Statement of Cash Flows

Question 1

Statement of Cash Flows

True or False

Interest payments are cash flows from financing activities.

Answer 1

False

Interest payments are cash flows from operating activities.

Question 2

Statement of Cash Flows

What is the the main difference between the Indirect Method and the Direct Method when preparing a Statement of cash flows?

Answer 2

The INDIRECT METHOD stars out with NET INCOME

The DIRECT METHOD starts out with INCOME FROM CONTINUING OPERATIONS and adjusts for CHANGES in ACCOUNTS.

If the DIRECT METHOD is used, the INDIRECT METHOD must also be shown.

Question 3

Statement of Cash Flows

How is gain on the sale of a plant asset reported on the statement of cash flows?

Answer 3

Gain on sale of a plant asset is included in net income.

If an entity is using the indirect method, an adjustment to remove the gain on the sale of a plant asset must be made to remove the effect from investment activities.

Question 4

Statement of Cash Flows

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?

Answer 4

The proceeds from the sale of equipment is reported as an inflow in the investing section of the statement of cash flows, at its gross amount. This gross amount includes the gain. Therefore, to avoid double counting and to properly classify cash inflows, the gain is subtracted from net income to show the proper cash balance from operating activities.

Question 5

Statement of Cash Flows

True or False

Noncash items that were subtracted in determining income must be added back in. This would include amortization of bond discount, as it is a charge against income but does not decrease cash.

Answer 5

Statement of Cash Flows

True

Noncash items that were subtracted in determining income must be added back in. This would include amortization of bond discount, as it is a charge against income but does not decrease cash.

Question 6

Statement of Cash Flows

True or False

Payment of dividends is a financing activity while receiving dividend income is an operating activity.

Answer 6

True

Payment of dividends is a financing activity while receiving dividend income is an operating activity.

Question 7

Statement of Cash Flows

Is payment of interest on a long-term note payable an Operating, Investing, or Financing activity?

Answer 7

Operating