Cash Flow Statement Quiz and Test | AccountingCoach (2024)

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer.For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Cash Flow Statement (Explanation).

For all questions assume that the indirect method is used.

There are four parts to the Statement of Cash Flows (or Cash Flow Statement):
1. Operating Activities
2. Investing Activities
3. Financing Activities
4. Supplemental Disclosures

For each of the following items, indicate which part will be affected.

Depreciation Expense.

Operating

Right!

Depreciation is added back to net income in the operating activities section because the company's net income was reduced by the depreciation expense shown on the income statement; however, the company's cash was not reduced by depreciation expense. (Accordingly depreciation expense is referred to as a non-cash expense.)

Investing

Wrong.

Depreciation expense appears in the operating activities section.

Financing

Wrong.

Depreciation expense appears in the operating activities section.

Supplemental

Wrong.

Depreciation expense appears in the operating activities section.

Proceeds from the sale of equipment used in the business.

Operating

Wrong.

The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Investing

Right!

The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Financing

Wrong.

Financing activities involve long-term liabilities and stockholders equity. The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

Supplemental

Wrong.

The entire proceeds from the sale of a long-term asset are shown in the investing activities section of the statement of cash flows.

The Loss on the Sale of Equipment in Question #2.

Operating

Right!

The loss (computed as proceeds minus the book value) appeared on the income statement and reduced the company's net income. However, the company's cash did not decrease. (Actually the company's cash increased by the amount received for the asset.) You need to add back the loss that reduced net income on the income statement so that the amount reflects the cash from operating activities.

Investing

Wrong.

The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.

Financing

Wrong.

The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.

Supplemental

Wrong.

The loss must be added back to the net income amount appearing in the operating activities section of the statement of cash flows.

Declaration and payment of dividends on company's stock.

Operating

Wrong.

Dividends declared/paid are shown in the financing activities section.

Investing

Wrong.

Dividends declared/paid are shown in the financing activities section.

Financing

Right!

Dividends cause stockholders' equity and cash to decrease. Changes in long-term liabilities and stockholders' equity are shown in the financing activities section of the statement of cash flows.

Supplemental

Wrong.

Dividends declared/paid are shown in the financing activities section.

Gain on the Sale of Automobile formerly used in the business.

Operating

Right!

The gain (computed as proceeds minus the book value) appeared on the income statement and increased the company's net income. However, the entire proceeds from the sale of a company's assets are shown in the investing section. In order to avoid double-counting the gain, the gain must be subtracted from the net income amount appearing in the operating activities section of the statement of cash flows.

Investing

Wrong.

The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.

Financing

Wrong.

The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.

Supplemental

Wrong.

The gain is shown as a deduction in the operating activities section. The proceeds from the sale will appear in the investing section.

The proceeds from the sale of the automobile in Item #5.

Operating

Wrong.

The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Investing

Right!

The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Financing

Wrong.

The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

Supplemental

Wrong.

The entire proceeds will be shown in the investing activities section. (The gain will appear as a deduction in the operating activities section of the statement of cash flows.)

An increase in the balance in a retailer's Merchandise Inventory.

Operating

Right!

Merchandise Inventory is a current asset. Changes in current assets (other than Cash) and changes in current liabilities are shown in the operating activities section of the statement of cash flows. An increase in Merchandise Inventory will be shown as a deduction in the cash from the operating activities section.

Investing

Wrong.

Financing

Wrong.

Supplemental

See Also

Managing Your Cash Flow

15.

A decrease in the current liability Income Taxes Payable.

Operating

Right!

Income Taxes Payable is a current liability account. Changes in current liabilities and changes in current assets (other than Cash) are shown in the operating activities section of the statement of cash flows. A decrease in a current liability will be reported as a decrease in cash from operating activities.

Investing

Wrong.

Financing

Wrong.

Supplemental

Wrong.

16.

The proceeds from issuing additional Common Stock.

Operating

Wrong.

Investing

Wrong.

Financing

Right!

The issuance of common stock results in an increase in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows. The proceeds from the issuance of common stock will be reported as an increase in cash from financing activities.

Supplemental

Wrong.

17.

The amortization of the cost of an intangible asset.

Operating

Right!

Amortization of the cost of an intangible asset is added back to net income in the operating activities section because the company's net income was reduced by the amortization expense shown on the income statement; however, the company's cash was not reduced by amortization expense. (Accordingly amortization expense is referred to as a non-cash expense.)

Investing

Wrong.

Amortization expense appears in the operating activities section.

Financing

Wrong.

Amortization expense appears in the operating activities section.

Supplemental

Wrong.

Amortization expense appears in the operating activities section.

18.

The exchange/conversion of long-term bonds into common stock.

Operating

Wrong.

The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Investing

Wrong.

The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Financing

Wrong.

The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

Supplemental

Right!

The exchange or conversion of bonds into common (or preferred) stock is a non-cash exchange and appears as supplemental information.

For items 19 - 30 indicate whether they will have a positive or negative EFFECT ON CASH.

A positive effect could also be thought of as a source of cash, an increase in cash, or a positive amount on the cash flow statement.

A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative amount on the cash flow statement.

19.

An increase in the balance of Prepaid Insurance.

Positive

Wrong.

Prepaid Insurance is a current asset. An increase in any asset account balance (other than Cash) is assumed to have used Cash or decreased Cash. Both of these are considered to have a negative effect on Cash.

Negative

Right!

Prepaid Insurance is a current asset. An increase in any asset account balance (other than Cash) is assumed to have used Cash or decreased Cash. Both of these are considered to have a negative effect on Cash.

[Because Prepaid Insurance is a current asset, the decrease in Cash appears in the operating activities section of the statement of cash flows.]

20.

A decrease in Supplies on hand.

Positive

Right!

Supplies (on Hand) is a current asset account. A decrease in any asset account balance (other than Cash) is assumed to be a source of Cash, provided Cash, increased Cash, or have used less Cash than the amount of Supplies Expense shown on the income statement. All of these are considered to have a positive effect on Cash.

[Because Supplies is a current asset, the increase in Cash will appear in the operating activities section of the statement of cash flows.]

Negative

Wrong.

Supplies (on Hand) is a current asset account. A decrease in any asset account balance (other than Cash) is assumed to be positive for the company's Cash account. Also see the Positive answer.

21.

The proceeds from the sale of equipment formerly used in the business.

Positive

Right!

Equipment is a long-term asset. A decrease in any asset account (other than Cash) is assumed to be a source of Cash, provided Cash, or increased Cash. All of these are positive effects on Cash.

[The entire proceeds from the sale of the equipment will be shown in the investing activities section of the statement of cash flows.]

Negative

Wrong.

Equipment is a long-term asset. A decrease in any asset account (other than Cash) is assumed to be a source of Cash, provided Cash, or increased Cash. All of these are positive effects on Cash.

22.

The Loss on the Sale of Equipment in the previous question.

Positive

Right!

The Loss on the Sale of Equipment caused a decrease to the net income amount on the income statement. However, there was no decrease in Cash for this loss. Therefore, we need to add back (show an increase) to the net income amount appearing in the operating activities section.

Negative

Wrong.

The Loss on the Sale of Equipment had already reduced the net income amount on the income statement. However, there was no decrease in Cash for this income statement item. Therefore you must add this amount back to the net income amount appearing in the operating activities section—a positive effect.

23.

An increase in the current liability Income Taxes Payable.

Positive

Right!

Income Taxes Payable is a current liability. An increase in any liability account (or in stockholders' equity) is assumed to increase Cash or at least be favorable from a Cash point of view. If Income Taxes Payable increased, the company did not pay the entire amount of Income Tax Expense shown on the income statement. Since the starting point in the operating activities section is net income, you add back the increase in Income Taxes Payable.

To assist in understanding the increase or decrease, you could substitute 'favorable effect on Cash' for increases in liabilities. (Substitute 'negative effect on Cash' for decreases in liabilities.) If a payable increases, it means the company did NOT pay all of the bills and that has a favorable effect on Cash.

Another way to remember the effect is that the effect on Cash will be the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount/effect on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount/effect on the SCF.

[Because Income Taxes Payable is a current liability, the change will be shown in the operating activities section of the SCF.]

Negative

Wrong.

Income Taxes Payable is a current liability. An increase in any liability account (or in stockholders' equity) is assumed to increase Cash or at least be favorable from Cash point of view. If Income Taxes Payable increased, the company did not pay the entire amount of Income Tax Expense shown on the income statement. Since the starting point in the operating activities section is net income, you add back the increase in Income Taxes Payable.

Another way to remember the effect is: the effect on Cash will be the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.

24.

A decrease in Accounts Payable.

Positive

Wrong.

Accounts Payable is a current liability account. It is assumed that a company had to use or decrease Cash in order to decrease any liability. You could also think of negative amounts on the statement of cash flows as being unfavorable from a Cash point of view. Decreasing a liability is unfavorable or negative as far as Cash is concerned.

Another way to remember the effect is: the change in Cash will be in the SAME direction as a change in the liability account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.

Negative

Right!

TIP: The change in Cash will be the SAME direction as a change in the LIABILITY account balance. An increase in any liability will be a positive amount on the statement of cash flows (SCF). A decrease in any liability will be shown as a negative amount on the SCF.

[Because Accounts Payable is a current liability, the change will be shown in the operating activities section of the SCF.]

25.

An increase in Accounts Receivable.

Positive

Wrong.

Accounts Receivable is a current asset. An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. The change in Cash is the OPPOSITE sign of the change in the other ASSET'S balance.

Negative

Right!

[Because Accounts Receivable is a current asset, the change appears in the operating activities section.]

26.

An increase in the current liability Warranty Liability.

Positive

Right!

The change in Cash will be the SAME direction as the change in the balance of a LIABILITY account. In this case the Warranty Liability balance increased, so the effect on Cash shown on the statement of cash flows is also a positive amount.

[Because Warranty Liability is a current liability, the change will appear in the operating activities section.]

Negative

Wrong.

If a liability account increases, Cash is assumed to also increase. Recall that the effect on Cash is the same sign/direction as the change in the liability.

27.

Dividends declared and paid.

Positive

Wrong.

Dividends decrease the company's amount of Cash.

Negative

Right!

Dividends do decrease the company's Cash, which is a negative effect on Cash.

[Because dividends affect a stockholders' equity account, dividends will be shown in the financing activities section as a negative amount.]

28.

Proceeds from the issuance of Preferred Stock.

Positive

Right!

The proceeds received by the company for the new stock being issued will increase the company's Cash, a positive effect on Cash.

[Because the transaction involves stockholders' equity, the amount will appear in the financing activities section of the statement of cash flows.]

Negative

Wrong.

The company will be increasing its Cash by issuing new shares of stock. An increase to Cash is a positive effect.

29.

The Gain on the Sale of Equipment formerly used in the business.

Positive

Wrong.

The Gain on Sale of Equipment was an increase to the net income on the income statement. On the statement of cash flows we need to subtract the gain from the net income so that only the cash from operating activities appears in the operating activities section. This subtraction or decrease will also prevent the double counting of the gain, since the entire proceeds from the sale are reported in the investing activities section.

Negative

Right!

30.

An increase in the long-term asset Investment in Another Company.

Positive

Wrong.

An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. An increase in any asset (other than Cash) is assumed to be a use of Cash or a decrease in Cash.

Negative

Right!

An increase in any asset (other than Cash) is assumed to have a negative effect on Cash. It is assumed that Cash was used or decreased.

31.

For a recent year a corporation's financial statements reported the following:

Based on the above information, what amount will the corporation report as Net Cash Provided by Operating Activities on the cash flow statement?

$65,000

Right!

The solution is shown below.

$125,000

Wrong.

Try another answer.

$155,000

Wrong.

Try another answer.

32.

A corporation reported the following information for the past year:

Assuming these are the only facts, what amount will the corporation report as the Net Cash Provided by Operating Activities on the cash flow statement?

$225,000

Wrong.

Try another answer.

$235,000

Right!

The solution is shown below.

$253,000

Wrong.

Try another answer.

33.

Using the information in Question #32, what amount will be reported under Cash From Investing Activities?

$3,000

Wrong.

Try another answer.

$8,000

Right!

The entire proceeds from the sale of a long-term asset is reported under Cash from Investing Activities.

$13,000

Wrong.

Try another answer.

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Cash Flow Statement Quiz and Test | AccountingCoach (2024)

FAQs

How do you answer a cash flow test? ›

Compare the change in cash figure with your net increase in cash or net decrease in cash from your statement of cash flows. If the results are the same, the statement of cash flows is correct. If they are different, there may be an error on the statement of cash flows.

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The reporting objectives of the statement of cash flows is to provide information about important cash inflows and outflows for business decision makers. It answers specific questions such as: (1) how does a company obtain its cash? (2) Where does a compay spend its cash? (3)What is the change in the cash balance?

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How to Calculate Free Cash Flow. Add your net income and depreciation, then subtract your capital expenditure and change in working capital. Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.

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Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive. Indirect method – The indirect method presents operating cash flows as a reconciliation from profit to cash flow.

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What are the 4 parts of statement of cash flows? ›

Cash flow from operating activities. Cash flow from investing activities. Cash flow from financing activities. Disclosure of non-cash activities, which is sometimes included when prepared under generally accepted accounting principles (GAAP).1.

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What is cash flow example? ›

Examples of cash outflows from transactions considered operating activities: Cash paid for operating expenses and inventory purchases. Cash for payroll transactions and accrued liabilities. Interest expense paid in cash.

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The cash flow statement is typically broken into three sections: Operating activities. Investing activities. Financing activities.

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Real flow refers to the flow of goods and services across different sectors of the economy. Flow of factor services from household sector to the producer sector or flow of goods and services from producer sector to household sector are examples of real flows. Was this answer helpful?

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Accept Cash and Checks.
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What are the 10 steps in the accounting cycle? ›

The 10 Steps of the Accounting Cycle in Order

Analyze Transactions. ...
Journalize Transactions. ...
Post Transactions. ...
Prepare an Unadjusted Trial Balance. ...
Prepare Adjusting Entries. ...
Prepare the Adjusted Trial Balance. ...
Prepare Financial Statements. ...
Prepare Closing Entries.

More items...

30 May 2022

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What is cash flow in NPV? ›

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Negative cash flow is when your business has more outgoing than incoming money. You cannot cover your expenses from sales alone. Instead, you need money from investments and financing to make up the difference. For example, if you had $5,000 in revenue and $10,000 in expenses in April, you had negative cash flow.

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The Difference Between Cash Flow and Profit

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Net Cash Flow = Total Cash Inflows – Total Cash Outflows

Balancing cash inflow and outflow is vital to maintaining a healthy business.

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How do you calculate NPV? ›

What is the formula for net present value?

NPV = Cash flow / (1 + i)^t – initial investment.
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The 5 types of financial statements you need to know

Income statement. Arguably the most important. ...
Cash flow statement. ...
Balance sheet. ...
Note to Financial Statements. ...
Statement of change in equity.

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What is non cash items? ›

Non-cash items are referred to as those entries on a cash flow statement or income statement that do not involve actual cash transactions. In other words, these are expenses that are listed in an income statement that do not involve cash payment.

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What is cash flow vs income? ›

A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.

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Is cash flow a debit or credit? ›

Debit and Credit Rules For Cash Flows

Regardless of the source of the cash flow, a cash inflow is indicated by a debit to cash and cash equivalents, while a cash outflow is shown as a credit to the same.

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What is the full meaning of cash? ›

Cash is legal tender—currency or coins—that can be used to exchange goods, debt, or services. Sometimes it also includes the value of assets that can be easily converted into cash immediately, as reported by a company.

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What is a cash flow called? ›

In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.

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What is Cash Profit? Cash profit is the profit recorded by a business that uses the cash basis of accounting. Under this method, revenues are based on cash receipts and expenses are based on cash payments. Consequently, cash profit is the net change in cash from these receipts and payments during a reporting period.

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Methods of cash flow forecasting

There are two main methods of forecasting: the direct method and the indirect method. Both serve the same purpose of predicting the amount of cash that moves in and out of your business.

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Real income, also known as real wage, is how much money an individual or entity makes after adjusting for inflation. Real income differs from nominal income, which has no such adjustments. Individuals often closely track their nominal vs. real income to have the best understanding of their purchasing power.

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National income is referred to as the total monetary value of all services and goods that are produced by a nation during a period of time. In other words, it is the sum of all the factor income that is generated during a production year. National income serves as an indicator of the nation's economic activity.

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What is nominal flow? ›

Money flow or nominal flow refers to the flow of factor payments from firms to households for their factor services and the corresponding flow of money from households to firms, in the form of consumption expenditure on the purchase of goods and services produced by the firms.

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What is cash flow answer? ›

A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period. It explains the reasons of receipts and payments in cash and change in cash balances during an accounting year in a company.

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How do you explain cash flow to dummies? ›

Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time, and can be used to measure rates of return, actual liquidity, real profits, and to evaluate the quality of investments.

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How do you do a cash flow statement step by step? ›

Here are four steps to help you create your own cash flow statement.

Start with the Opening Balance. ...
Calculate the Cash Coming in (Sources of Cash) ...
Determine the Cash Going Out (Uses of Cash) ...
Subtract Uses of Cash (Step 3) from your Cash Balance (sum of Steps 1 and 2)

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What are the 4 types of cash flows? ›

Types of Cash Flow

Cash Flows From Operations (CFO)
Cash Flows From Investing (CFI)
Cash Flows From Financing (CFF)
Debt Service Coverage Ratio (DSCR)
Free Cash Flow (FCF)
Unlevered Free Cash Flow (UFCF)

What is cashflow example? ›

Cash Flow from Investing Activities is cash earned or spent from investments your company makes, such as purchasing equipment or investing in other companies. Cash Flow from Financing Activities is cash earned or spent in the course of financing your company with loans, lines of credit, or owner's equity.

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Is cash flow 1 or 2 words? ›

There seems to be no unified way to spell “cash flow.” Both cash flow and cashflow show up all over the place. I've found myself writing it both ways. Mostly I'll stick with cash flow.

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What is negative cash flow? ›

Negative cash flow is when your business has more outgoing than incoming money. You cannot cover your expenses from sales alone. Instead, you need money from investments and financing to make up the difference.