Statement of Cash Flows

Question 1

What cash flows are related to the transactions entering into the determination of net operating income?

Answer 1

Operating Activities

Question 2

What cash flows involve the acquisition and sale of long-term assets used in the business, and nonoperating investment assets?

Answer 2

Investment Activities

Question 3

What cash flows result from transactions with creditors and owners?

Answer 3

Financing Activities

Question 4

What type of cash flow activity is interest received on a note receivable?

Answer 4

Operating Activity

Question 5

What type of cash flow activity is interest paid on a note/bond payable?

Answer 5

Operating Activity

Question 6

What type of cash flow activity are dividends paid to the owners/investors?

Answer 6

Financing Activity

Question 7

What type of cash flow activity are dividends received from investment securities?

Answer 7

Operating Activity

Question 8

What type of cash flow activity is collection of principal on a note receivable?

Answer 8

Investment Activity

Question 9

What are the three main components of Investing Activities?

Answer 9

1) Loans made by the entity
2) Investments (AFS or HTM…trading are operating due to short maturity)
3) Property, Plant, & Equipment

*”L-I-P”

Question 10

What balance sheet accounts are generally associated with Operating Activities?

Answer 10

Current assets and liabilities

Question 11

What balance sheet accounts are generally associated with Investing Activities?

Answer 11

Long-term assets

Question 12

What balance sheet accounts are generally associated with Financing Activities?

Answer 12

Long-term liabilities and shareholders equity

Question 13

On the statement of cash flows, what type of activities are generally associated with current assets and liabilities?

Answer 13

Operating Activities

Question 14

On the statement of cash flows, what type of activities are generally associated with long-term assets?

Answer 14

Investment Activities

Question 15

On the statement of cash flows, what type of activities are generally associated with long-term liabilities and shareholders equity?

Answer 15

Financing Activities

Question 16

What is the FASB’s preferred method of preparing the Operating Activities section of the statement of cash flows?

Answer 16

Direct method

Question 17

Are gains and losses from the sale of investments reported using the direct method?

Answer 17

No. Only backed out using indirect method.

Question 18

Would expenses not requiring the use of cash (such as depreciation) be reported using the direct method?

Answer 18

No. Only backed out using indirect method.

Question 19

Under the indirect method, how are net increases in current operating liabilities handled?

Answer 19

Added to net income

Question 20

Under the indirect method, how are net decreases in current operating liabilities handled?

Answer 20

Subtracted from net income

Question 21

Under the indirect method, how are net increases in current operating assets handled?

Answer 21

Subtracted from net income

Question 22

Under the indirect method, how are net decreases in current operating assets handled?

Answer 22

Added to net income

Question 23

Under the indirect method, how are noncash losses and expenses handled?

Answer 23

Added to net income

Question 24

Under the indirect method, how are noncash gains and revenues handled?

Answer 24

Subtracted from net income

Question 25

Under the indirect method, how are losses and expenses whose cash effects are related to investing or financing cash flows handled?

Answer 25

Non-operating losses and expenses are ADDED to net income as the total proceeds (to include the loss/expense) from the sale are already included in Investing or Financing Activities.

Question 26

Under the indirect method, how are gains and revenues whose cash effects are related to investing or financing cash flows handled?

Answer 26

Non-operating gains and revenues are SUBTRACTED from net income as the total proceeds (to include the gain/revenue) from the sale are already included in Investing or Financing Activities.

Question 27

What are the supplementary disclosures required when using the direct method of presenting the statement of cash flows?

Answer 27

1) A schedule reconciling net income to cash flow from operations (indirect method)
2) Schedule of non-cash investing and financing activities (converting bonds to stock, asset purchase with 100% financing, etc.)

Question 28

What are the supplementary disclosures required when using the indirect method of presenting the statement of cash flows?

Answer 28

1) Cash payments for Interest and Income Taxes must be disclosed!
2) Schedule of non-cash investing and financing activities (converting bonds to stock, asset purchase with 100% financing, etc.)

Question 29

Are cash flows per share disclosed?

Answer 29

No. Not a financial metric available on typical finance website.

Question 30

The accrual of which account primarily affects the sales revenue account?

Answer 30

Accounts Receivable

Question 31

The accrual of which two accounts primarily affect the cost of goods sold account?

Answer 31

Inventory and Accounts Payable

Question 32

What are the main steps in preparing a statement of cash flows?

Answer 32

1) Create a 3 column SCF template (1st column increases, 2nd decreases, 3rd net change)
2) Set up T-accounts for each balance sheet account
3) Analyze additional info and prepare journal entries for these transactions
4) Post any unreconciled balance sheet T-account differences to offset against appropriate SCF section
5) If using direct method, use income statement and related balance sheet accounts

Question 33

How is depreciation expense treated for both of the SCF methods?

Answer 33

Ignored under the direct method and added back to net income under the indirect method (as is a noncash expense)

Question 34

How is equity in earnings treated for both of the SCF methods?

Answer 34

Ignored under the direct method and subtracted from net income under the indirect method (as is a noncash revenue)