OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
Multiple Choice
1. LO 16.1 Which of the following statements is false?
A. Noncash activities should be reported in accrual basis financial statements.
B. Net cash flow from operating activities relates to normal business operations.
C. Net income usually equals net cash flow from operating activities.
D. The statement of cash flows is an essential part of the basic financial statements.
Solution
C
2. LO 16.2 Which of these transactions would not be part of the cash flows from the operating
activities section of the statement of cash flows?
A. credit purchase of inventory
B. sales of product, for cash
C. cash paid for purchase of equipment
D. salary payments to employees
Solution
C
3. LO 16.2 Which is the proper order of the sections of the statement of cash flows?
A. financing, investing, operating
B. operating, investing, financing
C. investing, operating, financing
D. operating, financing, investing
Solution
B
4. LO 16.2 Which of these transactions would be part of the financing section?
A. inventory purchased for cash
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
Solution
D
5. LO 16.2 Which of these transactions would be part of the operating section?
A. land purchased, with note payable
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
Solution
B
6. LO 16.2 Which of these transactions would be part of the investing section?
A. land purchased, with note payable
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
Solution
C
7. LO 16.3 What is the effect on cash when current noncash operating assets increase?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
B
8. LO 16.3 What is the effect on cash when current liabilities increase?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
A
9. LO 16.3 What is the effect on cash when current noncash operating assets decrease?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
A
10. LO 16.3 What is the effect on cash when current liabilities decrease?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
B
11. LO 16.3 Which of the following would trigger a subtraction in the indirect operating section?
A. gain on sale of investments
B. depreciation expense
C. decrease in accounts receivable
D. decrease in bonds payable
Solution
A
12. LO 16.3 Which of the following represents a source of cash in the investing section?
A. sale of investments
B. depreciation expense
C. decrease in accounts receivable
D. decrease in bonds payable
Solution
A
13. LO 16.3 Which of the following would be included in the financing section?
A. loss on sale of investments
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
B. depreciation expense
C. increase in notes receivable
D. decrease in notes payable
Solution
D
14. LO 16.4 If beginning cash equaled $10,000 and ending cash equals $19,000, which is true?
A. Operating cash flow 9,000; Investing cash flow (3,500); Financing cash flow (2,500)
B. Operating cash flow 4,500; Investing cash flow 9,000; Financing cash flow (4,500)
C. Operating cash flow 2,000; Investing cash flow (13,000); Financing cash flow 2,000
D. none of the above
Solution
B
15. LO 16.5 Which of the following is a stronger indicator of cash flow flexibility?
A. cash flow from operating activities
B. cash flow to sales ratio
C. free cash flow
D. all three indicate comparable degrees of flexibility
Solution
C
Questions
1. LO 16.1 What function does the statement of cash flows serve, as one of the four basic
financial statements?
Solution
The statement of cash flow serves as a bridge between the cash basis bank transactions and the
accrual basis financial statements (balance sheet, income statement, and retained earnings
statement). It reveals where the cash came from, and where it went.
2. LO 16.1 Is it possible for a company to have significant net income in the same time period
that net cash flows are negative? Explain.
Solution
It is certainly possible to have a significant net income and still have net cash decreases. This is
true because the net income is an accrual basis number, based on revenue earned and costs
incurred, regardless of whether the cash associated with that transaction moved. Also, cash
increases or decreases are often the result of nonoperating transactions (such as investing and
financing transactions), which would not be reflected in the net income at all.
3. LO 16.2 What categories of activities are reported on the statement of cash flows? Does it
matter in what order these sections are presented?
Solution
Operating, Investing, Financing (always in this order).
4. LO 16.2 Describe three examples of operating activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Answers will vary. Responses may include any transaction relating to day-to-day business
transactions. For example, sales revenue, interest revenue, dividend revenue, merchandise
purchases, rent expense, utility expense, salaries expense, interest expense, income tax expense,
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Chapter 16: Statement of Cash Flows
insurance expense, advertising expense, etc., any cash transaction that is not an investing or
financing transaction.
5. LO 16.2 Describe three examples of investing activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Any transaction that is related to acquiring or disposing of long-term assets like land, buildings,
equipment, stocks, bonds, or other investments. Can be cash spent for purchase of long-term
assets, or cash collected from sale of long-term assets.
6. LO 16.2 Describe three examples of financing activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Answers will vary. Responses may include any transaction that is related to issuing or retiring
long-term liabilities or equity. Can be (a) cash received or cash paid to creditors, relating to
borrowing or repaying the principal balance of notes payable or bonds payable, or (b) cash
received or paid, relating to issuance of capital stock, repurchase of treasury stock, or dividends
paid to shareholders.
7. LO 16.3 Explain the difference between the two methods used to prepare the operating section
of the statement of cash flows. How do the results of these two approaches compare?
Solution
The indirect method begins with net income and adjusts for items that affect cash differently than
they affect net income, whereas the direct method requires that each revenue and expense item
be converted to reflect the cash impact from that item. The net cash flow result is the same, no
matter which of the two methods is used.
8. LO 16.3 Why is depreciation an addition in the operating section of the statement of cash
flows, when prepared by the indirect method?
Solution
Depreciation represents a noncash expense that reduced the net income but did not reduce cash.
Noncash expenses must be added back to reconcile net income to net cash flow from operating.
9. LO 16.3 When preparing the operating section of the statement of cash flows, using the
indirect method, how must gains and losses be handled? Why?
Solution
Gains and losses must be removed from the operating section. To accomplish this, reverse the
effect of gains or losses; if a gain has been added to net income, it should be subtracted in the
operating section; if a loss has been deducted to arrive at net income, it should be added back in
the operating section. Why? First, gains and losses relate to long-term assets, which fall under
investing activities, not operating activities. Second, the gain/(loss) on the sale of long-term
assets represents the excess/(deficiency) computed when the asset’s cost basis is subtracted from
sales proceeds, so the number does not accurately represent the cash flow relating to the
transaction.
10. LO 16.3 If a company reports a gain/(loss) from the sale of assets, as part of the net income
on the income statement, and the net book value of those assets on the date of the sale is known,
can the amount of the cash proceeds from the sale be determined? If so, how?
Solution
Yes. Since gain or loss is computed by subtracting net book value from the sales proceeds, the
proceeds could be determined by adding the net book value to the gain/(loss).
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Chapter 16: Statement of Cash Flows
Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
Multiple Choice
1. LO 16.1 Which of the following statements is false?
A. Noncash activities should be reported in accrual basis financial statements.
B. Net cash flow from operating activities relates to normal business operations.
C. Net income usually equals net cash flow from operating activities.
D. The statement of cash flows is an essential part of the basic financial statements.
Solution
C
2. LO 16.2 Which of these transactions would not be part of the cash flows from the operating
activities section of the statement of cash flows?
A. credit purchase of inventory
B. sales of product, for cash
C. cash paid for purchase of equipment
D. salary payments to employees
Solution
C
3. LO 16.2 Which is the proper order of the sections of the statement of cash flows?
A. financing, investing, operating
B. operating, investing, financing
C. investing, operating, financing
D. operating, financing, investing
Solution
B
4. LO 16.2 Which of these transactions would be part of the financing section?
A. inventory purchased for cash
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
Solution
D
5. LO 16.2 Which of these transactions would be part of the operating section?
A. land purchased, with note payable
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
Solution
B
6. LO 16.2 Which of these transactions would be part of the investing section?
A. land purchased, with note payable
B. sales of product, for cash
C. cash paid for purchase of equipment
D. dividend payments to shareholders, paid in cash
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 16: Statement of Cash Flows
Solution
C
7. LO 16.3 What is the effect on cash when current noncash operating assets increase?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
B
8. LO 16.3 What is the effect on cash when current liabilities increase?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
A
9. LO 16.3 What is the effect on cash when current noncash operating assets decrease?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
A
10. LO 16.3 What is the effect on cash when current liabilities decrease?
A. Cash increases by the same amount.
B. Cash decreases by the same amount.
C. Cash decreases by twice as much.
D. Cash does not change.
Solution
B
11. LO 16.3 Which of the following would trigger a subtraction in the indirect operating section?
A. gain on sale of investments
B. depreciation expense
C. decrease in accounts receivable
D. decrease in bonds payable
Solution
A
12. LO 16.3 Which of the following represents a source of cash in the investing section?
A. sale of investments
B. depreciation expense
C. decrease in accounts receivable
D. decrease in bonds payable
Solution
A
13. LO 16.3 Which of the following would be included in the financing section?
A. loss on sale of investments
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Chapter 16: Statement of Cash Flows
B. depreciation expense
C. increase in notes receivable
D. decrease in notes payable
Solution
D
14. LO 16.4 If beginning cash equaled $10,000 and ending cash equals $19,000, which is true?
A. Operating cash flow 9,000; Investing cash flow (3,500); Financing cash flow (2,500)
B. Operating cash flow 4,500; Investing cash flow 9,000; Financing cash flow (4,500)
C. Operating cash flow 2,000; Investing cash flow (13,000); Financing cash flow 2,000
D. none of the above
Solution
B
15. LO 16.5 Which of the following is a stronger indicator of cash flow flexibility?
A. cash flow from operating activities
B. cash flow to sales ratio
C. free cash flow
D. all three indicate comparable degrees of flexibility
Solution
C
Questions
1. LO 16.1 What function does the statement of cash flows serve, as one of the four basic
financial statements?
Solution
The statement of cash flow serves as a bridge between the cash basis bank transactions and the
accrual basis financial statements (balance sheet, income statement, and retained earnings
statement). It reveals where the cash came from, and where it went.
2. LO 16.1 Is it possible for a company to have significant net income in the same time period
that net cash flows are negative? Explain.
Solution
It is certainly possible to have a significant net income and still have net cash decreases. This is
true because the net income is an accrual basis number, based on revenue earned and costs
incurred, regardless of whether the cash associated with that transaction moved. Also, cash
increases or decreases are often the result of nonoperating transactions (such as investing and
financing transactions), which would not be reflected in the net income at all.
3. LO 16.2 What categories of activities are reported on the statement of cash flows? Does it
matter in what order these sections are presented?
Solution
Operating, Investing, Financing (always in this order).
4. LO 16.2 Describe three examples of operating activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Answers will vary. Responses may include any transaction relating to day-to-day business
transactions. For example, sales revenue, interest revenue, dividend revenue, merchandise
purchases, rent expense, utility expense, salaries expense, interest expense, income tax expense,
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Chapter 16: Statement of Cash Flows
insurance expense, advertising expense, etc., any cash transaction that is not an investing or
financing transaction.
5. LO 16.2 Describe three examples of investing activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Any transaction that is related to acquiring or disposing of long-term assets like land, buildings,
equipment, stocks, bonds, or other investments. Can be cash spent for purchase of long-term
assets, or cash collected from sale of long-term assets.
6. LO 16.2 Describe three examples of financing activities, and identify whether each of them
represents cash collected or cash spent.
Solution
Answers will vary. Responses may include any transaction that is related to issuing or retiring
long-term liabilities or equity. Can be (a) cash received or cash paid to creditors, relating to
borrowing or repaying the principal balance of notes payable or bonds payable, or (b) cash
received or paid, relating to issuance of capital stock, repurchase of treasury stock, or dividends
paid to shareholders.
7. LO 16.3 Explain the difference between the two methods used to prepare the operating section
of the statement of cash flows. How do the results of these two approaches compare?
Solution
The indirect method begins with net income and adjusts for items that affect cash differently than
they affect net income, whereas the direct method requires that each revenue and expense item
be converted to reflect the cash impact from that item. The net cash flow result is the same, no
matter which of the two methods is used.
8. LO 16.3 Why is depreciation an addition in the operating section of the statement of cash
flows, when prepared by the indirect method?
Solution
Depreciation represents a noncash expense that reduced the net income but did not reduce cash.
Noncash expenses must be added back to reconcile net income to net cash flow from operating.
9. LO 16.3 When preparing the operating section of the statement of cash flows, using the
indirect method, how must gains and losses be handled? Why?
Solution
Gains and losses must be removed from the operating section. To accomplish this, reverse the
effect of gains or losses; if a gain has been added to net income, it should be subtracted in the
operating section; if a loss has been deducted to arrive at net income, it should be added back in
the operating section. Why? First, gains and losses relate to long-term assets, which fall under
investing activities, not operating activities. Second, the gain/(loss) on the sale of long-term
assets represents the excess/(deficiency) computed when the asset’s cost basis is subtracted from
sales proceeds, so the number does not accurately represent the cash flow relating to the
transaction.
10. LO 16.3 If a company reports a gain/(loss) from the sale of assets, as part of the net income
on the income statement, and the net book value of those assets on the date of the sale is known,
can the amount of the cash proceeds from the sale be determined? If so, how?
Solution
Yes. Since gain or loss is computed by subtracting net book value from the sales proceeds, the
proceeds could be determined by adding the net book value to the gain/(loss).
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