Statement of Cash Flows

Question 1

True or False.

The purchase of a 3-month Treasury bill would NOT be reported in a statement of cash flows.

Answer 1

TRUE.

The purchase of a 3-month Treasury bill is a purchase of a cash equivalent. As a result, cash decreases but cash equivalents increase.

Therefore there is no net effect on cash and cash equivalents and the transaction would not be reported in a statement of cash flows.

Question 2

Under the Indirect Method for the Statement of Cash Flows, the sale of equipment at a loss (i.e. for less than the carrying value) would result in:

Answer 2

(1) The amount of the loss added back into the “Operating” activities
(2) The Cash inflow added to the “Investing” activities for the amount of the sale

Question 3

True or False.

Under the cash basis of accounting, revenue would be equal to cash collected from customers.

Answer 3

TRUE.

Under the cash basis of accounting, revenue would be equal to cash collected from customers.

NOTE: You would add Total Revenues for both Cash and Credit Sales AND “Cash Collected” is a Debit Plug

Question 4

True or False.

The signing of a lease results in the recognition of an asset and a liability equal to the present value of the lease payments.

Answer 4

TRUE.

The signing of a lease results in the recognition of an asset and a liability equal to the present value of the lease payments.

NOTE – THIS will result in:

(1) A Cash outflow from operating activities (the payments made on the lease obligation); and
(2) A Cash outflow from financing activities (The portion allocated to principal)

Question 5

HOW do you calculate Cash basis net revenue?

Answer 5

Net cash sales plus collections made during the year on credit sales

NOTE: To calculate collections made during the year on credit sales, first find net credit sales, then adjust for any decrease or increase in accounts receivable

Question 6

For the Statement of Cash Flows:

An (increase) in prepaid expenses:

Answer 6

used cash beyond the amount of expenses

Therefore this would (increase) operating expenses

Question 7

An increase in accounts payable indicates that:

Answer 7

THE entity did not pay for all of the purchases included in cost of sales, requiring the use of less cash.

Therefore, it would be added back into income.

THIS is a (decrease) to your operating expenses

Question 8

An decrease in prepaid insurance expense (an asset) indicates that:

Answer 8

Some of the insurance that had been prepaid in an earlier period was used toward the current period’s expense, requiring less cash for insurance.

Therefore, it would be added back to income.

Question 9

For Cash provided by Operating Activities, a decrease in Accounts Payable and Accrued Liabilities indicates that:

Answer 9

More was paid for these items than was included in the Income Statement (I/S).

Therefore, deduct this amount out of the Cash provided by Operating Activities

Question 10

HOW should accumulated depreciation be handled when calculating Cash provided by Operating Activities?

Answer 10

IT should be added back to income.

WHY? - Because this is an expense that does not require the use of cash.

Therefore, it should be added back when calculating Cash provided by Operating Activities

Question 11

To arrive at the amount of net cash (provided) by Operating Activities:

Answer 11

Adjustments need to be made to net income for the changes in related balance sheet accounts.

E.g. An increase in a liability account will be added to net income and any increase in an asset account will be subtracted

Question 12

A decrease in Accrued Interest Payable indicates that:

Answer 12

The reduction amount of the total interest paid during the year was for the prior period’s expense and only the difference between the reduction and total interest payable amount was for expenses in the current period.

Therefore, the reduction would decrease your interest expense

Question 13

WHAT item is NOT disclosed on the statement of cash flows when prepared under the direct method?

Answer 13

A reconciliation of ending retained earnings to net cash flow from operations

i.e. This is not reported neither on the face of the statement nor in a separate schedule

Question 14

A decrease in the unamortized bond discount balance represents:

Answer 14

Interest expense incurred in the current period that wasn’t a result of a cash disbursement;

Therefore it is added back to net income

Question 15

IF used equipment is sold at a loss, the amount shown as a cash inflow from “Investing Activities” equals:

Answer 15

THE carrying amount of the equipment

NOTE: Because this is NOT an extraordinary item, it is not reported net of tax

Question 16

True or False.

Dividends received are reported under financing activities for GAAP.

Answer 16

FALSE.

“Dividends Received” are reported under “Operating Activities” for GAAP.

Dividends Paid” are reported under “Financing Activities” for GAAP

Question 17

WHEN using the indirect method of preparing a Statement of Cash Flows:

Answer 17

Net Income is adjusted by the

(1) non-cash items of income and expense
(2) non-operating items; and
(3) changes in the balances of accrual related balance sheet accounts
i. e. You have to subtract the non-cash expense items (depreciation and amortization) to arrive at the net income

Question 18

True or False.

Cash flow per share should not be disclosed in the Statement of Cash Flows.

Answer 18

TRUE.

Cash flow per share should not be disclosed, as it may imply that this is the amount that will be paid in dividends.

Question 19

IF a company purchased equipment for cash of $12,000, and sold equipment with a $3,000 carrying value for a gain of $5,000, How should these transactions be reported on the Statement of Cash Flows?

Answer 19

As a inflow of: $8,000 reported in the “Investing Activities”

As an Outflow of: $12,000 reported in the “Investing Activities”

NOTE: These transactions would NOT be netted against one another

Question 20

True or False.

A gain from the sale of used equipment is included in net income as a cash outflow from investment activities.

Answer 20

FALSE.

A gain from the sale of used equipment is included in net income as a deduction from income under Operating Activities.

NOTE: This is under the Indirect Method