Cash Flow Statement (Practice Quiz)

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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):

For items 1-18, indicate which part will be affected.

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.)

Depreciation expense appears in the operating activities section. Depreciation expense appears in the operating activities section. Depreciation expense appears in the operating activities section.

Proceeds from the sale of equipment used in the business.

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 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.

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.

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.

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

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.

Dividends declared/paid are shown in the financing activities section. Gain on the Sale of Automobile formerly used in the business.

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.

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.

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.

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.

An increase in the balance in Accounts Payable.

Accounts 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. An increase in Accounts Payable will be shown as an increase in the cash from operating activities.

Retirement of long-term Bonds Payable.

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section. A decrease in Bonds Payable will be shown as a decrease in cash from financing activities.

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Purchase of Treasury Stock (company's own stock).

The purchase of treasury stock results in a decrease 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 purchase of a new delivery truck to be used in the business.

The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows.

The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows. The purchase of a delivery truck will cause a decrease in cash from investing activities.

The new delivery truck to be used in the business is a long-term asset. Changes in long-term assets are shown in the investing activities section of the statement of cash flows.

A decrease in the balance of Accounts Receivable.

Accounts Receivable 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. A decrease in the Accounts Receivable will appear as an increase in cash from operating activities.

An increase in Bonds Payable (a long-term liability).

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section. An increase in Bonds Payable will be reported as a increase in cash from financing activities.

Bonds Payable is a long-term liability. Changes in long-term liabilities and changes in stockholders' equity are shown in the financing activities section.

A decrease in the current asset account Prepaid Insurance.

Prepaid Insurance 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. A decrease in Prepaid Insurance will be reported as an increase in cash from operating activities.

A decrease in the current liability Income Taxes Payable.

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.

The proceeds from issuing additional Common Stock.

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.

The amortization of the cost of an intangible asset.

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.)

Amortization expense appears in the operating activities section. Amortization expense appears in the operating activities section. Amortization expense appears in the operating activities section. The exchange/conversion of long-term bonds into common stock.

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.

An increase in the balance of Prepaid Insurance.

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.

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.]

A decrease in Supplies on hand.

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.]

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.

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

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.]

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 Loss on the Sale of Equipment in the previous question.

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.

An increase in the current liability Income Taxes Payable.

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.]

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.

A decrease in Accounts Payable.

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.

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.]

An increase in Accounts Receivable.

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.

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

An increase in the current liability Warranty Liability.

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.]

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.