Multiple-Choice Questions

1. The primary difference between a statement of cash flows prepared in direct format and one prepared in indirect format is

a. In how net cash flow from operations is computed.

b. That the indirect approach always results in higher net cash flow.

c. In how net cash flow from investing activities is reported.

d. That the beginning-of-the-year cash balance is included in direct format but not in indirect.

2. The statement of cash flows for the Halyard Exploration Company reported the following:

Cash paid for equipment .......$ 300,000

Cash paid to employees ....... 400,000

Cash paid to owners ......... 150,000

Cash paid to suppliers ......... 560,000

Cash received from creditors ..... 200,000

Cash received from customers ......1,200,000

What were Halyard’s net cash flows from operating, investing, and financing activities?

OperatingInvesting Financing

a. $240,000 ($300,000) $ 50,000

b. $500,000 ($860,000) $200,000

c. $640,000 ($860,000) $200,000

d. $240,000 ($860,000) $200,000

3. Haddad Company is a well-established, growing company. Which categories of activities would you generally expect to generate positive cash flows?

a. Operating activities only

b. Financing activities only

c. Investing activities only

d. Both operating activities and financing activities

e. Both financing activities and investing activities

4. A statement of cash flows has been prepared in the indirect format. Depreciation expense has been added back to net income because depreciation is

a. Not really an expense and to list it as such understates profitability.

b. An investing activity and should be reported in that section.

c. A source of cash for the company.

d. A noncash expense.

5. Zeff Company reports positive operating cash flows, near zero investing cash flows, and negative financing cash flows. This may indicate that the company

a. Is raising new capital to purchase long-term assets for expansion.

b. Does not have many good growth opportunities.

c. Has severe cash flow problems caused by too-rapid growth.

d. Is unable to provide goods and services that customers want.

6. A statement of cash flows prepared using the indirect format would report an increase in Accounts Receivable as

a. An addition to cash flow from financing activities.

b. A subtraction from cash flow from financing activities.

c. An addition to net income in computing cash flow from operating activities.

d. A subtraction from net income in computing cash flow from operating activities.

7. Flag Ship Company reported depreciation and amortization expense of $300,000 for the latest fiscal year. The depreciation and amortization expense

a. Increased cash flow for the year $300,000.

b. Decreased cash flow for the year $300,000.

c. Had no effect on cash flow for the year.

d. Had an effect on cash flow if assets were purchased during the year.

8. Rust Iron Company purchased a three-month insurance policy on March 1, 2004. The company paid $3,000 for the policy. The amount of insurance expense and cash outflow the company should report for March would be

Insurance Expense Cash Outflow

a. $3,000 $3,000

b. 3,000 1,000

c. 1,000 3,000

d. 1,000 1,000

9. Micro Fish Company recognized $10,000 of interest expense in 2002. The balance of the company’s interest payable account decreased $2,000. The amount of cash paid by the company for interest in 2002 was

a. $10,000.

b. $12,000.

c. $2,000.

d. $8,000.

10. Operating activities are reflected on a company’s balance sheet primarily in

a. Plant assets.

b. Current assets and liabilities.

c. Income from operations.

d. Cash flow from operating activities.