Investing and Financing Cash Flows and IFRS/U.S. GAAP Differences

Question 1

Which of the following transactions would be classified under cash flow from investing activities (CFI) according to U.S. GAAP?

A) Interest paid on corporate bonds issued by the company.
B) Sale proceeds from the disposal of a subsidiary’s equity stake.
C) Dividends paid to common shareholders.
D) Cash received from issuing new corporate bonds.

Answer Explanation:

Correct Answer: B) Sale proceeds from the disposal of a subsidiary’s equity stake.
Explanation:

Option B is correct because proceeds from selling equity investments are classified as investing cash inflows under U.S. GAAP.
Option A is incorrect because interest paid is classified as an operating cash outflow.
Option C is incorrect because dividends paid to shareholders are classified as financing cash outflows.
Option D is incorrect because issuing new bonds is a financing cash inflow.

Question 2

Under U.S. GAAP, which cash flow is correctly classified as an operating cash flow?

A) Dividends received from equity investments.
B) Cash paid for the purchase of land.
C) Repayment of long-term debt principal.
D) Proceeds from the sale of held-to-maturity securities.

Answer Explanation:

Correct Answer: A) Dividends received from equity investments.
Explanation:

Option A is correct because dividends received are considered operating cash inflows under U.S. GAAP.
Option B is incorrect because the purchase of land is classified as an investing cash outflow.
Option C is incorrect because repaying the principal on long-term debt is a financing cash outflow.
Option D is incorrect because the sale of held-to-maturity securities would be considered an investing cash inflow.

Question 3

A company reported the following cash flows: $500,000 from issuing new common stock, $300,000 from the sale of equipment, $200,000 of interest paid on existing debt, and $100,000 of dividends paid to shareholders. What is the net cash flow from financing activities (CFF)?

A) $600,000 inflow
B) $400,000 inflow
C) $300,000 inflow
D) $200,000 outflow

Answer Explanation:

Correct Answer: C) $300,000 inflow.
Calculation:

Cash inflow from issuing new stock: +$500,000 (financing activity).

Dividends paid: -$100,000 (financing activity).

Net CFF = $500,000 - $100,000 = $300,000 inflow.

Option A is incorrect because it mistakenly includes investing cash flows (sale of equipment) in financing activities.

Option B includes an incorrect amount of financing cash flows.

Option D incorrectly classifies the net cash flow as an outflow.

Question 4

According to U.S. GAAP, which of the following would be classified as a financing cash outflow?

A) Principal payments on a mortgage.
B) Purchase of a patent.
C) Cash paid for interest on a loan.
D) Dividends received from a long-term investment.

Answer Explanation:

Correct Answer: A) Principal payments on a mortgage.
Explanation:

Option A is correct because repaying the principal on debt is a financing cash outflow.
Option B is incorrect because purchasing a patent is an investing cash outflow.
Option C is incorrect because paying interest on a loan is classified as an operating cash outflow.
Option D is incorrect because dividends received are classified as operating cash inflows.

Question 5

XYZ Corp. reported a cash inflow of $2 million from the sale of equipment, a $500,000 outflow from buying marketable securities, $1 million paid in interest, and $800,000 received from issuing bonds. What is XYZ Corp.’s cash flow from investing activities (CFI)?

A) $1,500,000 inflow
B) $1,200,000 inflow
C) $1,500,000 outflow
D) $1,000,000 inflow

Answer Explanation:

Correct Answer: A) $1,500,000 inflow.
Calculation:

Sale of equipment: +$2,000,000 (investing inflow).

Purchase of marketable securities: -$500,000 (investing outflow).

Net CFI = $2,000,000 - $500,000 = $1,500,000 inflow.

Option B miscalculates the net cash flow by including operating or financing activities.

Option C incorrectly classifies the net result as an outflow.

Option D underestimates the net investing cash flow by excluding relevant items.

Question 6

Delta Inc. acquired machinery for $30,000 during the year. The gross property, plant, and equipment (PP&E) increased by $12,000, and Delta reported a $5,000 loss on the sale of old machinery in the income statement. What is the cash inflow from the disposal of machinery?

A) $7,000
B) $17,000
C) $10,000
D) $15,000

Answer Explanation:

Correct Answer: B) $17,000.
Calculation:

Compute the gross cost of disposed PP&E:
Disposals gross cost = Beginning gross PP&E + Acquisitions - Ending gross PP&E
Disposals gross cost = $60,000 + $30,000 - $72,000 = $18,000.
Compute accumulated depreciation on disposed PP&E:
Accumulated depreciation on disposed PP&E = Beginning accumulated depreciation + Depreciation expense - Ending accumulated depreciation
Accumulated depreciation on disposed PP&E = $20,000 + $8,000 - $23,000 = $5,000.
Compute carrying value of PP&E disposal:
Carrying value = Gross cost - Accumulated depreciation = $18,000 - $5,000 = $13,000.
Compute disposal proceeds:
Disposal proceeds = Carrying value + Loss on disposal = $13,000 + $5,000 = $17,000.
Option A incorrectly calculates the disposal proceeds by misaligning the gain/loss adjustments.
Option C is incorrect due to miscalculating the accumulated depreciation effect.
Option D miscalculates the impact of the gain on the disposal proceeds.

Question 7

During 2023, Omega Corp. recorded a gain of $12,000 on the sale of equipment. The net carrying value of the equipment was $28,000. If Omega’s accumulated depreciation increased by $8,000 during the year, what was the original cost of the disposed equipment?

A) $36,000
B) $40,000
C) $32,000
D) $48,000

Answer Explanation:

Correct Answer: B) $40,000.
Calculation:

Compute the gross cost of disposed equipment:
Gross cost of disposed equipment = Carrying value + Accumulated depreciation = $28,000 + $12,000 = $40,000.
Option A underestimates the original cost due to incorrect adjustment of depreciation.
Option C does not account correctly for the gain on disposal.
Option D overestimates the cost due to an error in carrying value calculations

Question 8

ABC Ltd. reported a CFI of $0, having spent $50,000 on new equipment and reported proceeds from asset disposals. If the company sold land with a book value of $20,000 and recognized a gain of $15,000 on this sale, what was the total cash inflow from all asset disposals?

A) $65,000
B) $50,000
C) $85,000
D) $70,000

Answer Explanation:

Correct Answer: C) $85,000.
Calculation:

Compute proceeds from land disposal:
Proceeds = Book value + Gain = $20,000 + $15,000 = $35,000.
Since CFI is $0, the proceeds from all disposals must equal the cash outflow of $50,000 spent on new equipment.
Total proceeds = $50,000 + $35,000 = $85,000.
Option A miscalculates by excluding the equipment cost impact.
Option B ignores proceeds from land.
Option D does not fully account for the disposal gain impact.

Question 9

XYZ Co. recorded depreciation of $6,000, purchased new PP&E worth $45,000, and reported accumulated depreciation of $10,000 on disposed PP&E. If the net PP&E increased by $15,000 during the year, what is the carrying value of the disposed PP&E?

A) $20,000
B) $36,000
C) $25,000
D) $41,000

Answer Explanation:

Correct Answer: C) $25,000.
Calculation:

Compute carrying value of disposed PP&E using the shortcut approach:
Carrying value of disposed = Beginning net PP&E - Depreciation + Additions - Ending net PP&E
Carrying value of disposed = $60,000 - $6,000 + $45,000 - $84,000 = $25,000.
Option A miscalculates the impact of depreciation and additions.
Option B and D misapply the accumulated depreciation.

Question 10

If MNO Inc. reported an $8,000 gain on the sale of land with an original cost of $35,000 and accumulated depreciation of $15,000, what were the disposal proceeds?

A) $43,000
B) $40,000
C) $50,000
D) $48,000

Answer Explanation:

Correct Answer: D) $48,000.
Calculation:

Compute disposal proceeds:
Proceeds = Book value + Gain = ($35,000 - $15,000) + $8,000 = $48,000.
Option A fails to adjust for gain appropriately.
Option B does not consider depreciation.
Option C incorrectly calculates the gain’s impact.

Question 11

In 2022, Netflix Inc. reported a $7,000 inflow from issuing bonds at par and an $8,000 outflow from repurchasing its own stock. Netflix also declared dividends of $12,000, and dividends payable increased from $1,000 to $3,000. What is the total cash flow from financing activities for Netflix in 2022?

A) $(9,000)
B) $(13,000)
C) $(11,000)
D) $(7,000)

Answer Explanation:

Correct Answer: C) $(11,000).
Calculation:

Net principal from bonds:
$7,000 (inflow)
Net cash outflow from share repurchase:
$8,000 (outflow)
Dividends paid:
Dividend declared: $(12,000)
Increase in dividends payable: $2,000
Cash dividends paid: $(12,000) + $2,000 = $(10,000)
Total CFF:
$7,000 (bonds) - $8,000 (repurchase) - $10,000 (dividends) = $(11,000).
Option A incorrectly calculates the effect of dividend payable.
Option B misstates the dividends payable adjustment.
Option D misses the dividend declared adjustment.

Question 12

In 2023, Tesla issued new shares resulting in a $20,000 inflow and paid down $15,000 of its existing debt. It declared dividends of $5,000, with dividends payable decreasing by $1,000. What was Tesla’s cash flow from financing activities?

A) $3,000
B) $(1,000)
C) $(2,000)
D) $(4,000)

Answer Explanation:

Correct Answer: B) $(1,000).
Calculation:

Net proceeds from shares:
$20,000 (inflow)
Debt repayment:
$(15,000) (outflow)
Dividends paid:
Declared dividends: $(5,000)
Decrease in dividends payable: $(1,000)
Cash paid for dividends: $(5,000) - $(1,000) = $(6,000)
Total CFF:
$20,000 - $15,000 - $6,000 = $(1,000).
Option A misses the impact of the change in dividends payable.
Option C and D incorrectly account for debt repayment or dividend adjustments.

Question 13

Apple Inc. reported $10,000 in new bond issuances and repurchased $12,000 of its own shares. Dividends declared were $14,000, and dividends payable increased from $3,000 to $7,000. Calculate the cash flow from financing for Apple in 2023.

A) $(12,000)
B) $(8,000)
C) $(10,000)
D) $(6,000)

Answer Explanation:

Correct Answer: B) $(8,000).
Calculation:

Net bond inflow:
$10,000 (inflow)
Repurchase of shares:
$(12,000) (outflow)
Dividends paid:
Declared dividends: $(14,000)
Increase in dividends payable: $4,000
Cash paid for dividends: $(14,000) + $4,000 = $(10,000)
Total CFF:
$10,000 - $12,000 - $10,000 = $(8,000).
Option A fails to adjust correctly for dividend payments.
Option C miscalculates the share repurchase impact.
Option D miscalculates the dividend payable effect.

Question 14

Alphabet Inc. had a net bond repayment of $3,000, declared dividends of $6,500, and dividends payable decreased from $2,000 to $500. Additionally, Alphabet issued new shares with net proceeds of $4,500. What is the net cash flow from financing activities?

A) $(5,500)
B) $(7,000)
C) $(3,500)
D) $(4,000)

Answer Explanation:

Correct Answer: C) $(3,500).
Calculation:

Net bond repayment:
$(3,000) (outflow)
Net proceeds from shares:
$4,500 (inflow)
Dividends paid:
Declared dividends: $(6,500)
Decrease in dividends payable: $(1,500)
Cash dividends paid: $(6,500) - $(1,500) = $(5,000)
Total CFF:
$(3,000) + $4,500 - $5,000 = $(3,500).
Option A and B miscalculate bond repayment and dividend payable adjustments.
Option D incorrectly assesses the inflow from shares issued.

Question 15

Microsoft declared dividends of $9,000 in 2022, repaid bonds worth $7,500, and recorded a $4,000 increase in bonds payable. Additionally, dividends payable decreased from $3,500 to $2,000. Calculate Microsoft’s cash flow from financing activities.

A) $(11,000)
B) $(12,500)
C) $(13,500)
D) $(10,500)

Answer Explanation:

Correct Answer: D) $(10,500).
Calculation:

Net bond inflow/outflow:
Increase in bonds payable: $4,000
Repayment: $(7,500)
Net: $(3,500)
Dividends paid:
Declared dividends: $(9,000)
Decrease in dividends payable: $(1,500)
Cash dividends paid: $(9,000) - $(1,500) = $(7,500)
Total CFF:
$(3,500) - $7,500 = $(10,500).
Option A fails to adjust dividends properly.
Option B and C incorrectly account for the impact of changes in bond payables.

Question 16

Alphabet Inc. uses the indirect method and reports a net income of $50,000. The total revenues and gains amount to $120,000, including a gain on asset disposal of $12,000. The total expenses and losses are $80,000, including $10,000 depreciation and $3,000 loss on disposal of PP&E. If accounts receivable increased by $5,000 and unearned revenue increased by $3,000, what is the cash collected from customers under the direct method?

A) $108,000
B) $114,000
C) $110,000
D) $106,000

Answer Explanation:

Correct Answer: C) $110,000.
Calculation:

Revenues less noncash gains:
Total revenues: $120,000
Less gain on disposal: $(12,000)
Revenues adjusted for noncash charges: $108,000
Adjust for working capital changes:
Decrease due to accounts receivable increase: $(5,000)
Increase due to unearned revenue increase: $3,000
Cash collected from customers: $108,000 - $5,000 + $3,000 = $110,000.
Option A fails to account properly for the change in unearned revenue.
Option B miscalculates the adjustment for accounts receivable.
Option D incorrectly handles the noncash gains adjustment.

Question 17

Microsoft Corp. has net income of $75,000. The reported total revenues and gains are $140,000, which include a $15,000 gain from the sale of land. Total expenses and losses are $65,000, which include $8,000 depreciation and a $5,000 loss on the disposal of machinery. With accounts payable increasing by $6,000, inventory decreasing by $4,000, and wages payable decreasing by $2,000, what is the cash paid to suppliers under the direct method?

A) $(56,000)
B) $(50,000)
C) $(52,000)
D) $(54,000)

Answer Explanation:

Correct Answer: D) $(54,000).
Calculation:

Expenses less noncash charges:
Total expenses: $65,000
Less depreciation: $(8,000)
Less loss on disposal: $(5,000)
Adjusted expenses: $52,000
Adjust for working capital changes:
Increase in accounts payable: $6,000 (source)
Decrease in inventory: $4,000 (source)
Cash paid to suppliers: $52,000 - $6,000 - $4,000 = $(54,000).
Option A miscalculates changes in accounts payable.
Option B misinterprets the inventory adjustment.
Option C incorrectly adds changes in working capital.

Question 18

Apple Inc. reports a net income of $65,000. The company’s total revenues and gains amount to $130,000, including a $10,000 gain on asset disposal. The expenses and losses are $75,000, including $7,000 depreciation and $4,000 loss on disposal of equipment. With accounts receivable increasing by $3,000, wages payable decreasing by $1,500, and taxes payable increasing by $2,500, what is the cash paid to employees under the direct method?

A) $(7,000)
B) $(8,000)
C) $(9,000)
D) $(10,000)

Answer Explanation:

Correct Answer: C) $(9,000).
Calculation:

Expense less noncash adjustments:
Total expenses: $75,000
Less depreciation: $(7,000)
Less loss on disposal: $(4,000)
Adjusted expenses: $64,000
Wages paid adjustment:
Wages payable decrease: $(1,500)
Cash paid to employees: $(64,000) - $(1,500) = $(9,000).
Option A does not correctly include the wages payable impact.
Option B ignores the change in wages payable.
Option D miscalculates the effects of working capital changes.

Question 19

Tesla Inc. has a net income of $55,000. Total revenues and gains reported are $125,000, including a gain on the sale of equipment of $8,000. Total expenses and losses are $70,000, which include $9,000 depreciation and $6,000 loss on disposal of assets. Tesla’s accounts payable increased by $5,000, and interest payable increased by $1,500. What is the cash paid for interest under the direct method?

A) $(500)
B) $(1,500)
C) $(2,000)
D) $(1,000)

Answer Explanation:

Correct Answer: A) $(500).
Calculation:

Interest expense adjustment:
Total expenses: $70,000
Less depreciation: $(9,000)
Less loss on disposal: $(6,000)
Adjusted expenses: $55,000
Adjust for interest payable:
Increase in interest payable: $1,500 (source)
Cash paid for interest: $55,000 - $1,500 = $(500).
Option B misstates the interest payable adjustment.
Option C fails to account correctly for working capital changes.
Option D does not properly adjust for the increase in payables.

Question 20

Amazon Inc. reported a net income of $60,000 with total revenues and gains of $130,000, including a gain on the sale of a building for $20,000. Total expenses and losses were $70,000, with $10,000 depreciation and a $5,000 loss on disposal of assets. Inventory decreased by $4,000, and accounts payable decreased by $2,000. What is the cash paid to suppliers under the direct method?

A) $(64,000)
B) $(62,000)
C) $(66,000)
D) $(68,000)

Answer Explanation:

Correct Answer: B) $(62,000).
Calculation:

Expenses less noncash charges:
Total expenses: $70,000
Less depreciation: $(10,000)
Less loss on disposal: $(5,000)
Adjusted expenses: $55,000
Adjust for working capital changes:
Decrease in inventory: $4,000 (source)
Decrease in accounts payable: $(2,000) (use)
Cash paid to suppliers: $(55,000) + $4,000 - $2,000 = $(62,000).
Option A overstates the impact of accounts payable.
Option C miscalculates changes in working capital.
Option D does not correctly include inventory adjustments.

Question 21

Apple Inc. reported $500 million in interest paid and $200 million in dividends paid during 2022 under U.S. GAAP. If Apple were reporting under IFRS, which of the following classifications would be allowed for these cash flows?

A) Interest paid as CFF; dividends paid as CFF.
B) Interest paid as CFI; dividends paid as CFO.
C) Interest paid as CFO or CFF; dividends paid as CFO or CFF.
D) Interest paid as CFI; dividends paid as CFI.

Answer Explanation:

Correct Answer: C) Interest paid as CFO or CFF; dividends paid as CFO or CFF.
Under IFRS, interest paid can be classified as either operating or financing activities, and dividends paid can also be classified as either operating or financing activities. This flexibility contrasts with U.S. GAAP, which requires interest paid to be classified as CFO and dividends paid as CFF.

Option A incorrectly limits classifications.
Option B incorrectly classifies interest paid as CFI, which is not allowed under IFRS.
Option D misclassifies both interest and dividends.

Question 22

In 2023, Tesla Inc. received $100 million in dividends from its investments and reported this as CFO under U.S. GAAP. If Tesla were using IFRS, what other classification option would be available for this cash flow?

A) CFI
B) CFF
C) CFO only
D) Neither CFI nor CFF.

Answer Explanation:

Correct Answer: A) CFI.
Under IFRS, dividends received can be classified as either operating or investing activities. This contrasts with U.S. GAAP, where dividends received are always classified as CFO.

Option B is incorrect because CFF is not an option for dividends received.
Option C reflects the U.S. GAAP restriction, not IFRS flexibility.
Option D is incorrect because CFI is a valid classification under IFRS.

Question 23

Microsoft Corp. sold a building for $300 million and paid $60 million in taxes on the sale under U.S. GAAP, recording $300 million in CFI and $60 million in CFO. If Microsoft were using IFRS, how could these transactions be reported?

A) $240 million net inflow in CFI.
B) $300 million in CFI and $60 million in CFO.
C) $300 million in CFI and $60 million in CFF.
D) $240 million net inflow in CFF.

Answer Explanation:

Correct Answer: A) $240 million net inflow in CFI.
Under IFRS, taxes paid related to investing transactions can be reported in CFI, allowing a net presentation. This differs from U.S. GAAP, where all taxes paid are classified as CFO.

Option B describes the U.S. GAAP treatment.
Option C misclassifies taxes as CFF, which is not appropriate for this transaction.
Option D incorrectly places both the sale and taxes in financing activities.

Question 24

Alphabet Inc. classified a bank overdraft of $50 million as a financing liability under U.S. GAAP. How would this be treated under IFRS?

A) As cash in the balance sheet and included in CFO.
B) As debt in the balance sheet and included in CFF.
C) As an investing liability and included in CFI.
D) As a financing liability but excluded from cash.

Answer Explanation:

Correct Answer: A) As cash in the balance sheet and included in CFO.
Under IFRS, bank overdrafts are considered part of cash and cash equivalents, impacting CFO. U.S. GAAP treats overdrafts as short-term debt, included in financing activities.

Option B reflects U.S. GAAP treatment, not IFRS.
Option C misclassifies the overdraft.
Option D incorrectly excludes overdrafts from cash equivalents under IFRS.

Question 25

Amazon Inc. received $300 million in interest income and classified it as CFO under U.S. GAAP. What options are available for Amazon under IFRS, and why might it choose an alternative classification?

A) CFI to match the classification of investing returns.
B) CFF to align with financing income sources.
C) CFO to maintain consistency with cash operating activities.
D) CFO or CFI depending on the company’s presentation preference.

Answer Explanation:

Correct Answer: D) CFO or CFI depending on the company’s presentation preference.
Under IFRS, interest received can be classified as either CFO or CFI, providing companies flexibility in presentation. Companies might choose CFI if they consider the income a return on investing activities.

Option A correctly identifies CFI as an option but doesn’t address CFO.
Option B incorrectly states CFF as a possibility, which it is not.
Option C only identifies one of the correct classifications.