = $50 billion - $30 billion + CFF

CFF = $5 billion - $50 billion + $30 billion = $15 billion inflow

Repurchasing $10 billion in stock implies there were other financing inflows of $15 billion to net the overall financing cash flow to $15 billion.

Option B and C incorrectly account for inflows without adjusting for repurchases.

Option D assumes zero other inflows, which contradicts the change in cash reported.

Question 6

Loftus Communications Limited reported revenue of £2,000,000 in 20X2 and an increase in accounts receivable from £500,000 in 20X1 to £900,000 in 20X2. If the company also saw an increase in unearned revenue from £300,000 to £1,000,000 during the year, what was the total cash received from customers in 20X2?

A) £2,000,000
B) £2,100,000
C) £2,300,000
D) £1,600,000

Answer Explanation:

Correct Answer: C) £2,300,000
Calculation and Explanation:

Revenue reported = £2,000,000

Increase in accounts receivable = £900,000 - £500,000 = £400,000 (use of cash)

Increase in unearned revenue = £1,000,000 - £300,000 = £700,000 (source of cash)

Cash received from customers = Revenue - Increase in Accounts Receivable + Increase in Unearned Revenue

Cash received = £2,000,000 - £400,000 + £700,000 = £2,300,000

Option A is incorrect because it does not adjust for changes in accounts receivable or unearned revenue.

Option B partially adjusts for changes but miscalculates one component.

Option D incorrectly subtracts changes, suggesting an understanding gap of deferred revenue impact.

Question 7

Loftus Communications Limited deferred revenue from its maintenance contracts, which rose from £300,000 in 20X1 to £1,000,000 in 20X2. What does this increase in deferred revenue imply about Loftus’s cash position during 20X2?

A) Loftus generated significant cash flow from operations through advance payments by customers.
B) Loftus experienced an increased use of cash due to higher receivables.
C) The increase in deferred revenue negatively impacted cash flow, reducing available funds.
D) Loftus’s cash flow from operations was entirely dependent on credit sales.

Answer Explanation:

Correct Answer: A) Loftus generated significant cash flow from operations through advance payments by customers.
Explanation:

The increase in deferred revenue indicates that Loftus received cash from customers before delivering services, enhancing cash flow.
Option B misinterprets the impact of deferred revenue by focusing on receivables rather than advance payments.
Option C incorrectly assumes that the increase in deferred revenue is a cash outflow rather than an inflow.
Option D is incorrect as it disregards the impact of advance payments reflected in deferred revenue.

Question 8

Loftus Communications Limited’s accounts receivable increased by £400,000 in 20X2. Which of the following best describes the cash flow impact of this increase on Loftus’s financial statements?

A) It indicates a cash inflow because customers paid faster than expected.
B) It signifies a cash outflow since Loftus extended more credit to its customers.
C) The increase in receivables has no direct impact on cash flow.
D) The change in accounts receivable enhances net income but does not affect cash flow.

Answer Explanation:

Correct Answer: B) It signifies a cash outflow since Loftus extended more credit to its customers.
Explanation:

An increase in accounts receivable means more sales were made on credit, delaying cash receipts, and thus, it’s a use of cash.
Option A is incorrect; a decrease in receivables would indicate faster payments.
Option C misunderstands the relationship between receivables and cash flow.
Option D confuses accrual impacts on net income with cash impacts, which are distinct.

Question 9

f Loftus Communications Limited’s unearned revenue increased by £700,000 in 20X2, which of the following accurately reflects the financial statement impact of this change?

A) It improves net income because the revenue is recognized immediately.
B) It boosts cash flow from operations since cash is received before services are performed.
C) It increases liabilities, reducing the overall equity of the company.
D) It has no impact on cash flow or liabilities until the revenue is earned.

Answer Explanation:

Correct Answer: B) It boosts cash flow from operations since cash is received before services are performed.
Explanation:

Unearned revenue represents cash collected in advance, directly increasing operating cash flows without impacting income until the service is performed.
Option A is incorrect because revenue is deferred, not recognized.
Option C partially describes the liability impact but misses the positive cash flow effect.
Option D fails to recognize the immediate cash inflow associated with unearned revenue.

Question 10

Loftus Communications Limited’s cash flow statement indicated cash receipts of £2,300,000 during 20X2, driven by increased unearned revenue and accounts receivable movements. Which of the following strategies could Loftus employ to maintain this level of cash flow in subsequent years?

A) Increase credit terms to boost sales, even if it raises accounts receivable.
B) Focus on enhancing upfront cash payments by expanding maintenance contracts.
C) Reduce prices to accelerate cash collections and attract more cash sales.
D) Limit deferred revenue by recognizing revenue as soon as possible.

Answer Explanation:

Correct Answer: B) Focus on enhancing upfront cash payments by expanding maintenance contracts.
Explanation:

Expanding maintenance contracts helps sustain cash inflows by collecting cash in advance, stabilizing cash flow from operations.
Option A may increase sales but could worsen cash flow due to growing receivables.
Option C might improve sales volume but would not necessarily enhance cash flow stability from contracts.
Option D could undermine the strategic cash inflow advantage of deferred revenue.

Question 11

Which of the following best describes the first step when preparing a cash flow statement using the direct method?

A) Identify noncash charges such as depreciation and adjust for them.
B) Begin with net income and adjust for changes in working capital.
C) Start at the top of the income statement with revenue and analyze associated balance sheet accounts.
D) Compute the total of cash inflows and outflows directly from the changes in balance sheet items.

Answer Explanation:

Correct Answer: C) Start at the top of the income statement with revenue and analyze associated balance sheet accounts.
Explanation:

In the direct method, preparation begins by examining revenue and identifying related changes in the balance sheet. This is distinct from the indirect method, which starts with net income.
Option A and Option B incorrectly describe steps related to the indirect method.
Option D is incorrect as it oversimplifies the direct method and does not involve calculating cash flows directly from balance sheet changes.

Question 12

When using the direct method of cash flow statement preparation, an increase in accounts receivable would be:

A) Subtracted from revenue to determine cash collected from customers.
B) Added to revenue to reflect total cash inflows from sales.
C) Ignored since it is not a cash flow activity.
D) Included as an operating cash outflow under cash operating expenses.

Answer Explanation:

Correct Answer: A) Subtracted from revenue to determine cash collected from customers.
Explanation:

An increase in accounts receivable indicates that more sales were made on credit, reducing the actual cash collected from customers. Therefore, it is subtracted from revenue.
Option B is incorrect because adding it would falsely inflate cash inflows.
Option C misinterprets the cash impact of changes in working capital.
Option D confuses accounts receivable adjustments with cash operating expenses.

Question 13

Loftus Corp. is preparing its cash flow statement using the direct method. If accounts payable increased by $200,000 during the year, what impact does this have on the calculation of cash flow from operating activities?

A) It is subtracted from cost of goods sold, increasing cash flow from operations.
B) It is added to cost of goods sold, reducing cash flow from operations.
C) It is a use of cash and should be treated as an operating outflow.
D) It represents a source of cash and should be added to cash flow from operations.

Answer Explanation:

Correct Answer: D) It represents a source of cash and should be added to cash flow from operations.
Explanation:

An increase in accounts payable means the company delayed cash payments to suppliers, which increases cash flow from operations as it’s a source of cash.
Option A incorrectly treats it as an adjustment to the cost of goods sold rather than a direct impact on cash flows.
Option B is the opposite of the correct cash flow adjustment.
Option C misunderstands the nature of payables as a source rather than a use of cash.

Question 14

When preparing a cash flow statement under the direct method, which of the following adjustments is necessary for the cost of goods sold (COGS)?

A) Subtract increases in inventory and add increases in accounts payable.
B) Add increases in inventory and subtract increases in accounts payable.
C) Ignore inventory changes and adjust only for accounts payable changes.
D) Treat COGS as non-cash and exclude it from the cash flow calculations.

Answer Explanation:

Correct Answer: A) Subtract increases in inventory and add increases in accounts payable.
Explanation:

Increases in inventory represent additional cash outflows for inventory purchases, and increases in accounts payable represent delayed payments, thus conserving cash.
Option B reverses the adjustments, leading to incorrect cash flow calculations.
Option C neglects the importance of inventory adjustments in determining the cash outflow related to COGS.
Option D incorrectly assumes COGS is non-cash, which misrepresents the nature of the expense.

Question 15

Which of the following is a key distinction between the direct and indirect methods of cash flow statement preparation?

A) Only the direct method shows the net income reconciliation to cash flow from operations.
B) The direct method provides more detailed information about cash receipts and payments.
C) The indirect method includes non-cash transactions, while the direct method does not.
D) Cash flows from investing and financing activities differ between the two methods.

Answer Explanation:

Correct Answer: B) The direct method provides more detailed information about cash receipts and payments.
Explanation:

The direct method specifically identifies cash inflows and outflows, allowing for a clear understanding of cash movement, unlike the indirect method, which starts with net income and adjusts for non-cash items.
Option A is incorrect as the net income reconciliation is specific to the indirect method.
Option C misrepresents the inclusion of non-cash adjustments, which are primarily featured in the indirect method.
Option D is false as both methods present cash flows from investing and financing in the same manner.

Question 16

Loftus Communications is calculating cash flows from operating activities using the direct method. Which adjustment is correctly applied when determining the cash collected from customers based on the given balance sheet and income statement?

A) Subtract the increase in accounts receivable and add the decrease in unearned revenue to sales.
B) Add the increase in accounts receivable and subtract the increase in unearned revenue from sales.
C) Subtract the decrease in accounts receivable and add the increase in unearned revenue to sales.
D) Subtract the increase in accounts receivable and add the increase in unearned revenue to sales.

Answer Explanation:

Correct Answer: D) Subtract the increase in accounts receivable and add the increase in unearned revenue to sales.
Explanation:

Cash collected from customers is calculated by adjusting sales for changes in accounts receivable and unearned revenue. An increase in accounts receivable indicates credit sales not yet collected, thus a deduction, while an increase in unearned revenue reflects cash received for future services, thus an addition.
Option A is incorrect because adding a decrease in unearned revenue does not align with the adjustments needed when it increases.
Option B misinterprets the direction of adjustments for both accounts.
Option C incorrectly subtracts a decrease in accounts receivable instead of an increase.

Question 17

When calculating cash paid to suppliers using the direct method, how should the cost of goods sold (COGS) be adjusted based on the provided financial data?

A) Add the increase in inventory and subtract the increase in accounts payable from COGS.
B) Subtract the decrease in inventory and add the increase in accounts payable to COGS.
C) Add the decrease in inventory and add the decrease in accounts payable to COGS.
D) Subtract the increase in inventory and subtract the decrease in accounts payable from COGS.

Answer Explanation:

Correct Answer: B) Subtract the decrease in inventory and add the increase in accounts payable to COGS.
Explanation:

Cash paid to suppliers involves adjusting COGS for changes in inventory and accounts payable. Decreasing inventory indicates that less was purchased than sold, which reduces cash outflows, and increasing accounts payable shows delayed payments to suppliers, conserving cash.
Option A incorrectly adds the increase in inventory, which would suggest purchasing more than reported in COGS.
Option C mistakenly adds adjustments that should actually subtract cash outflows.
Option D misrepresents the treatment of inventory and accounts payable changes.

Question 18

Loftus Communications’ interest expense on the income statement was $1,000, but cash interest paid was $500. Which of the following correctly explains this discrepancy when using the direct method?

A) The increase in interest payable indicates that some interest was accrued but not paid in cash.
B) A decrease in interest payable suggests that previous accruals were paid down in cash this year.
C) Interest expense was misreported and does not match cash flow from financing activities.
D) Interest paid is adjusted for tax effects when reported on the cash flow statement.

Answer Explanation:

Correct Answer: A) The increase in interest payable indicates that some interest was accrued but not paid in cash.
Explanation:

The increase in interest payable reflects that part of the interest expense was accrued rather than paid, reducing the cash outflow for interest.
Option B describes the opposite effect, which does not align with the provided financial data.
Option C is incorrect as there is no misreporting; the difference is due to accrual accounting adjustments.
Option D is irrelevant, as tax effects do not alter cash interest paid under direct method adjustments.

Question 19

Which of the following correctly describes how changes in deferred tax liabilities affect cash paid to tax authorities in the direct method of cash flow preparation?

A) An increase in deferred tax liabilities is added to tax expense to determine cash paid for taxes.
B) An increase in deferred tax liabilities is subtracted from tax expense because it reduces current cash taxes.
C) Changes in deferred tax liabilities have no effect on cash paid to tax authorities and are ignored.
D) Deferred tax liabilities are adjusted only when preparing the indirect method of cash flows.

Answer Explanation:

Correct Answer: B) An increase in deferred tax liabilities is subtracted from tax expense because it reduces current cash taxes.
Explanation:

Deferred tax liabilities represent taxes owed in the future; therefore, an increase indicates that part of the tax expense is deferred, reducing current cash outflows for taxes.
Option A incorrectly suggests adding the increase, which would overstate cash paid.
Option C overlooks the cash flow impact of deferred tax changes.
Option D incorrectly limits the adjustment to the indirect method.

Question 20

Based on the provided balance sheet and income statement, what is the primary reason why depreciation is ignored when calculating cash flows from operations using the direct method?

A) Depreciation is an investing activity and therefore irrelevant to operating cash flows.
B) Depreciation represents a noncash charge that does not impact actual cash flows.
C) Depreciation is adjusted later in the financing section of the cash flow statement.
D) Depreciation is accounted for in cash paid to suppliers as part of cost of goods sold.

Answer Explanation:

Correct Answer: B) Depreciation represents a noncash charge that does not impact actual cash flows.
Explanation:

Depreciation is excluded in the direct method because it does not involve any cash movement; it merely represents the allocation of the cost of tangible assets over time.
Option A misclassifies depreciation as an investing activity.
Option C incorrectly assumes that depreciation is addressed in financing activities, which it is not.
Option D falsely suggests that depreciation affects cash outflows included in cost of goods sold.

Question 21

Given the financial statements of Loftus Communications Limited, calculate the cash paid to suppliers in 20X2 if the cost of goods sold is £2,500,000, accounts payable increased by £600,000, and inventory decreased by £200,000.

A) £1,700,000
B) £1,900,000
C) £2,100,000
D) £2,300,000

Answer Explanation:

Correct Answer: B) £1,900,000
Calculation:

Adjust cost of goods sold for changes in inventory:

Decrease in inventory indicates fewer purchases than reported COGS:
Purchases = £2,500,000 (COGS) - £200,000 (inventory decrease) = £2,300,000.
Adjust purchases for changes in accounts payable:

Increase in accounts payable indicates purchases made on credit:
Cash paid = £2,300,000 (purchases) - £600,000 (increase in accounts payable) = £1,900,000.
Option A is incorrect because it assumes incorrect adjustments for accounts payable.
Option C incorrectly adds the change in accounts payable.
Option D fails to account correctly for the inventory decrease.

Question 22

Loftus Communications reported total operating expenses of £3,000,000 for 20X2. If wages payable decreased by £200,000, accounts payable related to operating expenses increased by £100,000, and no other adjustments are needed, what is the cash paid for operating expenses?

A) £2,900,000
B) £3,100,000
C) £3,200,000
D) £2,800,000

Answer Explanation:

Correct Answer: C) £3,200,000
Calculation:

Start with total operating expenses: £3,000,000.
Adjust for changes in payables:
Decrease in wages payable (a liability): Add £200,000 because past accruals were paid in cash.
Increase in accounts payable: Subtract £100,000 as it indicates more expenses were accrued and not yet paid.
Cash paid for operating expenses:
Cash paid = £3,000,000 + £200,000 - £100,000 = £3,200,000.
Option A misses the correct adjustments for both payables.
Option B only adds for wages payable but ignores accounts payable.
Option D reverses the adjustments for liabilities.

Question 23

Loftus Communications’ income tax expense was £1,500,000 in 20X2. The taxes payable increased by £250,000, and the deferred tax liability increased by £150,000. What was the cash paid for taxes in 20X2?

A) £1,250,000
B) £1,600,000
C) £1,100,000
D) £1,350,000

Answer Explanation:

Correct Answer: A) £1,250,000
Calculation:

Adjust the tax expense for changes in payables and deferred taxes:
Increase in taxes payable means less cash was paid than the expense recognized: Subtract £250,000.
Increase in deferred tax liability indicates a portion of the tax is deferred to future periods: Subtract £150,000.
Cash paid for taxes:
Cash paid = £1,500,000 - £250,000 - £150,000 = £1,250,000.
Option B incorrectly adds the changes in liabilities instead of subtracting.
Option C misses the correct deferred tax adjustment.

Question 24

Loftus Communications received cash from customers totaling £4,000,000 in 20X2. If accounts receivable increased by £400,000 and unearned revenue increased by £600,000, what is the total revenue reported for 20X2?

A) £4,200,000
B) £3,800,000
C) £3,400,000
D) £4,600,000

Answer Explanation:

Correct Answer: B) £3,800,000
Calculation:

Start with cash received from customers: £4,000,000.
Adjust for changes in accounts receivable and unearned revenue:
Increase in accounts receivable: Subtract £400,000 (revenue earned but not yet collected).
Increase in unearned revenue: Subtract £600,000 (cash received but not yet earned).
Total revenue = £4,000,000 - £400,000 - £600,000 = £3,800,000.
Option A incorrectly adds the changes in accounts receivable and unearned revenue.
Option C does not correctly adjust for both accounts.
Option D reverses the adjustments, overstating revenue.

Question 25

In 20X2, Loftus Communications paid cash wages of £1,800,000. If the wages payable account decreased by £100,000 and total wages expense reported on the income statement was £1,900,000, what was the change in wages payable?

A) £0
B) £200,000 decrease
C) £100,000 decrease
D) £100,000 increase

Answer Explanation:

Correct Answer: B) £200,000 decrease
Calculation:

Start with wages expense from the income statement: £1,900,000.
Cash paid for wages was £1,800,000.
Decrease in wages payable must account for the difference:
Wages payable change = £1,900,000 - £1,800,000 = £100,000.
Given that cash paid exceeds the reported expense, wages payable must have decreased by £200,000.
Option A suggests no change, which does not reconcile with the data.
Option C understates the change in wages payable.
Option D incorrectly states an increase instead of a decrease.