Practice Problems: Statement of Cash Flows
Indicate whether each of the following statements is true or false.
1. The requirement for a statement of cash flows was preceded by the requirement for the statement of changes in financial position.
2. The statement of cash flows is one of the major financial statements.
3. Investing activities are transactions with creditors and owners.
4. The direct method of calculating cash flows from operations is encouraged by the FASB and is the predominant method used.
5. Issuance of capital stock and the subsequent reacquisition of some of those shares would both be financing activities.
Select the best answer for each of the following questions.
1. Which of the following statements is true?
a. The direct method of calculating cash flows from operations starts with net income and adjusts for noncash revenues and expenses and changes in current assets and current liabilities.
b. The indirect method of calculating cash flows from operations adjusts each item in the income statement to a cash basis.
c. The descriptions in (a) and (b) should be reversed.
d. The direct method is easier to use than the indirect method.
2. Investing activities include all of the following except:
a. Payment of debt.
b. Collection of loans.
c. Making of loans.
d. Sale of available-for-sale and held-to-maturity securities.
3. If sales on an accrual basis are USD 500,000 and accounts receivable increased by USD 30,000, the cash received from customers would be:
a. USD 500,000.
b. USD 470,000.
c. USD 530,000.
d. Cannot be determined.
4. Assume cost of goods sold on an accrual basis is USD 300,000, accounts payable increased by USD 20,000, and inventory increased by USD 50,000. Cash paid for merchandise is:
a. USD 370,000.
b. USD 230,000.
c. USD 270,000.
d. USD 330,000.
5. Assume net income was USD 200,000, depreciation expense was USD 10,000, accounts receivable increased by USD 15,000, and accounts payable increased by USD 5,000. The amount of cash flows from operating activities is:
a. USD 200,000.
b. USD 180,000.
c. USD 210,000.
d. USD 190,000.
Check your answers on the next page.