Question 1

Which financial statement reports the cash inflows and cash outflows of a business during an accounting period?

A. Balance Sheet

B. Income Statement

C. Cash Flow Statement

D. Statement of Changes in Equity

✅ Correct Answer: C. Cash Flow Statement

Explanation

The Cash Flow Statement summarizes all cash receipts and cash payments during a reporting period. Unlike the Income Statement, which uses accrual accounting, the Cash Flow Statement focuses solely on actual cash movements. It helps investors, creditors, and management evaluate liquidity, solvency, and the company’s ability to generate sufficient cash to finance operations, repay debt, and support future growth.

---

Question 2

Which of the following is one of the three major sections of the Cash Flow Statement?

A. Revenue Activities

B. Operating Activities

C. Manufacturing Activities

D. Cost Activities

✅ Correct Answer: B. Operating Activities

Explanation

Operating activities represent the company’s primary revenue-generating business activities. This section includes cash received from customers and cash paid to suppliers, employees, and tax authorities. It indicates whether the company’s core operations generate enough cash to sustain the business without relying on external financing or asset sales.

---

Question 3

Cash received from customers is generally classified under:

A. Investing Activities

B. Financing Activities

C. Operating Activities

D. Non-Cash Activities

✅ Correct Answer: C. Operating Activities

Explanation

Cash collected from customers represents the primary source of operating cash inflows for most businesses. These receipts result directly from selling goods or providing services. Strong operating cash inflows usually indicate healthy business performance and sufficient liquidity to meet operating expenses and future investment needs.

---

Question 4

Purchasing equipment with cash is classified as:

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Operating Activity

✅ Correct Answer: B. Investing Activity

Explanation

Investing activities include acquiring and disposing of long-term assets such as property, equipment, and investments. Purchasing equipment requires a cash outflow because the company is investing in assets expected to generate future economic benefits. These transactions are reported separately from daily operating activities.

---

Question 5

Issuing common stock for cash is reported under:

A. Operating Activities

B. Investing Activities

C. Financing Activities

D. Extraordinary Activities

✅ Correct Answer: C. Financing Activities

Explanation

Financing activities involve transactions that affect a company’s capital structure. Issuing common stock generates cash by raising funds from shareholders. These proceeds are classified as financing cash inflows because they increase owners’ equity and provide resources to finance business operations or expansion.

---

Question 6

Which financial statement explains why the cash balance changed during the accounting period?

A. Income Statement

B. Balance Sheet

C. Cash Flow Statement

D. Trial Balance

✅ Correct Answer: C. Cash Flow Statement

Explanation

The Cash Flow Statement reconciles the beginning and ending cash balances by showing all cash inflows and outflows from operating, investing, and financing activities. It helps users understand how cash was generated and spent, providing valuable insights beyond the profitability reported on the Income Statement.

---

Question 7

Paying dividends in cash is generally classified as:

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Cash Activity

✅ Correct Answer: C. Financing Activity

Explanation

Cash dividends paid to shareholders are financing activities because they represent distributions of profits to owners rather than operating expenses. Although dividends reduce cash, they do not affect net income. Reporting them separately allows users to evaluate how management returns value to shareholders.

---

Question 8

Which method starts the operating section with net income?

A. Direct Method

B. Gross Method

C. Indirect Method

D. Equity Method

✅ Correct Answer: C. Indirect Method

Explanation

The indirect method begins with net income and adjusts for non-cash expenses, gains, losses, and changes in working capital to determine cash provided by operating activities. It is the most commonly used method because it reconciles accrual accounting income with actual operating cash flows.

---

Question 9

Depreciation expense is added back under the indirect method because it is:

A. A financing activity

B. A cash expense

C. A non-cash expense

D. An investing activity

✅ Correct Answer: C. A non-cash expense

Explanation

Depreciation reduces accounting profit but does not involve an actual cash payment during the period. Therefore, under the indirect method, depreciation is added back to net income to eliminate its non-cash effect and calculate the actual cash generated from operating activities.

---

Question 10

Which financial statement is most useful for evaluating a company’s liquidity?

A. Statement of Cash Flows

B. Statement of Retained Earnings

C. Trial Balance

D. Income Statement

✅ Correct Answer: A. Statement of Cash Flows

Explanation

Liquidity refers to a company’s ability to meet short-term obligations as they become due. The Statement of Cash Flows provides direct information about cash generated and used during the period, making it one of the best tools for assessing liquidity, cash management, and overall financial flexibility.

---

Question 11

Which activity includes cash received from collecting accounts receivable?

A. Financing Activities

B. Investing Activities

C. Operating Activities

D. Equity Activities

✅ Correct Answer: C. Operating Activities

Explanation

Collecting accounts receivable converts credit sales recorded in previous periods into cash. Since accounts receivable arise from a company’s normal business operations, the related cash collections are classified as operating activities. These cash inflows help assess the company’s ability to convert sales into cash efficiently and maintain sufficient liquidity for day-to-day operations.

---

Question 12

Borrowing money from a bank is classified as:

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Cash Activity

✅ Correct Answer: C. Financing Activity

Explanation

Obtaining a bank loan provides cash from external financing sources and increases the company’s liabilities. Because the transaction changes the capital structure rather than resulting from normal business operations, it is reported as a financing activity. Users analyze financing cash flows to understand how a company funds its operations and expansion.

---

Question 13

Repaying the principal amount of a long-term loan is reported as:

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Operating Activity

✅ Correct Answer: C. Financing Activity

Explanation

Repayment of loan principal represents a reduction in borrowed capital and is classified as a financing cash outflow. It differs from interest payments, which under U.S. GAAP are generally reported as operating activities. Separating principal repayments helps users evaluate the company’s debt management and financing strategy.

---

Question 14

Selling equipment for cash is classified under:

A. Operating Activities

B. Investing Activities

C. Financing Activities

D. Revenue Activities

✅ Correct Answer: B. Investing Activities

Explanation

Selling property, plant, and equipment generates cash from disposing of long-term assets. Since these assets are investments used in business operations rather than inventory sold to customers, the cash received is reported under investing activities. This classification allows users to distinguish operating cash generation from investment decisions.

---

Question 15

Which of the following is NOT an operating cash outflow?

A. Cash paid to employees

B. Cash paid to suppliers

C. Cash paid to purchase machinery

D. Cash paid for utilities

✅ Correct Answer: C. Cash paid to purchase machinery

Explanation

Purchasing machinery is an investing activity because it involves acquiring a long-term asset expected to benefit future periods. The other payments—employees, suppliers, and utilities—are routine operating expenses necessary for running the business. Proper classification improves the usefulness of the Statement of Cash Flows for financial analysis.

---

Question 16

The indirect method adjusts net income primarily because accounting income is prepared using:

A. Cash Accounting

B. Tax Accounting

C. Accrual Accounting

D. Fund Accounting

✅ Correct Answer: C. Accrual Accounting

Explanation

Net income includes revenues earned and expenses incurred regardless of when cash is received or paid. The indirect method converts accrual-based net income into operating cash flow by adjusting for non-cash items and working capital changes. This reconciliation helps users understand the relationship between profitability and actual cash generation.

---

Question 17

Which item is added back to net income when preparing operating cash flows using the indirect method?

A. Cash Dividends Paid

B. Depreciation Expense

C. Purchase of Land

D. Repayment of Notes Payable

✅ Correct Answer: B. Depreciation Expense

Explanation

Depreciation is recorded to allocate the cost of long-term assets over their useful lives, but it does not require a current-period cash payment. Therefore, it reduces net income without reducing cash. Adding depreciation back removes its non-cash effect and produces a more accurate measure of operating cash flow.

---

Question 18

An increase in accounts receivable during the year will generally:

A. Increase operating cash flow

B. Decrease operating cash flow

C. Increase financing cash flow

D. Have no effect on cash flow

✅ Correct Answer: B. Decrease operating cash flow

Explanation

An increase in accounts receivable means that more sales were made on credit than cash was collected. Although these sales increase net income, the cash has not yet been received. Under the indirect method, the increase is deducted from net income because it represents revenue that has not yet generated cash.

---

Question 19

An increase in accounts payable generally indicates that the company:

A. Paid more cash to suppliers

B. Delayed cash payments to suppliers

C. Purchased fewer goods

D. Reduced operating cash flow

✅ Correct Answer: B. Delayed cash payments to suppliers

Explanation

When accounts payable increase, the company has incurred expenses or purchased inventory without immediately paying cash. This preserves cash during the period and increases operating cash flow under the indirect method. However, consistently increasing payables may also signal liquidity concerns if payments are excessively delayed.

---

Question 20

Which section of the Cash Flow Statement helps investors evaluate how a company finances its operations and growth?

A. Operating Activities

B. Investing Activities

C. Financing Activities

D. Comprehensive Income

✅ Correct Answer: C. Financing Activities

Explanation

The financing activities section reports cash flows related to borrowing, repaying debt, issuing shares, repurchasing stock, and paying dividends. These transactions reveal how management raises capital and returns value to shareholders. Investors and creditors use this information to assess financial strategy, capital structure, and long-term sustainability.

 

Question 21

Which of the following is an example of an operating cash inflow?

A. Proceeds from issuing bonds

B. Cash received from customers

C. Proceeds from selling equipment

D. Cash received from issuing common stock

✅ Correct Answer: B. Cash received from customers

Explanation

Cash received from customers is the primary source of operating cash inflows because it results from the company’s normal revenue-generating activities. Operating cash flows measure how effectively the core business generates cash. Consistently positive operating cash flow is generally a sign of financial strength and indicates that the company can fund its daily operations without relying heavily on external financing.

---

Question 22

Which of the following is an investing cash outflow?

A. Paying employee salaries

B. Repaying a bank loan

C. Purchasing land

D. Paying dividends

✅ Correct Answer: C. Purchasing land

Explanation

Buying land requires the company to spend cash to acquire a long-term asset that will provide future economic benefits. Therefore, the transaction is classified as an investing activity. Investing cash flows reflect management’s decisions regarding capital expenditures and long-term investments that support future business growth rather than current operations.

---

Question 23

A company receives cash from issuing corporate bonds. This transaction is classified as:

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Cash Investing Activity

✅ Correct Answer: C. Financing Activity

Explanation

Issuing bonds increases a company’s liabilities while generating cash from investors or lenders. Since the transaction changes the company’s financing structure rather than its operating or investing activities, it is reported as a financing cash inflow. This section helps users evaluate how the business raises capital to support operations and expansion.

---

Question 24

Which method reports specific cash receipts and cash payments from operating activities?

A. Indirect Method

B. Direct Method

C. Equity Method

D. Cost Method

✅ Correct Answer: B. Direct Method

Explanation

The direct method presents actual cash received from customers and actual cash paid to suppliers, employees, and other operating expenses. It provides a clear picture of cash generated and used in daily operations. Although many companies use the indirect method, the direct method is often considered easier for users to understand because it reports actual cash transactions.

---

Question 25

Which financial statement connects the beginning and ending cash balances?

A. Income Statement

B. Statement of Retained Earnings

C. Cash Flow Statement

D. Balance Sheet Only

✅ Correct Answer: C. Cash Flow Statement

Explanation

The Cash Flow Statement reconciles the opening and closing cash balances by reporting all cash inflows and outflows during the accounting period. It explains why cash increased or decreased, making it an essential tool for evaluating liquidity, financial flexibility, and the company’s ability to generate cash from various business activities.

---

Question 26

Under the indirect method, an increase in inventory is generally:

A. Added to net income

B. Deducted from net income

C. Reported as financing activity

D. Ignored completely

✅ Correct Answer: B. Deducted from net income

Explanation

An increase in inventory usually means the company purchased more inventory than it sold, requiring additional cash that has not yet been recognized as an expense through cost of goods sold. Since cash has been used, the increase in inventory is deducted from net income when calculating cash provided by operating activities under the indirect method.

---

Question 27

Which of the following transactions does NOT involve cash?

A. Paying wages

B. Collecting accounts receivable

C. Issuing common stock in exchange for land

D. Receiving cash from customers

✅ Correct Answer: C. Issuing common stock in exchange for land

Explanation

When common stock is exchanged directly for land, no cash changes hands. This is considered a significant non-cash investing and financing activity. Although it is excluded from the main sections of the Cash Flow Statement, accounting standards generally require such transactions to be disclosed separately because they affect the company’s financial position.

---

Question 28

Why is the Cash Flow Statement important to investors?

A. It reports only net income.

B. It measures market share.

C. It shows the company’s ability to generate cash.

D. It calculates earnings per share.

✅ Correct Answer: C. It shows the company’s ability to generate cash.

Explanation

Investors analyze the Cash Flow Statement because cash generation is critical to a company’s long-term success. Strong operating cash flows indicate the business can finance operations, invest in growth, pay dividends, and repay debt. Unlike accounting profit, cash flow is less affected by accrual estimates and therefore provides valuable insight into financial health.

---

Question 29

Which activity is most likely to appear in the financing section?

A. Purchasing inventory

B. Selling merchandise

C. Repurchasing treasury stock

D. Collecting customer payments

✅ Correct Answer: C. Repurchasing treasury stock

Explanation

Repurchasing treasury stock reduces shareholders’ equity and requires the company to use cash to buy back its own shares. Because this transaction affects the company’s capital structure, it is classified as a financing activity. Share repurchases may be used to return capital to shareholders or improve financial ratios such as earnings per share.

---

Question 30

A company reports positive operating cash flow but negative investing cash flow. This most likely indicates that the company is:

A. Unable to generate cash from operations

B. Investing in long-term assets for future growth

C. Experiencing financial distress

D. Paying excessive dividends

✅ Correct Answer: B. Investing in long-term assets for future growth

Explanation

Negative investing cash flow is often a positive sign when it results from purchasing property, equipment, or other productive assets. Combined with positive operating cash flow, it suggests that the company generates sufficient cash from its core business to finance investments that support future expansion. Analysts typically view this pattern as an indicator of healthy and sustainable business growth.

---

Question 31

Which of the following is classified as a financing cash outflow?

A. Cash paid to suppliers

B. Cash paid to purchase equipment

C. Cash paid to repay loan principal

D. Cash paid for advertising

✅ Correct Answer: C. Cash paid to repay loan principal

Explanation

Repaying the principal of a loan reduces a company’s outstanding debt and is classified as a financing activity. It does not relate to the company’s day-to-day operations or investment in long-term assets. Separating financing cash flows allows investors and creditors to evaluate how effectively a business manages its debt obligations and capital structure over time.

---

Question 32

Which section of the Cash Flow Statement usually receives the greatest attention from financial analysts?

A. Operating Activities

B. Investing Activities

C. Financing Activities

D. Supplemental Disclosures

✅ Correct Answer: A. Operating Activities

Explanation

Operating cash flow is often considered the most important section because it reflects the cash generated by a company’s core business activities. Consistently positive operating cash flow indicates that the business can sustain operations, pay obligations, and invest in future growth without depending heavily on borrowing or issuing additional equity.

---

Question 33

Which transaction would increase cash from investing activities?

A. Purchasing machinery

B. Issuing common stock

C. Selling a building

D. Paying employee salaries

✅ Correct Answer: C. Selling a building

Explanation

Selling a building generates cash from disposing of a long-term asset, making it an investing cash inflow. Investing activities include both the purchase and sale of long-term assets. Users of financial statements analyze these transactions to understand how management allocates resources and manages the company’s investment portfolio.

---

Question 34

Which financial statement is prepared for a specific accounting period rather than at a specific date?

A. Balance Sheet

B. Cash Flow Statement

C. Statement of Financial Position Only

D. Trial Balance

✅ Correct Answer: B. Cash Flow Statement

Explanation

Like the Income Statement, the Cash Flow Statement covers a period of time, such as a month, quarter, or year. It summarizes all cash inflows and outflows during that reporting period. In contrast, the Balance Sheet reports financial position at a single point in time, showing assets, liabilities, and equity on a specific date.

---

Question 35

When using the indirect method, a decrease in accounts receivable is:

A. Deducted from net income

B. Added to net income

C. Reported as financing activity

D. Reported as investing activity

✅ Correct Answer: B. Added to net income

Explanation

A decrease in accounts receivable indicates that customers paid amounts previously owed to the company. Since these collections increase cash but may not affect current-period net income, the decrease is added back when converting accrual-based net income into cash provided by operating activities under the indirect method.

---

Question 36

Which of the following is a common purpose of preparing a Cash Flow Statement?

A. To calculate gross profit

B. To determine inventory turnover

C. To evaluate the company’s cash-generating ability

D. To measure market capitalization

✅ Correct Answer: C. To evaluate the company’s cash-generating ability

Explanation

One of the primary objectives of the Cash Flow Statement is to help users assess whether a company can generate sufficient cash to meet obligations, finance investments, and distribute dividends. It complements the Income Statement by focusing on actual cash movements instead of accrual-based accounting income.

---

Question 37

A decrease in accounts payable under the indirect method will generally:

A. Increase operating cash flow

B. Decrease operating cash flow

C. Increase investing cash flow

D. Have no effect on cash flow

✅ Correct Answer: B. Decrease operating cash flow

Explanation

A decrease in accounts payable means the company paid off amounts owed to suppliers, resulting in a cash outflow. Because more cash has been spent than the expenses recognized during the period, the decrease is deducted from net income when calculating cash flows from operating activities using the indirect method.

---

Question 38

Which of the following is an example of a cash equivalent?

A. Inventory

B. Accounts Receivable

C. Three-month Treasury Bill

D. Equipment

✅ Correct Answer: C. Three-month Treasury Bill

Explanation

Cash equivalents are short-term, highly liquid investments that can be readily converted into known amounts of cash with insignificant risk of changes in value. Treasury bills with original maturities of three months or less are common examples. These investments are included with cash on the Cash Flow Statement because they function similarly to cash.

---

Question 39

Why do lenders carefully review the Cash Flow Statement?

A. To determine the company’s advertising budget

B. To evaluate the company’s ability to repay debt

C. To calculate product prices

D. To estimate inventory quantities

✅ Correct Answer: B. To evaluate the company’s ability to repay debt

Explanation

Lenders are primarily concerned with whether a company generates enough cash to make interest and principal payments on time. The Cash Flow Statement provides valuable information about operating cash generation, financing activities, and liquidity. Strong operating cash flow generally reduces lending risk and improves a company’s creditworthiness.

---

Question 40

Which statement best describes free cash flow?

A. Cash available after paying operating expenses and capital expenditures

B. Total cash received from customers

C. Cash generated only from financing activities

D. Net income before depreciation

✅ Correct Answer: A. Cash available after paying operating expenses and capital expenditures

Explanation

Free cash flow represents the cash remaining after a company has generated cash from operations and paid for necessary capital expenditures, such as purchasing equipment or buildings. It is an important measure of financial flexibility because it indicates the cash available to repay debt, pay dividends, repurchase shares, or invest in future growth opportunities.

---

Question 41

Which of the following transactions is reported as an operating cash outflow?

A. Purchase of a building

B. Payment of employee wages

C. Repayment of a bank loan principal

D. Purchase of long-term investments

✅ Correct Answer: B. Payment of employee wages

Explanation

Employee wages are part of the company’s normal operating expenses and require cash payments during the accounting period. Therefore, they are classified as operating cash outflows. Operating activities reflect the cash effects of the company’s primary business operations and are a key indicator of whether the business can generate sufficient cash to sustain its daily activities.

---

Question 42

A company purchases marketable securities intended as long-term investments. How should the cash payment be classified?

A. Operating Activity

B. Investing Activity

C. Financing Activity

D. Non-Cash Activity

✅ Correct Answer: B. Investing Activity

Explanation

Purchasing long-term investments represents the acquisition of assets expected to generate future economic benefits. Since these investments are not part of the company’s routine operations, the cash payment is reported as an investing activity. Investors use this section to evaluate how management allocates resources toward future growth and income-generating assets.

---

Question 43

Which ratio is commonly analyzed together with the Cash Flow Statement to assess liquidity?

A. Gross Profit Margin

B. Debt-to-Equity Ratio

C. Current Ratio

D. Inventory Turnover Ratio

✅ Correct Answer: C. Current Ratio

Explanation

The Current Ratio compares current assets to current liabilities and measures a company’s ability to meet short-term obligations. When analyzed alongside operating cash flow, it provides a more complete picture of liquidity. A company may report a strong Current Ratio, but weak operating cash flows could indicate potential cash management challenges despite adequate current assets.

---

Question 44

Which of the following best describes positive operating cash flow?

A. The company generated sufficient cash from its core business operations.

B. The company borrowed additional money.

C. The company sold long-term assets.

D. The company issued new shares.

✅ Correct Answer: A. The company generated sufficient cash from its core business operations.

Explanation

Positive operating cash flow indicates that the company’s normal business activities produce more cash than they consume. This is generally viewed as a sign of financial health because internally generated cash can be used to pay operating expenses, invest in growth, reduce debt, and distribute dividends without relying heavily on external financing.

---

Question 45

Which of the following would decrease operating cash flow under the indirect method?

A. Increase in Accounts Receivable

B. Depreciation Expense

C. Decrease in Inventory

D. Increase in Accounts Payable

✅ Correct Answer: A. Increase in Accounts Receivable

Explanation

An increase in Accounts Receivable means that the company recognized revenue but has not yet collected the related cash from customers. Since net income includes these credit sales while cash has not been received, the increase is deducted from net income when calculating cash flows from operating activities using the indirect method.

---

Question 46

The primary purpose of the investing activities section is to report cash flows related to:

A. Daily business operations

B. Borrowing and repaying debt

C. Acquisition and disposal of long-term assets

D. Payment of operating expenses

✅ Correct Answer: C. Acquisition and disposal of long-term assets

Explanation

The investing activities section reports cash transactions involving property, plant, equipment, intangible assets, and long-term investments. These activities demonstrate how much the company is investing in future operations or recovering from asset sales. Analysts often examine investing cash flows to evaluate management’s long-term growth strategy and capital allocation decisions.

---

Question 47

Which statement about the Cash Flow Statement is correct?

A. It is prepared only by manufacturing companies.

B. It reports only cash transactions.

C. It includes unrealized gains and losses as cash flows.

D. It replaces the Balance Sheet.

✅ Correct Answer: B. It reports only cash transactions.

Explanation

The Cash Flow Statement focuses exclusively on transactions that involve cash or cash equivalents during the reporting period. Non-cash transactions, such as depreciation or exchanging stock for assets, are excluded from the main sections and disclosed separately when required. This focus makes the statement an essential tool for evaluating liquidity and cash management.

---

Question 48

A company reports negative cash flow from financing activities because it repaid debt and paid dividends. This generally indicates that the company is:

A. Always experiencing financial distress

B. Returning cash to creditors and shareholders

C. Unable to generate operating cash

D. Selling long-term assets

✅ Correct Answer: B. Returning cash to creditors and shareholders

Explanation

Negative financing cash flow is not necessarily a sign of poor financial performance. If the company has sufficient operating cash flow, repaying debt and paying dividends may reflect strong financial health and effective capital management. Analysts evaluate financing activities together with operating and investing cash flows before drawing conclusions about overall financial performance.

---

Question 49

Which accounting principle explains why net income and operating cash flow are often different?

A. Historical Cost Principle

B. Revenue Recognition Principle

C. Accrual Basis of Accounting

D. Monetary Unit Assumption

✅ Correct Answer: C. Accrual Basis of Accounting

Explanation

Under accrual accounting, revenues and expenses are recognized when earned or incurred rather than when cash is received or paid. As a result, net income frequently differs from operating cash flow. The indirect method reconciles these differences by adjusting for non-cash expenses and changes in working capital accounts.

---

Question 50

Why is the Cash Flow Statement considered an essential financial statement?

A. It reports only shareholder information.

B. It measures product quality.

C. It helps users evaluate liquidity, solvency, and financial flexibility.

D. It replaces all other financial statements.

✅ Correct Answer: C. It helps users evaluate liquidity, solvency, and financial flexibility.

Explanation

The Cash Flow Statement provides critical information about how a company generates and uses cash through operating, investing, and financing activities. It complements the Income Statement and Balance Sheet by revealing whether the business can meet short-term obligations, finance expansion, repay debt, and distribute dividends. Investors, creditors, analysts, and management rely on this statement to assess financial health, sustainability, and long-term cash-generating ability.

 

Section 1: Operating Activities (Questions 1-17)

Q1. Which of the following is classified as a cash inflow from operating activities?

• A) Sale of equipment

• B) Collection of accounts receivable

• C) Issuance of common stock

• D) Receipt of a bank loan

• Correct Answer: B) Collection of accounts receivable

• Explanation: Operating activities involve the primary revenue-producing activities of a business. Collecting cash from customers for prior sales on credit directly impacts the company’s core operations, increasing operating cash flow. Conversely, selling equipment is an investing activity, while issuing stock or taking out a bank loan are financing activities. Providing detailed breakdowns like this helps users understand the structural differences between operating, investing, and financing sections.

Q2. Under the indirect method, an increase in inventory is:

• A) Added to net income

• B) Deducted from net income

• C) Ignored in the operating section

• D) Classified as an investing cash outflow

• Correct Answer: B) Deducted from net income

• Explanation: When inventory increases, it implies that the company purchased more goods than it sold during the period, tying up cash that hasn’t yet been reflected as an expense in net income. Since net income is the starting point of the indirect method, we must deduct this increase to reconcile accrual-based net income to the actual cash basis. Tracking working capital changes is essential for accurate operating cash flow reporting.

Q3. Where should interest paid on loans be classified under US GAAP?

• A) Financing activities

• B) Investing activities

• C) Operating activities

• D) Non-cash disclosure

• Correct Answer: C) Operating activities

• Explanation: Under US GAAP, interest expense is reported on the income statement and affects net income. Because the indirect method reconciles net income to cash from operations, interest paid must be classified under operating activities. Note that under IFRS, companies have more flexibility and can classify interest paid as either operating or financing, making this a classic trap question for accounting students worldwide.

Q4. How is depreciation expense treated under the indirect method of preparing the Statement of Cash Flows?

• A) Deducted from net income

• B) Added to net income

• C) Reported as an investing inflow

• D) Reported as a financing outflow

• Correct Answer: B) Added to net income

• Explanation: Depreciation is a non-cash expense that reduces net income on the income statement but does not involve any actual cash outflow. Therefore, to convert net income into cash provided by operating activities, depreciation must be added back. This adjustment ensures that non-cash operational deductions are neutralized in the reconciliation process.

Q5. If a company records a gain on the sale of land, how is this gain treated under the indirect method?

• A) Added to net income in the operating section

• B) Deducted from net income in the operating section

• C) Added to cash flows from investing activities

• D) Ignored completely

• Correct Answer: B) Deducted from net income in the operating section

• Explanation: The total cash received from selling land is fully reported under investing activities. Because the gain is already included in net income, leaving it there would result in double-counting the effect of the transaction. To prevent this, the gain is deducted from net income in the operating section to isolate true operational cash flows.

Q6. A decrease in accounts payable during the period indicates that:

• A) Cash was saved by not paying suppliers

• B) More goods were purchased on credit than paid for

• C) Cash paid to suppliers was greater than credit purchases

• D) Net income is higher than cash flow

• Correct Answer: C) Cash paid to suppliers was greater than credit purchases

• Explanation: Accounts payable decreases when a company pays off its historical obligations to suppliers at a faster rate than it incurs new credit expenses. This cash outflow reduces the company’s cash balance. Therefore, under the indirect method, a decrease in accounts payable is deducted from net income to accurately reflect the operational cash drain.

Q7. Which of the following is an example of a non-cash operating adjustment?

• A) Amortization of intangible assets

• B) Purchase of treasury stock

• C) Payment of dividends

• D) Retirement of bonds

• Correct Answer: A) Amortization of intangible assets

• Explanation: Similar to depreciation, amortization is the systematic allocation of the cost of an intangible asset over its useful life. It reduces net income without consuming physical cash. Hence, it must be added back to net income within the operating activities section. The other options represent financing cash flows.

Q8. Under the direct method of presenting cash flows, which item would appear?

• A) Net Income

• B) Depreciation Expense

• C) Cash paid to employees

• D) Gain on sale of equipment

• Correct Answer: C) Cash paid to employees

• Explanation: The direct method calculates operating cash flows by listing major classes of gross cash receipts and gross cash payments (e.g., cash received from customers, cash paid to suppliers, and cash paid to employees). Non-cash items like depreciation and gains/losses are completely omitted from the direct method presentation because they do not represent actual cash transactions.

Q9. An increase in prepaid expenses during the year results in:

• A) A deduction from net income in the operating section

• B) An addition to net income in the operating section

• C) An investing cash inflow

• D) A financing cash outflow

• Correct Answer: A) A deduction from net income in the operating section

• Explanation: An increase in prepaid expenses means the company paid cash in advance for services or goods to be consumed in the future (e.g., insurance or rent). Because this cash outflow occurred but was not yet recorded as an expense on the income statement, net income overstates cash. We deduct this increase to reconcile to cash balance.

Q10. Under US GAAP, dividends received from an investment in another company’s stock are classified as:

• A) Investing activities

• B) Operating activities

• C) Financing activities

• D) Capital revenue

• Correct Answer: B) Operating activities

• Explanation: Even though the investment itself is classified as an investing activity, US GAAP requires that dividends received, along with interest received, be classified as operating cash flows because they enter into the determination of net income. This differs from IFRS, which allows dividends received to be classified as investing activities.

Q11. If accounts receivable increases during the fiscal year, this means:

• A) Cash collected exceeds revenues earned

• B) Revenues earned on credit exceed cash collections

• C) The company wrote off too many bad debts

• D) Cash flow from operations will automatically increase

• Correct Answer: B) Revenues earned on credit exceed cash collections

• Explanation: An increase in accounts receivable indicates that the company recognized revenue on the income statement for which it has not yet collected cash. Since net income includes these uncollected credit sales, the increase must be deducted from net income to show the true, lesser amount of cash actually collected from customers.

Q12. How is a decrease in accrued liabilities handled under the indirect method?

• A) Added to net income

• B) Deducted from net income

• C) Classified as a financing inflow

• D) Classified as an investing outflow

• Correct Answer: B) Deducted from net income

• Explanation: Accrued liabilities (like wages payable or taxes payable) decrease when the company pays out more cash to settle outstanding obligations than it recognizes as new expenses during the period. This represents a net cash outflow. Consequently, it must be deducted from net income to adjust the accrual metrics to a cash basis.

Q13. Which of the following statements is true regarding the operating section?

• A) The direct and indirect methods yield different net cash flows from operating activities.

• B) The direct and indirect methods yield identical net cash flows from operating activities.

• C) The indirect method lists actual cash collected from customers.

• D) The direct method starts with net income.

• Correct Answer: B) The direct and indirect methods yield identical net cash flows from operating activities.

• Explanation: Although the presentation format and internal calculations differ significantly between the direct and indirect methods, the total net cash provided by or used in operating activities is exactly the same under both methods. They are simply two different roads leading to the exact same numerical destination.

Q14. In a period of rising prices, using the LIFO method instead of FIFO will generally cause operating cash flow to:

• A) Decrease due to higher inventory costs

• B) Stay the same because inventory method is non-cash

• C) Increase due to lower income tax payments

• D) Decrease due to lower net income

• Correct Answer: C) Increase due to lower income tax payments

• Explanation: While inventory methods themselves are non-cash accounting choices, LIFO results in a higher Cost of Goods Sold (COGS) during inflation. Higher COGS leads to lower reported net income, which subsequently reduces the company’s real cash tax liability. Paying fewer taxes directly saves cash, increasing the net cash flow from operating activities.

Q15. Under the indirect method, a loss on the retirement of long-term debt should be:

• A) Added to net income

• B) Deducted from net income

• C) Reported in the financing section only

• D) Reported in the investing section only

• Correct Answer: A) Added to net income

• Explanation: The retirement of debt is structurally a financing activity, and the actual cash paid will be reported there. However, the loss arising from this transaction reduces net income on the income statement. To avoid distorting the operating section with non-operating losses, this loss must be added back to net income.

Q16. If a company’s Net Income is $50,000, depreciation is $5,000, and accounts receivable increased by $2,000, what is the operating cash flow?

• A) $57,000

• B) $53,000

• C) $47,000

• D) $43,000

• Correct Answer: B) $53,000

• Explanation: Using the indirect method framework: Start with Net Income ($50,000), add back non-cash depreciation expense (+$5,000), and subtract the increase in accounts receivable (-$2,000). Total: $50,000 + $5,000 – $2,000 = $53,000. This is a fundamental application of working capital adjustments.

Q17. Which of the following is not required to be disclosed when using the indirect method under US GAAP?

• A) Cash paid for interest

• B) Cash paid for income taxes

• C) Non-cash investing and financing activities

• D) Detailed cash receipts from customers

• Correct Answer: D) Detailed cash receipts from customers

• Explanation: Detailed cash receipts from customers are only explicitly listed when using the direct method. Under the indirect method, companies are required to disclose cash paid for interest, cash paid for income taxes, and significant non-cash transactions, but they do not break down operating receipts.

Section 2: Investing Activities (Questions 18-33)

Q18. Cash flows from investing activities generally relate to changes in:

• A) Current liabilities and equity

• B) Long-term assets

• C) Long-term liabilities

• D) Operating revenues

• Correct Answer: B) Long-term assets

• Explanation: The investing activities section of the cash flow statement explicitly tracks the acquisition and disposal of long-term assets and other investments not included in cash equivalents. This includes buying or selling property, plant, equipment (PPE), intangible assets, and long-term investment securities.

Q19. Which of the following is classified as an investing cash outflow?

• A) Payment of cash dividends to shareholders

• B) Purchase of manufacturing equipment

• C) Repayment of long-term bonds payable

• D) Purchase of inventory for resale

• Correct Answer: B) Purchase of manufacturing equipment

• Explanation: Buying equipment is a long-term capital expenditure designed to support operations over multiple years, qualifying it as an investing cash outflow. Dividend payments and bond repayments are financing activities, while purchasing inventory is an operating outflow.

Q20. If a company sells a delivery truck for $10,000 cash, how is this reported?

• A) $10,000 inflow in Operating Activities

• B) $10,000 inflow in Investing Activities

• C) Only the gain or loss is reported in Investing Activities

• D) $10,000 inflow in Financing Activities

• Correct Answer: B) $10,000 inflow in Investing Activities

• Explanation: The full gross cash proceeds received from the disposal of productive long-term assets are reported as a cash inflow in the investing activities section. Any book gain or loss is handled as an adjustment in the operating section if using the indirect method.

Q21. The purchase of stocks or bonds issued by another entity is classified as a:

• A) Operating activity

• B) Financing activity

• C) Investing activity

• D) Non-cash activity

• Correct Answer: C) Investing activity

• Explanation: Spending cash to buy debt or equity securities of other corporations is an investment aimed at earning returns (interest/dividends) or capital appreciation. Therefore, the cash spent is classified as an investing cash outflow, distinct from financing own-equity operations.

Q22. When a company lends money to another entity, the issuance of the loan principal is a:

• A) Financing cash outflow

• B) Investing cash outflow

• C) Operating cash outflow

• D) Non-cash transaction

• Correct Answer: B) Investing cash outflow

• Explanation: Making loans to third parties represents an deployment of capital to generate interest income over time, placing it under investing activities. Conversely, obtaining a loan from a bank is categorized under financing activities.

Q23. The collection of principal on a loan made to another entity is reported as an:

• A) Operating cash inflow

• B) Investing cash inflow

• C) Financing cash inflow

• D) Extraordinary item

• Correct Answer: B) Investing cash inflow

• Explanation: Just as lending the principal amount is an investing outflow, receiving the return of that principal upon maturity or repayment is classified as an investing cash inflow. Remember that the interest collected on that loan goes to operating activities under US GAAP.

Q24. If a company acquires land by issuing common stock, this transaction is reported as:

• A) An investing cash outflow and financing cash inflow

• B) An operating activity

• C) A non-cash investing and financing activity via disclosure

• D) It is completely excluded from financial statements

• Correct Answer: C) A non-cash investing and financing activity via disclosure

• Explanation: Because no actual cash changed hands during the transaction, it cannot be physically included in the cash flow totals. However, since it is a significant investing and financing event, accounting standards require it to be disclosed clearly in a footnote or separate schedule.

Q25. Capital expenditures (CapEx) are primarily found in which section?

• A) Financing activities

• B) Operating activities

• C) Investing activities

• D) Footnotes only

• Correct Answer: C) Investing activities

• Explanation: Capital expenditures refer to funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or technology. These are long-term investments in the business’s productive capacity, making the investing section their native home on the cash flow statement.

Q26. A company sells an investment security at a loss. The cash received from this sale will appear in the cash flow statement as a:

• A) Deduction in operating activities

• B) Inflow in investing activities equal to the net proceeds

• C) Outflow in investing activities

• D) Inflow in financing activities

• Correct Answer: B) Inflow in investing activities equal to the net proceeds

• Explanation: Regardless of whether the sale resulted in a gain or a loss, the actual physical cash received (the net proceeds) enters the company’s bank account via an investing transaction, showing up as a positive inflow in the investing activities section.

Q27. Which of the following would not be involved in calculating cash paid for equipment?

• A) Beginning and ending balances of Equipment

• B) Cost of equipment sold or retired

• C) Depreciation expense of the period

• D) Beginning and ending balances of Accounts Payable

• Correct Answer: C) Depreciation expense of the period

• Explanation: To find cash paid for equipment, analysts look at changes in the gross asset account balances and adjust for the historical cost of items disposed of. Depreciation affects the Accumulated Depreciation contra-account, not the gross cost of the equipment asset account itself.

Q28. The purchase of an intangible asset, such as a patent for cash, is classified as an:

• A) Operating activity

• B) Investing activity

• C) Financing activity

• D) Expense on the cash flow statement

• Correct Answer: B) Investing activity

• Explanation: Patents, trademarks, and copyrights are long-term assets, even though they lack physical substance. Acquiring them provides future economic benefits over multiple periods. Thus, cash outlays for patents are categorized as investing activities.

Q29. A positive net cash flow from investing activities is generally unusual because it implies that a company is:

• A) Highly profitable

• B) Divesting or selling off its long-term productive assets

• C) Borrowing heavily from banks

• D) Expanding its operations rapidly

• Correct Answer: B) Divesting or selling off its long-term productive assets

• Explanation: Growing companies typically spend more cash buying new equipment and property than they receive from selling old ones, leading to negative investing cash flows. A positive investing cash flow usually means the company is down-sizing, liquidating assets, or closing divisions.

Q30. Under IFRS, interest and dividends received can be alternatively classified as:

• A) Only financing activities

• B) Only operating activities

• C) Investing activities

• D) Non-cash items

• Correct Answer: C) Investing activities

• Explanation: IFRS allows companies managerial flexibility. Because interest and dividends received represent returns on financial investments, IFRS permits companies to classify them as investing cash flows, whereas US GAAP strictly keeps them in operating activities.

Q31. If a company builds its own warehouse, the cash spent on construction materials and labor should be classified under:

• A) Operating activities

• B) Development expenses

• C) Investing activities

• D) Financing activities

• Correct Answer: C) Investing activities

• Explanation: The costs incurred to construct a self-built long-term fixed asset are capitalized into Property, Plant, and Equipment on the balance sheet. Consequently, the cash outflows associated with this construction are reported as investing activities.

Q32. Cash paid to acquire a subsidiary company (net of cash acquired) is reported under:

• A) Financing activities

• B) Operating activities

• C) Investing activities

• D) Equity changes

• Correct Answer: C) Investing activities

• Explanation: Business combinations and strategic acquisitions of other operating corporate entities represent macro-level investments in long-term corporate growth. The net cash paid out to finalize a subsidiary acquisition belongs in the investing section.

Q33. Where would you find the cash proceeds from selling treasury bills with an original maturity of 60 days?

• A) Investing activities

• B) Operating activities

• C) Financing activities

• D) It is not reported because it is a cash equivalent transition

• Correct Answer: D) It is not reported because it is a cash equivalent transition

• Explanation: Short-term, highly liquid investments with original maturities of three months or less qualify as cash equivalents. Moving cash into or out of cash equivalents does not change the total cash and cash equivalents balance, so these individual portfolio shifts are not explicitly reported on the statement.

Section 3: Financing Activities (Questions 34-45)

Q34. Cash flows from financing activities typically involve transactions affecting:

• A) Revenues and expenses

• B) Long-term assets and investments

• C) Non-current liabilities and stockholders’ equity

• D) Working capital components

• Correct Answer: C) Non-current liabilities and stockholders’ equity

• Explanation: Financing activities involve how a company raises capital and returns it to investors and lenders. This encompasses changes in long-term debts (bonds, notes payable) and equity accounts (common stock, treasury stock, retained earnings via dividends).

Q35. Which of the following is classified as a cash inflow from financing activities?

• A) Sale of obsolete machinery

• B) Issuance of bonds payable

• C) Collection of interest on a note receivable

• D) Receipt of cash dividends from an affiliate

• Correct Answer: B) Issuance of bonds payable

• Explanation: Issuing bonds allows a company to borrow large amounts of cash from institutional lenders and investors. This inflows cash to finance corporate strategies, marking it as a clear financing cash inflow. The others are investing or operating activities.

Q36. The payment of cash dividends to a company’s own shareholders is classified as a:

• A) Operating cash outflow

• B) Investing cash outflow

• C) Financing cash outflow

• D) Administrative expense

• Correct Answer: C) Financing cash outflow

• Explanation: Paying dividends represents a return of accumulated earnings back to equity providers. Because it directly rewards capital providers for funding the firm, it is classified as a financing cash outflow under both US GAAP and standard interpretations.

Q37. The purchase of treasury stock (a company buying back its own shares) represents a:

• A) Financing cash outflow

• B) Investing cash outflow

• C) Operating cash inflow

• D) Non-cash transaction

• Correct Answer: A) Financing cash outflow

• Explanation: When a corporation repurchases its own shares from the open market, it is shrinking its equity base and distributing cash back to exiting shareholders. This restructuring of equity capital represents a clear financing cash outflow.

Q38. When a company repays the principal balance of a long-term bank note, this is a:

• A) Operating activity

• B) Investing activity

• C) Financing activity

• D) Balancing account

• Correct Answer: C) Financing activity

• Explanation: Repaying the underlying principal borrowed via long-term notes or loans decreases the firm’s debt obligations. Settling outstanding financing debt structures counts as a financing cash outflow. Note that the interest portion is treated differently under GAAP.

Q39. Under US GAAP, cash paid for the redemption or early retirement of a company’s own bonds should be reported as a:

• A) Operating outflow

• B) Financing outflow

• C) Investing outflow

• D) Extraordinary loss

• Correct Answer: B) Financing outflow

• Explanation: Retiring your own issued debt early removes that financing mechanism from the liability side of the balance sheet. The cash spent to buy back and cancel those bonds is categorized strictly as a financing cash outflow.

Q40. Under IFRS, dividends paid to shareholders can optionally be classified as:

• A) Operating activities

• B) Investing activities

• C) Capital expenditures

• D) Non-operating adjustments

• Correct Answer: A) Operating activities

• Explanation: While commonly placed in financing, IFRS allows dividends paid to be classified as operating cash flows to demonstrate a company’s ability to pay dividends out of its ongoing operational profits. This structural flexibility is distinct from GAAP.

Q41. Which of the following items is considered a non-cash financing activity?

• A) Payment of stock dividends

• B) Conversion of bonds directly into common stock

• C) Repayment of short-term commercial paper

• D) Amortization of bond discount

• Correct Answer: B) Conversion of bonds directly into common stock

• Explanation: Converting bonds directly into common stock alters the financing capital structure without touching physical cash. Because no cash changes hands, it is treated as a non-cash financing activity and disclosed in footnotes rather than the main statement body.

Q42. How does the payment of a stock dividend affect the Statement of Cash Flows?

• A) Reported as a financing outflow

• B) Reported as an operating outflow

• C) It has no effect on the statement

• D) Disclosed as a major cash commitment

• Correct Answer: C) It has no effect on the statement

• Explanation: Unlike cash dividends, stock dividends distribute additional shares of stock to existing owners without any cash changing hands. It is an internal accounting adjustment between equity accounts and does not impact cash balances or trigger disclosure.

Q43. The cash inflow from issuing preferred stock should be listed under:

• A) Operating activities

• B) Investing activities

• C) Financing activities

• D) Comprehensive income components

• Correct Answer: C) Financing activities

• Explanation: Preferred stock is an equity instrument that provides a way to raise capital. Cash obtained from issuing preferred shares represents equity financing, placing it alongside common stock issuances in the financing activities section.

Q44. If a company takes out a short-term working capital loan from a bank, the receipt of cash is a:

• A) Operating inflow

• B) Financing inflow

• C) Investing inflow

• D) Current asset offset

• Correct Answer: B) Financing inflow

• Explanation: Even though the loan is short-term and intended to support operational working capital needs, borrowing money from a financial institution represents an act of raising debt capital. Therefore, it is categorized as a financing inflow.

Q45. An increase in the Balance Sheet account “Notes Payable (Long-Term)” usually corresponds to a:

• A) Financing cash outflow

• B) Financing cash inflow

• C) Investing cash inflow

• D) Operating expense adjustment

• Correct Answer: B) Financing cash inflow

• Explanation: An increase in long-term notes payable indicates that the firm has taken on additional long-term debt during the year. Barring non-cash exchanges, this indicates that cash was borrowed, generating a financing cash inflow.

Section 4: Comprehensive & Advanced Analysis (Questions 46-50)

Q46. What is the final reconciliation objective of the Statement of Cash Flows?

• A) To match Net Income exactly

• B) To explain the change in total assets

• C) To reconcile the beginning and ending balances of cash and cash equivalents

• D) To prove the double-entry system balances

• Correct Answer: C) To reconcile the beginning and ending balances of cash and cash equivalents

• Explanation: The primary goal of the statement of cash flows is to show how a company’s cash position shifted over a period. The net sum of operating, investing, and financing cash flows must equal the net change in cash and cash equivalents for the year.

Q47. Free Cash Flow (FCF) is most commonly calculated as:

• A) Net Income – Depreciation

• B) Cash Flow from Operations – Capital Expenditures

• C) Cash Flow from Operations + Financing Cash Flows

• D) Revenue – Operating Cash Flows

• Correct Answer: B) Cash Flow from Operations – Capital Expenditures

• Explanation: Free Cash Flow represents the cash a company generates that is available for discretionary use, such as paying dividends, buying back stock, or reducing debt. Subtracting capital expenditures from operational cash flow shows what is left over after maintaining the asset base.

Q48. A company has negative operating cash flow but positive financing cash flow. This profile typically describes a:

• A) Mature, stable corporation

• B) Declining company near bankruptcy

• C) Fast-growing startup company

• D) Cash-rich investment fund

• Correct Answer: C) Fast-growing startup company

• Explanation: Startups often burn cash operationally as they build out client bases and scale systems, leading to negative operating cash flows. To survive, they rely on outside capital injections from stock issuances or venture debt, creating high positive financing cash flows.

Q49. Where are significant non-cash investing and financing transactions reported?

• A) In the operating activities section

• B) In the body of the balance sheet

• C) In a separate schedule or narrative note disclosure

• D) They are omitted completely from financial reports

• Correct Answer: C) In a separate schedule or narrative note disclosure

• Explanation: Although these items do not affect current cash balances, they represent critical structural shifts in long-term asset and capital structures. To preserve full transparency without distorting cash tallies, they are disclosed in footnotes or attached schedules.

Q50. If a company prepares its cash flow statement under IFRS, where can taxes paid be classified?

• A) Strictly operating activities

• B) Strictly financing activities

• C) Operating activities, unless specifically identified with investing/financing activities

• D) Nowhere, taxes are non-cash adjustments under IFRS

• Correct Answer: C) Operating activities, unless specifically identified with investing/financing activities

• Explanation: IFRS requires taxes paid to be disclosed separately and typically classified as operating activities. However, if a tax expense can be explicitly tied to an investing or financing transaction (like capital gains tax on selling land), it can be classified accordingly.

 

 

1. What is the primary purpose of the Statement of Cash Flows? A) To report net income B) To show changes in cash and cash equivalents C) To present the financial position at a point in time D) To calculate earnings per share

Correct Answer: B The Statement of Cash Flows reports the sources and uses of cash during a period, explaining the change in cash and cash equivalents. It helps users assess liquidity, solvency, and the entity’s ability to generate cash. Unlike the income statement (which uses accrual accounting) or the balance sheet (a snapshot), it focuses purely on actual cash movements classified into operating, investing, and financing activities.

2. Under IAS 7, cash equivalents are short-term, highly liquid investments that are: A) Readily convertible to known amounts of cash and subject to insignificant risk of changes in value B) Held for trading purposes only C) Maturing in more than three months D) Equity investments

Correct Answer: A IAS 7 defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. Typically these have original maturities of three months or less. This definition ensures only instruments that function almost like cash are included, maintaining the integrity of the cash flow statement’s focus on liquidity.

3. Which method starts with net income and adjusts for non-cash items and changes in working capital? A) Direct method B) Indirect method C) Hybrid method D) Accrual method

Correct Answer: B The indirect method begins with profit or loss (net income) and adjusts for non-cash transactions (depreciation, amortization, provisions), gains/losses on asset sales, and changes in working-capital items. It is widely used because the required data is readily available from the income statement and balance sheet. IAS 7 and US GAAP both permit it, although the direct method is encouraged under IFRS.

4. Under the direct method, cash receipts from customers are calculated as: A) Sales + Increase in receivables B) Sales – Increase in receivables + Decrease in receivables C) Sales revenue only D) Cost of goods sold

Correct Answer: B Cash receipts from customers equal sales revenue adjusted for the change in trade receivables. An increase in receivables means some sales were not collected in cash, so they are subtracted; a decrease means prior receivables were collected, so they are added. This conversion from accrual to cash basis is the essence of the direct method for operating cash flows.

5. Interest paid is classified under which activity under IAS 7 (when the entity chooses the option)? A) Only operating B) Operating or financing C) Only investing D) Only financing

Correct Answer: B IAS 7 allows interest paid to be classified as either an operating or a financing cash flow, provided the classification is applied consistently. Many entities choose operating to align with the income-statement treatment of interest expense, while others prefer financing to show the cost of borrowing separately. US GAAP requires interest paid to be classified as an operating activity.

6. Dividends paid are most commonly classified as: A) Operating activity B) Investing activity C) Financing activity D) Non-cash item

Correct Answer: C Dividends paid represent a return of capital to equity holders and are therefore classified as financing cash outflows under both IAS 7 and US GAAP. This classification helps users distinguish cash generated from operations from cash returned to owners. Interest dividends received may be operating or investing under IFRS, but dividends paid are almost always financing.

7. Purchase of property, plant and equipment is classified as: A) Operating outflow B) Investing outflow C) Financing outflow D) Non-cash transaction

Correct Answer: B Acquisition of long-term productive assets such as PPE is an investing activity because it reflects the use of cash to obtain resources that will generate future economic benefits. The cash outflow is reported in the investing section regardless of whether the asset is purchased with cash or partly financed (the financing portion appears in financing activities).

8. Proceeds from the issue of shares are reported in: A) Operating activities B) Investing activities C) Financing activities D) Supplementary information only

Correct Answer: C Issuing equity shares brings cash into the entity from owners and is therefore a financing inflow. The cash flow statement shows the net cash raised after any share-issue costs. This information is useful for assessing how the entity is funded and the extent of dilution of existing shareholders.

9. Depreciation expense is added back in the indirect method because: A) It is a cash expense B) It is a non-cash expense that reduced net income C) It increases cash D) It is an investing outflow

Correct Answer: B Depreciation is a non-cash charge that reduces reported profit but does not involve an outflow of cash in the current period. Adding it back converts accrual-based net income toward cash generated by operations. The actual cash outflow for the asset occurred when it was purchased and was classified as an investing activity at that time.

10. A gain on sale of equipment is: A) Added in the operating section under the indirect method B) Subtracted in the operating section under the indirect method C) Ignored completely D) Classified as financing

Correct Answer: B Under the indirect method the entire proceeds from the sale appear in investing activities. Because the gain was included in net income, it must be subtracted in the operating section so that the gain is not double-counted. Only the cash proceeds (which include the gain) are reported once, in investing cash flows.

11. Which of the following is a non-cash investing and financing activity that must be disclosed? A) Depreciation B) Conversion of bonds into shares C) Payment of salaries D) Collection of receivables

Correct Answer: B Significant non-cash transactions (for example, converting debt to equity, acquiring assets by issuing shares, or exchanging assets) are not reported in the body of the cash flow statement but must be disclosed either in the notes or in a separate schedule. This ensures users have a complete picture of investing and financing activities that affect the entity’s capital structure.

12. Free Cash Flow is commonly calculated as: A) Operating cash flow – Capital expenditures B) Net income + Depreciation C) Cash from financing activities D) Total cash inflows – Total cash outflows

Correct Answer: A Free Cash Flow (FCF) measures the cash an entity generates after maintaining or expanding its asset base. The most common formula is cash from operating activities minus capital expenditures (maintenance and growth). Analysts use FCF to evaluate the cash available for dividends, debt repayment, share buy-backs or further investment without external financing.

13. Under US GAAP, interest received is classified as: A) Investing B) Operating C) Financing D) Either operating or investing

Correct Answer: B US GAAP requires interest received (and interest paid) to be classified as operating cash flows. This differs from IAS 7, which permits a choice between operating and investing for interest received. The US GAAP approach treats interest as part of the entity’s core operating results, consistent with its treatment in the income statement.

14. An increase in inventory is treated under the indirect method as: A) An addition to net income B) A subtraction from net income C) An investing outflow D) A financing inflow

Correct Answer: B An increase in inventory means the entity used cash to purchase more goods than it sold. Because the purchase is already reflected in cost of goods sold (which reduced net income), the additional cash tied up in inventory must be subtracted to arrive at cash from operations. Conversely, a decrease in inventory is added back.

15. Cash paid to suppliers is calculated under the direct method as: A) Cost of goods sold + Increase in inventory – Increase in payables B) Cost of goods sold only C) Purchases only D) Sales – Gross profit

Correct Answer: A Cash paid to suppliers equals cost of goods sold adjusted for the change in inventory and the change in trade payables. An increase in inventory adds to purchases; an increase in payables means some purchases were not yet paid in cash and is therefore subtracted. This formula converts the accrual-based cost of goods sold into the actual cash outflow.

16. Which section of the cash flow statement is most useful for assessing an entity’s ability to generate cash from its core business? A) Investing B) Financing C) Operating D) Non-cash disclosures

Correct Answer: C Operating cash flows reflect the cash generated or consumed by the entity’s primary revenue-producing activities. Consistent positive operating cash flow is a key indicator of financial health and the ability to fund investing and financing needs internally. Analysts compare operating cash flow with net income to evaluate earnings quality.

17. Proceeds from the sale of a building are reported as: A) Operating inflow B) Investing inflow C) Financing inflow D) Non-cash item

Correct Answer: B Sale of long-term assets such as buildings or equipment generates cash that is classified as an investing inflow. The cash proceeds (not the gain or loss) appear in the investing section. Any gain or loss is adjusted out of operating cash flows under the indirect method so that only the actual cash received is reported once.

18. Repayment of a bank loan principal is classified as: A) Operating B) Investing C) Financing D) Either operating or financing

Correct Answer: C Repayment of the principal portion of borrowings is a financing outflow. Interest may be operating or financing under IFRS, but the principal repayment itself always reduces the entity’s liabilities to lenders and is therefore financing. This classification helps users track changes in the entity’s capital structure.

19. Under the indirect method, an increase in accounts payable is: A) Subtracted from net income B) Added to net income C) Reported as investing D) Ignored

Correct Answer: B An increase in accounts payable means the entity delayed cash payments to suppliers, effectively conserving cash. Because the related expense already reduced net income, the increase in the liability is added back to arrive at cash from operations. A decrease in payables is subtracted because cash was used to settle prior obligations.

20. Which of the following is NOT a cash equivalent? A) Treasury bill maturing in 60 days B) Money-market fund C) Equity shares held for trading D) Bank deposit with 30-day maturity

Correct Answer: C Equity shares are subject to significant risk of changes in value and are not readily convertible to a known amount of cash. Cash equivalents must meet both the short maturity (usually ≤3 months) and insignificant risk criteria. Equity investments, even if liquid, fail the “known amount” and “insignificant risk” tests and are therefore excluded from cash and cash equivalents.

21. The direct method of presenting operating cash flows is: A) Prohibited by IFRS B) Encouraged by IAS 7 but rarely used in practice C) Required by US GAAP D) Identical to the indirect method

Correct Answer: B IAS 7 encourages the direct method because it provides more transparent information about specific cash receipts and payments. However, most entities use the indirect method for practical reasons. US GAAP permits both methods; when the direct method is used, a reconciliation to the indirect method is also required.

22. Cash flows from acquiring and disposing of investments in subsidiaries are classified as: A) Operating B) Investing C) Financing D) Non-cash

Correct Answer: B Acquisition or disposal of subsidiaries, associates or joint ventures is an investing activity. The cash consideration paid or received (net of cash acquired or disposed of) appears in the investing section. This classification distinguishes strategic investment decisions from day-to-day operating cash flows.

23. A company reports net income of $100,000, depreciation of $20,000 and an increase in receivables of $15,000. Cash from operations (indirect) is: A) $105,000 B) $135,000 C) $85,000 D) $100,000

Correct Answer: A Start with net income $100,000, add back non-cash depreciation $20,000, then subtract the increase in receivables $15,000 (cash not yet collected). Result: $100,000 + $20,000 – $15,000 = $105,000. This simple adjustment illustrates the core logic of the indirect method.

24. Taxes paid are classified under IAS 7 as: A) Always operating B) Operating, unless specifically identified with financing or investing C) Always financing D) Always investing

Correct Answer: B IAS 7 requires taxes paid to be classified as operating cash flows unless they can be specifically identified with financing or investing activities (for example, tax on a gain from sale of an investment may be investing). In practice most entities report the entire tax payment as operating for simplicity and consistency.

25. Which ratio uses cash flow information to assess liquidity? A) Current ratio B) Cash flow to current liabilities C) Debt-to-equity D) Gross profit margin

Correct Answer: B The cash-flow-to-current-liabilities ratio (operating cash flow ÷ current liabilities) measures an entity’s ability to cover short-term obligations with cash generated from operations. It is often considered more reliable than the traditional current ratio because it focuses on actual cash generation rather than accrual-based working-capital balances.

26. Bank overdrafts that are repayable on demand and form an integral part of cash management are: A) Always financing liabilities B) Included as a component of cash and cash equivalents under IAS 7 C) Prohibited from the cash flow statement D) Classified as investing

Correct Answer: B IAS 7 permits bank overdrafts that are repayable on demand and form an integral part of an entity’s cash-management practices to be included as a negative component of cash and cash equivalents. This treatment reflects the economic reality that many entities manage liquidity on a net basis across bank accounts.

27. Amortization of a bond discount is: A) Added back under the indirect method B) Subtracted under the indirect method C) Reported as financing outflow D) Ignored

Correct Answer: A Amortization of a discount on bonds payable increases interest expense without a corresponding cash outflow in the current period. Therefore it is added back to net income in the operating section under the indirect method. The actual cash interest paid is lower than the expense recognized.

28. Cash dividends received from equity investments are classified under US GAAP as: A) Investing B) Operating C) Financing D) Either operating or investing

Correct Answer: B US GAAP requires dividends received to be classified as operating cash flows. This treatment is consistent with the classification of interest received. Under IFRS an entity may choose operating or investing classification, provided the choice is applied consistently.

29. The purchase of treasury shares is reported as: A) Operating outflow B) Investing outflow C) Financing outflow D) Non-cash transaction

Correct Answer: C Acquisition of an entity’s own shares (treasury stock) is a financing activity because it represents a return of capital to shareholders. The cash paid reduces equity and is shown as a financing outflow. Subsequent re-issuance of treasury shares is a financing inflow.

30. Which of the following appears in the investing section? A) Payment of salaries B) Proceeds from long-term borrowing C) Purchase of intangible assets D) Payment of dividends

Correct Answer: C Acquisition of intangible assets (patents, software, licenses, etc.) is an investing outflow, analogous to the purchase of PPE. These assets are expected to generate future economic benefits over multiple periods, so the cash spent to acquire them is classified as investing rather than operating.

31. Under the indirect method, a decrease in prepaid expenses is: A) Subtracted from net income B) Added to net income C) Reported as investing D) Reported as financing

Correct Answer: B A decrease in prepaid expenses means that an expense recognized in the current period was paid in a prior period. Because the cash outflow already occurred earlier, the current-period expense must be added back to convert net income to cash from operations. An increase in prepayments is subtracted.

32. Cash flow from financing activities includes all of the following except: A) Proceeds from issuing bonds B) Repayment of lease liabilities (principal) C) Purchase of equipment D) Payment of dividends

Correct Answer: C Purchase of equipment is an investing activity. Financing activities relate to transactions with owners and lenders that change the size and composition of equity and borrowings. Asset acquisitions, even if financed by debt, are shown in investing; the related borrowing appears in financing.

33. The reconciliation of net income to cash from operations is required when: A) The direct method is used under US GAAP B) The indirect method is used C) Only under IFRS D) Never

Correct Answer: A When an entity elects the direct method under US GAAP, it must still provide a separate reconciliation of net income to net cash from operating activities (i.e., the indirect-method information). IFRS encourages the direct method but does not mandate the additional reconciliation.

34. A loss on the sale of an investment is: A) Added in the operating section (indirect method) B) Subtracted in the operating section C) Reported as financing D) Ignored

Correct Answer: A The loss reduced net income but the full cash proceeds (which are lower because of the loss) appear in investing activities. Adding the loss back in the operating section prevents the loss from reducing operating cash flow and ensures the cash effect is reported only once, in investing.

35. Which item is classified as an operating cash flow under both IFRS and US GAAP? A) Interest paid (always) B) Dividends paid C) Cash paid to employees D) Proceeds from share issue

Correct Answer: C Cash payments to employees for services are unambiguously operating under both frameworks. Interest paid may differ (choice under IFRS, operating under US GAAP), dividends paid are financing, and share proceeds are financing. Employee compensation is part of core operations.

36. Capitalized interest paid is classified as: A) Operating under US GAAP B) Investing under US GAAP C) Always financing D) Non-cash

Correct Answer: B Under US GAAP, interest that is capitalized as part of the cost of a qualifying asset is classified as an investing cash outflow (the same section as the asset itself). Interest that is expensed remains operating. IFRS generally treats interest paid as operating or financing regardless of capitalization.

37. The cash flow statement helps users assess: A) Only profitability B) Liquidity, solvency and financial flexibility C) Market share D) Employee satisfaction

Correct Answer: B By showing the sources and uses of cash, the statement enables users to evaluate the entity’s ability to generate cash, meet obligations, fund growth, and withstand unexpected events. These insights into liquidity, solvency and financial flexibility complement the information provided by the income statement and balance sheet.

38. An entity using the indirect method reports a large positive adjustment for “increase in deferred revenue.” This indicates: A) Cash was collected in advance of revenue recognition B) Revenue was recognized without cash collection C) An investing inflow D) A financing outflow

Correct Answer: A An increase in deferred (unearned) revenue means customers paid cash before the entity recognized the related revenue. The cash has already been received, so the increase is added in the operating section. This adjustment converts the later revenue recognition back to the earlier cash collection.

39. Which of the following is presented as a supplementary disclosure rather than in the body of the cash flow statement? A) Depreciation B) Cash paid for interest and taxes (often) C) Proceeds from share issue D) Purchase of inventory

Correct Answer: B IAS 7 and US GAAP require disclosure of cash paid for interest and income taxes, either on the face of the statement or in the notes. Many entities present these amounts as supplementary information when they use the indirect method, because the amounts are not separately visible in the operating section.

40. Net cash used in investing activities is typically negative for: A) Mature companies with little growth B) Growing companies investing heavily in PPE C) Companies repaying all debt D) Companies paying large dividends

Correct Answer: B Growing companies usually report net cash outflows in the investing section because they are acquiring PPE, intangibles and other long-term assets. Mature or declining companies may show smaller investing outflows or even inflows from asset disposals. The sign of investing cash flow is therefore an important indicator of growth strategy.

41. Under IAS 7, an entity may classify dividends paid as: A) Only operating B) Operating or financing C) Only investing D) Only financing

Correct Answer: B IAS 7 permits dividends paid to be classified as either operating or financing, provided the classification is consistent. Most entities choose financing because dividends are a return to owners. Classifying them as operating is less common and may be used when the entity views dividends as a cost of obtaining equity capital.

42. Cash flows arising from changes in ownership interests in a subsidiary that do not result in loss of control are classified as: A) Operating B) Investing C) Financing D) Non-cash

Correct Answer: C Under IFRS 10 / IAS 7, transactions with non-controlling interests that do not result in loss of control are treated as equity transactions and therefore classified as financing cash flows. This treatment is consistent with the accounting in the statement of changes in equity.

43. A company sells inventory for $50,000 cash that cost $30,000. The $20,000 gross profit appears in: A) Operating cash flow only through the net income figure (indirect) B) Investing cash flow C) Financing cash flow D) Nowhere in the cash flow statement

Correct Answer: A Under the indirect method the entire gross profit is embedded in net income and therefore affects operating cash flow. Under the direct method the $50,000 cash receipt is shown as a cash inflow from customers and the $30,000 is part of cash paid to suppliers; the profit itself is not separately presented.

44. Which of the following reduces cash from operations under the indirect method? A) Depreciation B) Increase in accounts receivable C) Increase in accounts payable D) Amortization of discount on bonds

Correct Answer: B An increase in accounts receivable means revenue has been recognized but cash has not yet been collected. The amount is therefore subtracted from net income. The other three items are added back because they are non-cash expenses or sources of cash.

45. The statement of cash flows is required for: A) Only public companies B) All entities preparing financial statements under IFRS or US GAAP (with limited exceptions) C) Only manufacturing companies D) Only banks

Correct Answer: B Both IAS 7 and ASC 230 require a statement of cash flows as an integral part of a complete set of financial statements for virtually all entities. Limited exceptions exist for certain benefit plans and highly specialized entities, but the vast majority of companies must present the statement.

46. Free cash flow to equity (FCFE) is approximately: A) Operating cash flow – Capex – Debt repayments + New debt B) Net income only C) Cash from financing D) Investing cash flow

Correct Answer: A FCFE estimates the cash available to equity holders after the entity has paid its expenses, taxes, reinvestment needs and net debt obligations. The simplified formula starts with operating cash flow, subtracts capital expenditures, and adjusts for net borrowing (new debt issued minus debt repaid). It is a key input in equity valuation models.

47. When a company acquires another company for cash, the cash paid (net of cash acquired) is classified as: A) Operating B) Investing C) Financing D) Non-cash

Correct Answer: B Business combinations settled in cash are investing activities. Only the net cash consideration (cash paid minus cash and cash equivalents acquired) is reported in the investing section. This treatment focuses on the net cash impact of the acquisition decision.

48. A positive cash flow from financing activities most likely indicates: A) The company is generating strong internal cash B) The company is raising capital through debt or equity C) The company is selling long-term assets D) The company has high operating profits

Correct Answer: B Positive financing cash flow means the entity received more cash from owners and lenders than it returned to them (via dividends, share buy-backs or debt repayments). This is common for growing companies that need external capital. Persistent reliance on financing inflows may signal that operations are not yet self-sustaining.

49. Under the indirect method, the starting point is: A) Cash balance B) Net income / profit or loss C) Total assets D) Sales revenue

Correct Answer: B The indirect method begins with profit or loss (net income) for the period and then makes a series of adjustments to convert that accrual figure into cash generated by operations. This approach is practical because net income is already calculated and widely understood by users.

50. The most important qualitative characteristic that the cash flow statement enhances is: A) Understandability of accrual earnings B) Relevance and faithful representation of liquidity and cash-generating ability C) Comparability of inventory methods D) Timeliness of the balance sheet

Correct Answer: B By providing information about the entity’s ability to generate cash and the timing and certainty of cash flows, the statement directly enhances the relevance and faithful representation of the financial statements with respect to liquidity, solvency and financial flexibility—information that accrual-based statements alone cannot fully convey.

 

Cash Flow Statement Quiz: 50 Multiple Choice Questions with Answers and Explanations

The statement of cash flows is one of the most critical financial statements for understanding a company’s liquidity and financial health. This comprehensive quiz features 50 multiple-choice questions covering all aspects of cash flow statements—from basic concepts to complex calculations. Each question includes a detailed explanation to help you master this essential accounting topic.

---

Section 1: Basic Concepts and Purpose

1. What is the primary purpose of the statement of cash flows?

A) To show the profitability of a company
B) To provide information about cash receipts and cash payments during a period
C) To show the financial position of a company
D) To calculate the company’s net worth

Answer: B) To provide information about cash receipts and cash payments during a period

Explanation: The statement of cash flows is designed to provide relevant information about the cash inflows and outflows of an entity during a specific period. Unlike the income statement, which reports on an accrual basis, the cash flow statement focuses exclusively on actual cash movements. This information helps users assess the company’s ability to generate future cash flows, pay dividends, and meet obligations. Profitability (option A) is shown on the income statement, while financial position (option C) is shown on the balance sheet.

---

2. What are the three main sections of a cash flow statement?

A) Operating, Investing, and Financing activities
B) Operating, Managing, and Financing activities
C) Investing, Financing, and Revenue activities
D) Operating, Investing, and Profit activities

Answer: A) Operating, Investing, and Financing activities

Explanation: The cash flow statement is divided into three sections: operating activities (the primary revenue-generating activities), investing activities (acquisition and disposal of long-term assets and investments), and financing activities (transactions with owners and creditors). These three categories provide a comprehensive picture of all cash movements within a business. The term “Managing activities” (option B) is not a valid classification for cash flow statements.

---

3. According to Accounting Standard 3 (AS-3), cash flows are classified into:

A) Operating and Investing activities only
B) Investing and Financing activities only
C) Operating and Financing activities only
D) Operating, Investing, and Financing activities

Answer: D) Operating, Investing, and Financing activities

Explanation: AS-3 (revised) specifies that cash flows should be classified into three categories: operating, investing, and financing activities. This classification helps users understand how different types of business activities affect the company’s cash position. The standard provides guidance on which transactions belong to each category, ensuring consistency in financial reporting across companies. This three-way classification is universally accepted in accounting standards worldwide.

---

4. The cash flow statement is prepared using which basis of accounting?

A) Accrual basis
B) Cash basis
C) Hybrid basis
D) Both accrual and cash basis

Answer: B) Cash basis

Explanation: Unlike the income statement which uses accrual accounting, the cash flow statement is prepared on a cash basis—recording transactions only when cash actually changes hands. This fundamental difference explains why net income (accrual basis) often differs from net cash provided by operating activities. The cash flow statement reconciles these differences by adjusting accrual-based net income for non-cash items and changes in working capital. The statement essentially converts the accrual-based income statement to a cash basis.

---

5. Which of the following would be least useful in answering questions about a company’s cash flows?

A) Whether cash dividends were more or less than net cash flow from operations
B) What the average balance in the cash account was during the period
C) Whether operating activities resulted in positive or negative net cash flow
D) How cash was used by financing activities during the period

Answer: B) What the average balance in the cash account was during the period

Explanation: The statement of cash flows provides information about cash inflows and outflows during a period, but it does not reveal the average balance in cash accounts—it typically shows only beginning and ending balances. Options A, C, and D are all questions that the cash flow statement is designed to answer. Users can compare cash dividends to operating cash flow, assess whether operations generated positive cash flow, and analyze how financing activities used cash. The average balance is not directly provided by the statement.

---

Section 2: Cash Equivalents

6. Which of the following is considered a cash equivalent?

A) Inventory
B) Accounts receivable
C) A 3-month Treasury bill
D) Machinery

Answer: C) A 3-month Treasury bill

Explanation: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. These typically include Treasury bills, commercial paper, and money market funds with original maturities of three months or less. Inventory (option A) and accounts receivable (option B) are not considered cash equivalents because they are not readily convertible to known amounts of cash. Machinery (option D) is a long-term asset.

---

7. Which of the following is NOT considered a cash or cash equivalent?

A) Cash in hand
B) Demand deposits
C) Bank borrowings
D) Short-term investments with a maturity of two months

Answer: C) Bank borrowings

Explanation: Cash and cash equivalents include cash on hand, demand deposits, and short-term highly liquid investments that are readily convertible to known amounts of cash. Bank borrowings (option C) represent liabilities, not cash or cash equivalents. They represent amounts owed to banks, not cash the company possesses. The key characteristic of cash equivalents is their high liquidity and insignificant risk of value change—typically investments with maturities of three months or less from the date of acquisition.

---

8. Short-term highly liquid investments that are readily convertible into known amounts of cash are called:

A) Cash funds
B) Cash equivalents
C) Marketable securities
D) Current assets

Answer: B) Cash equivalents

Explanation: Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. They typically include investments with original maturities of three months or less, such as Treasury bills, commercial paper, and money market funds. “Cash funds” (option A) is not a standard accounting term for these items. While marketable securities (option C) may include some cash equivalents, not all marketable securities meet the criteria.

---

9. Cash and cash equivalents do NOT include:

A) Cash in hand
B) Cash at bank
C) Cheques in hand
D) Inventories

Answer: D) Inventories

Explanation: Cash and cash equivalents include cash on hand, cash at bank, and cheques in hand—items that represent immediately available cash or near-cash. Inventories (option D) are not considered cash equivalents because they represent goods held for sale, not liquid assets that can be readily converted to known amounts of cash. Inventory must be sold, and the cash collection process typically involves accounts receivable, introducing significant time delays and uncertainty about the exact amount to be collected.

---

10. Which transaction is considered a movement between cash and cash equivalents?

A) Purchase of cash equivalent securities
B) Sale of cash equivalent securities
C) Cash withdrawn from bank
D) All of the above

Answer: D) All of the above

Explanation: Transactions involving cash and cash equivalents—such as purchasing or selling cash equivalent securities and withdrawing cash from bank accounts—are considered movements between cash and cash equivalents and do not appear in the cash flow statement as inflows or outflows. These are simply transfers between forms of cash. The cash flow statement focuses on changes in the total cash and cash equivalents balance, distinguishing between internal transfers and external cash flows.

---

Section 3: Operating Activities

11. Which of the following would be added to net income when using the indirect method for operating activities?

A) Increase in accounts receivable
B) Decrease in inventories
C) Decrease in accounts payable
D) Gain on sale of equipment

Answer: B) Decrease in inventories

Explanation: Under the indirect method, a decrease in inventories is added back to net income because it represents cash generated from selling inventory that was not recognized in net income. When inventory decreases, cash flows have increased, but this is not reflected in accrual-based net income. Conversely, an increase in accounts receivable (option A) is subtracted because it represents sales made on credit that did not generate cash. Decreases in accounts payable (option C) are subtracted as they indicate cash paid to suppliers.

---

12. Under the indirect method, depreciation expense is:

A) Subtracted from net income
B) Added to net income
C) Not reported in operating activities
D) Reported in investing activities

Answer: B) Added to net income

Explanation: Depreciation is a non-cash expense that reduces net income but does not involve an actual cash outflow. Under the indirect method, it must be added back to net income to reconcile accrual-based net income to cash provided by operating activities. The same treatment applies to other non-cash expenses such as amortization. Adding back depreciation effectively reverses its effect on net income, bringing the calculation closer to the actual cash generated from operations.

---

13. A gain on the sale of equipment is treated as which of the following when using the indirect method?

A) Added to net income
B) Deducted from net income
C) Reported in investing activities
D) Not reported

Answer: B) Deducted from net income

Explanation: A gain on the sale of equipment represents an investing activity, not an operating activity. Under the indirect method, the gain is deducted from net income because the full proceeds from the sale appear in the investing section, and including the gain in operating activities would double-count the cash effect. The gain increased net income but represents cash from an investing transaction, not from operations. For the same reason, losses on asset sales are added back to net income.

---

14. Using the indirect method, an increase in accounts receivable would be:

A) Added to net income
B) Deducted from net income
C) Reported in the financing section
D) Ignored

Answer: B) Deducted from net income

Explanation: An increase in accounts receivable indicates that sales were made on credit and cash was not collected. Under the indirect method, this increase is subtracted from net income because it represents revenue included in net income that did not result in a cash inflow. This adjustment helps convert accrual-based net income to cash basis. The opposite adjustment applies when accounts receivable decreases—the decrease is added back to net income because it represents cash collected from prior credit sales.

---

15. Which of the following is NOT an operating activity?

A) Cash received from customers
B) Cash paid to suppliers
C) Cash paid to employees
D) Cash received from sale of land

Answer: D) Cash received from sale of land

Explanation: Cash received from the sale of land is classified as an investing activity, not an operating activity. Operating activities include cash received from customers, cash paid to suppliers, and cash paid to employees—the day-to-day transactions related to the company’s primary revenue-generating activities. Sale of land involves the disposal of a long-term productive asset, which is typical of investing activities. For many companies, land is held for long-term use or investment, not for trading.

---

16. Which calculation correctly determines cash collected from customers using the direct method?

A) Sales + Increase in Accounts Receivable
B) Sales – Increase in Accounts Receivable
C) Sales – Decrease in Accounts Receivable
D) Sales + Decrease in Accounts Payable

Answer: B) Sales – Increase in Accounts Receivable

Explanation: To determine cash collected from customers using the direct method, start with sales revenue and subtract the increase in accounts receivable. An increase in receivables means not all sales were collected in cash. For example, if sales were $750,000 and accounts receivable increased from $40,000 to $50,000, cash collected would be $740,000 ($750,000 – $10,000). If accounts receivable decreased, the decrease would be added to sales because it represents collection of prior sales.

---

17. Sales for the year were $750,000. Accounts receivable were $40,000 at the beginning and $50,000 at the end of the year. Using the direct method, cash collected from customers is:

A) $700,000
B) $710,000
C) $740,000
D) $760,000

Answer: C) $740,000

Explanation: Cash collected from customers = Sales – Increase in Accounts Receivable. Accounts receivable increased by $10,000 ($50,000 – $40,000). Therefore: $750,000 – $10,000 = $740,000. The $10,000 increase represents sales made on credit that have not yet been collected. The direct method clearly shows the relationship between sales and cash collections. Option D ($760,000) would be correct if there was a decrease in accounts receivable, but here there was an increase.

---

18. Income tax expense was $150,000 for the year. Income tax payable was $20,000 at the beginning and $30,000 at the end of the year. Using the direct method, cash paid for income taxes is:

A) $140,000
B) $150,000
C) $160,000
D) $170,000

Answer: A) $140,000

Explanation: Cash paid for income taxes = Income Tax Expense + Decrease in Income Tax Payable – Increase in Income Tax Payable. Income tax payable increased by $10,000 ($30,000 – $20,000), meaning some of the expense was not paid in cash. Therefore: $150,000 – $10,000 = $140,000. The increase in income tax payable represents taxes that have been expensed but not yet paid. This adjustment converts accrual-based tax expense to actual cash payments.

---

19. Which of the following would be deducted from net income in determining cash flows from operating activities using the indirect method?

A) Amortization expense
B) Decrease in inventories
C) Decrease in accounts receivable
D) Gain on sale of plant and equipment

Answer: D) Gain on sale of plant and equipment

Explanation: A gain on sale of plant and equipment is deducted from net income when using the indirect method. This gain is included in net income but represents cash from an investing activity, not from operations. The full proceeds from the sale will appear in the investing section of the cash flow statement. Deducting the gain removes it from the operating section. Amortization expense (option A) and decreases in inventories (option B) and accounts receivable (option C) are all added to net income, not deducted.

---

20. Interest paid by a manufacturing company is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: A) Operating activity

Explanation: For non-financial companies, interest paid is generally classified as an operating activity under most accounting standards. This treatment reflects that interest expense is a regular part of business operations, closely related to the company’s revenue-generating activities. However, it’s worth noting that some standards allow for alternative treatments—for example, under IFRS, interest paid can be classified as either operating or financing, provided the classification is applied consistently.

---

Section 4: Investing Activities

21. Which of the following is an example of a cash flow from investing activities?

A) Receipt of cash from the sale of land
B) Receipt of cash from issuing bonds
C) Payment of dividends
D) Deduction of amortization expense

Answer: A) Receipt of cash from the sale of land

Explanation: Investing activities include acquiring and disposing of long-term assets and investments. Cash received from the sale of land is a classic example of an investing cash inflow. Issuing bonds (option B) is a financing activity. Payment of dividends (option C) is a financing activity. Amortization (option D) is a non-cash expense that affects operating activities when using the indirect method, not a direct cash flow item.

---

22. The purchase of equipment would be classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: B) Investing activity

Explanation: The purchase of equipment is a cash outflow from investing activities because it involves acquiring a long-term productive asset. Investing activities include both cash outflows for purchases of property, plant, and equipment and cash inflows from their sale. This classification helps users understand how much cash a company is investing in its long-term productive capacity. Equipment purchases are often significant in size and are strategically important for the company’s future operations.

---

23. Cash received from dividend income is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) It depends on the nature of the company

Answer: D) It depends on the nature of the company

Explanation: The classification of dividend received depends on the primary business of the company. For an investment company or financial institution where dividend income is a core revenue source, it is classified as an operating activity. For a manufacturing or trading company, dividend received is typically classified as an investing activity. This nuance is important because the same transaction can be classified differently depending on the nature of the entity’s operations.

---

24. When plant assets are purchased, the cost appears:

A) In the operating section
B) In the financing section
C) In the investing section
D) As a footnote only

Answer: C) In the investing section

Explanation: The purchase of plant assets is classified as an investing activity. This is a cash outflow that represents the company’s investment in its long-term productive capacity. The investing section of the cash flow statement reports all transactions involving the acquisition and disposal of long-term assets. This classification helps users assess how much the company is investing in its future operations. The operating section (option A) deals with day-to-day business activities.

---

25. Sale of investments is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: B) Investing activity

Explanation: The sale of investments represents a cash inflow from investing activities. This includes the disposal of equity or debt securities of other entities that are held for investment purposes. Investing activities involve transactions with long-term assets and investments. The classification helps users understand the extent to which the company is liquidating its investment portfolio. The proceeds from such sales are reported in the investing section, separate from operating and financing cash flows.

---

26. Which of the following is NOT an investing activity?

A) Purchase of machinery
B) Sale of land
C) Purchase of shares of another company
D) Payment of salaries

Answer: D) Payment of salaries

Explanation: Payment of salaries is an operating activity, not an investing activity. Investing activities involve the acquisition or disposal of long-term assets and investments. Purchase of machinery (option A), sale of land (option B), and purchase of shares of another company (option C) are all investing activities because they relate to long-term assets or investments. Salaries are part of the company’s day-to-day operations and are essential for generating revenue, making them operating activities.

---

27. A company sold equipment for $30,000. The equipment had a cost of $70,000 and accumulated depreciation of $50,000. What amount appears in the investing section of the cash flow statement?

A) $30,000
B) $20,000
C) $10,000
D) $0

Answer: A) $30,000

Explanation: The amount that appears in the investing section is the cash proceeds received from the sale, which is $30,000. The book value of the equipment ($20,000 = $70,000 – $50,000) and any gain or loss ($10,000 gain) are relevant for the income statement but not for the investing section of the cash flow statement. The investing section reports only the actual cash received or paid, regardless of any gains or losses recognized for accounting purposes.

---

28. Purchase and sale of shares for a manufacturing company comes under:

A) Operating activities
B) Investing activities
C) Financing activities
D) Cash equivalents

Answer: B) Investing activities

Explanation: For a manufacturing company, the purchase and sale of shares of other companies are classified as investing activities. This is because they represent investments in other entities rather than the company’s primary revenue-generating activities. However, for financial institutions or investment companies where trading securities is part of normal operations, such transactions would be classified as operating activities. The classification depends on the nature of the entity’s business activities.

---

29. Purchase of debentures is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: B) Investing activity

Explanation: Purchase of debentures represents an investment in debt securities of another entity, making it an investing activity. This is a cash outflow from investing activities because it involves the acquisition of an investment. When the company sells these debentures, the proceeds would be reported as an investing cash inflow. This classification helps users understand the company’s investment decisions and how cash is being deployed into investment assets.

---

30. Acquisition of a building for cash is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: B) Investing activity

Explanation: The acquisition of a building for cash is an investing activity because buildings are long-term assets used in operations. Investing activities involve the purchase and sale of property, plant, and equipment, as well as other long-term investments. This cash outflow represents a significant investment in the company’s productive capacity. The building will be used over many years to generate revenue, and its purchase is distinct from the day-to-day operating activities of the business.

---

Section 5: Financing Activities

31. Which of the following is an example of a cash flow from financing activities?

A) Receipt of cash from sale of land
B) Receipt of cash from issuing bonds
C) Deduction of amortization expense
D) Collection of accounts receivable

Answer: B) Receipt of cash from issuing bonds

Explanation: Issuing bonds is a financing activity because it involves obtaining cash from creditors. Financing activities include obtaining resources from owners and providing them with a return on their investment, as well as obtaining and repaying borrowings. The receipt of cash from issuing bonds represents an inflow from financing activities. Sale of land (option A) is an investing activity, amortization (option C) is a non-cash item, and collection of receivables (option D) is an operating activity.

---

32. Payment of dividends is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: C) Financing activity

Explanation: Payment of dividends is a financing activity because it represents a return of profits to the company’s owners. Dividends are cash outflows to shareholders, who are the ultimate owners of the company. This classification helps users understand how much cash is being returned to owners versus reinvested in the business. Under some accounting frameworks (such as IFRS), dividends paid may alternatively be classified as an operating activity, but under most standards they are presented as financing activities.

---

33. Issue of shares is classified under which section?

A) Operating activities
B) Investing activities
C) Financing activities
D) Cash equivalents

Answer: C) Financing activities

Explanation: The issue of shares is a financing activity because it involves raising capital from owners. This cash inflow represents funds obtained from shareholders in exchange for ownership interests in the company. Financing activities also include the repurchase of shares (treasury stock transactions) and the payment of dividends. This classification is consistent across accounting standards and helps users understand how the company is funding its operations and growth.

---

34. Repayment of bank loan is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Cash equivalent transaction

Answer: C) Financing activity

Explanation: Repayment of a bank loan is a financing activity because it involves returning borrowed funds to a creditor. Cash flows from financing activities include both obtaining resources from creditors and repaying those obligations. This classification helps users understand the company’s borrowing and repayment patterns. The amount of debt repayment provides insight into the company’s leverage management and its ability to meet debt obligations as they come due.

---

35. Interest paid on debentures is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Non-cash activity

Answer: C) Financing activity

Explanation: For companies preparing statements under AS-3, interest paid on debentures is classified as a financing activity. This treatment reflects that interest is the cost of obtaining financing. However, it’s important to note that under some accounting frameworks, interest paid can be classified as an operating activity. The classification can vary, but AS-3 specifically classifies interest on debentures as a financing activity, making it the correct answer for this context.

---

36. Increase in Securities Premium Reserve is classified as:

A) Operating activity
B) Investing activity
C) Financing activity
D) Cash equivalent

Answer: C) Financing activity

Explanation: An increase in the Securities Premium Reserve arises when shares are issued at a premium, making it a financing activity. The premium represents additional capital received from shareholders beyond the face value of shares. This is part of the proceeds from issuing shares, which is a financing cash inflow. The premium account is disclosed separately in the balance sheet but is part of shareholders’ equity. This classification aligns with the treatment of share issuance proceeds.

---

37. Financing activities bring changes in:

A) Only the size and composition of owners’ equities
B) Only the borrowings of the enterprise
C) The size and composition of owners’ equities and borrowings
D) Current assets and liabilities

Answer: C) The size and composition of owners’ equities and borrowings

Explanation: Financing activities change the size and composition of owners’ equities and borrowings. These activities involve transactions with equity holders (issuing shares, paying dividends) and creditors (obtaining and repaying loans). They affect the capital structure of the enterprise. Current assets and liabilities (option D) are affected by operating activities. The financing section of the cash flow statement specifically tracks cash flows that impact the company’s funding sources.

---

38. Which of the following is NOT a financing activity?

A) Issue of equity shares
B) Loan taken from bank
C) Increase in securities premium
D) Sale of investment

Answer: D) Sale of investment

Explanation: Sale of investment is an investing activity, not a financing activity. Financing activities relate to transactions with owners and creditors—raising capital, repaying borrowings, and returning profits to shareholders. Issue of equity shares (option A), loans taken from banks (option B), and increases in securities premium (option C) are all financing activities. Sale of investment involves disposing of an asset held for investment purposes, which is characteristic of investing activities.

---

39. When shares are issued for non-cash consideration, how is this reported in the cash flow statement?

A) As an operating activity
B) As an investing activity
C) As a financing activity
D) In the supplementary disclosure section

Answer: D) In the supplementary disclosure section

Explanation: Non-cash financing transactions—such as issuing shares for non-cash consideration—are not reported in the cash flow statement proper because they do not involve cash flows. Instead, they are disclosed in the supplementary notes to the financial statements. This disclosure ensures users are aware of significant financing transactions that affect the company’s capital structure without impacting cash. The same treatment applies to significant non-cash investing and financing transactions.

---

40. Payment of interest is classified as which type of activity?

A) Operating activity
B) Investing activity
C) Financing activity
D) Depends on the nature of the company

Answer: A) Operating activity

Explanation: For most companies, interest paid is classified as an operating activity, particularly under US GAAP. This treatment reflects that interest expense is part of regular business operations. However, classification can vary. Under IFRS, companies may choose to classify interest paid as either operating or financing, provided the choice is applied consistently. Under AS-3 in India, interest paid on debentures is classified as a financing activity, demonstrating how accounting standards can differ in their classification requirements.

---

Section 6: Direct Method vs. Indirect Method

41. Which of the following correctly states the difference between the direct and indirect methods?

A) Only the total in the operating section differs
B) The totals in all three sections differ
C) The three sections totals are the same regardless of the method used
D) Only investing and financing totals differ

Answer: C) The three sections totals are the same regardless of the method used

Explanation: The direct and indirect methods affect only the presentation of the operating section—the total net cash provided by operating activities is the same under both methods. The investing and financing sections are presented identically regardless of the method chosen. The difference lies in how cash flows from operating activities are calculated and presented: the direct method shows major classes of gross cash receipts and payments, while the indirect method starts with net income and adjusts for non-cash items and changes in working capital.

---

42. Which method of reporting operating cash flows is most commonly used by companies?

A) Direct method
B) Indirect method
C) Both equally
D) Neither method

Answer: B) Indirect method

Explanation: Most companies use the indirect method for preparing the operating section of their cash flow statements. The indirect method is more commonly used because it is easier to prepare and is consistent with the information available in accrual-based accounting systems. It also provides a useful reconciliation between net income and cash flow from operations. Although accounting standards generally encourage the direct method, the indirect method is far more prevalent in practice.

---

43. Under the indirect method, the first step in calculating cash flow from operating activities is:

A) Adjusting for changes in working capital
B) Adding back non-cash expenses
C) Starting with net income
D) Subtracting non-operating gains

Answer: C) Starting with net income

Explanation: The indirect method begins with net income and then adjusts for non-cash items, non-operating gains and losses, and changes in working capital to arrive at cash provided by operating activities. Net income serves as the starting point because it is prepared on an accrual basis. The indirect method essentially converts the accrual-based net income to a cash basis by reversing the effects of accrual accounting. All other options are steps that come after starting with net income.

---

44. When using the indirect method, which of the following would be incorrect in adjusting net income?

A) Subtract depreciation
B) Add decrease in accounts receivable
C) Add increase in accounts payable
D) Add loss on sale of equipment

Answer: A) Subtract depreciation

Explanation: Depreciation is a non-cash expense and should be added back to net income, not subtracted. The incorrect statement is subtracting depreciation. All other options are correct adjustments under the indirect method. Decreases in accounts receivable are added (cash was collected), increases in accounts payable are added (expenses were not paid in cash), and losses on asset sales are added (the loss reduced net income without affecting cash).

---

45. Under the direct method, which of the following items would NOT appear in the operating activities section?

A) Payments to employees
B) Payments to suppliers
C) Net income
D) Collections from customers

Answer: C) Net income

Explanation: Under the direct method, net income does not appear in the operating section—instead, major classes of gross cash receipts and payments are shown. The direct method lists cash receipts from customers and cash payments to suppliers, employees, and for other expenses. Net income is not presented directly; it is replaced by these cash-based categories. The reconciliation between net income and cash flow from operations is provided in a separate schedule when the direct method is used.

---

46. The information needed to prepare the cash flow statement includes all of the following EXCEPT:

A) Comparative balance sheet
B) Retained earnings statement
C) Additional information
D) Current income statement

Answer: B) Retained earnings statement

Explanation: The retained earnings statement is not needed to prepare the cash flow statement. The necessary information comes from the comparative balance sheet (which provides the changes in balance sheet accounts), the current income statement (which provides net income and details of operating items), and additional information about non-cash transactions and other relevant events. The retained earnings statement, while part of the complete set of financial statements, does not provide unique information needed for cash flow statement preparation.

---

Section 7: Calculations and Analysis

47. What is free cash flow?

A) Cash provided by operating activities less dividends
B) Cash provided by operating activities less capital expenditures
C) Cash provided by operating activities less capital expenditures and dividends
D) Cash provided by investing activities less dividends

Answer: C) Cash provided by operating activities less capital expenditures and dividends

Explanation: Free cash flow measures the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It is calculated as cash flow from operating activities minus cash used to purchase capital assets to maintain productive capacity minus cash used for dividends. Free cash flow represents the cash available for discretionary purposes—such as expansion, debt reduction, or additional dividends. It is an important metric for investors assessing a company’s financial flexibility.

---

48. Using the formula: Cash Flow from Operating Activities – Cash used to purchase capital assets to maintain productive capacity. What is being calculated?

A) Free cash flow
B) Operating cash flow
C) Net cash flow
D) Cash flow from investing activities

Answer: A) Free cash flow

Explanation: This formula calculates free cash flow, which measures the cash available to the company after accounting for cash outflows to maintain productive capacity. Free cash flow is an important indicator of a company’s ability to generate additional cash from its operations. It represents the cash that can be used for expansion, acquisitions, debt repayment, or dividend distributions beyond what is required to maintain existing operations. Free cash flow is a key metric used by investors and analysts.

---

49. Cost of goods sold was $50,000. Inventory was $12,500 at the beginning and $15,500 at the end. Accounts payable were $10,000 at the beginning and $9,000 at the end. Using the direct method, cash payments for merchandise are:

A) $54,000
B) $50,000
C) $49,000
D) $53,000

Answer: A) $54,000

Explanation: Cash paid to suppliers = Cost of Goods Sold + Increase in Inventory + Decrease in Accounts Payable. Inventory increased by $3,000 ($15,500 – $12,500) and accounts payable decreased by $1,000 ($9,000 – $10,000). Therefore: $50,000 + $3,000 + $1,000 = $54,000. The increase in inventory represents goods purchased but not yet sold, which requires cash outflow. The decrease in accounts payable represents cash paid to suppliers, which also increases the cash payment amount.

---

50. Which of the following is NOT a limitation of the cash flow statement?

A) It cannot be used to judge the profitability of an enterprise
B) It helps in short-term financial planning
C) It cannot be used for assessing liquidity
D) It does not help in ascertaining net changes in cash equivalents

Answer: B) It helps in short-term financial planning

Explanation: Helping in short-term financial planning is a purpose, not a limitation, of the cash flow statement. Limitations of the cash flow statement include that it cannot be used to judge the overall profitability of a company (since profit is determined on an accrual basis), and it may not fully capture the company’s liquidity position because it doesn’t consider non-cash resources available to the company. The cash flow statement is limited in that it focuses only on cash flows and does not provide a complete picture of a company’s financial health without other financial statements.

 

Cash Flow Statement Quiz: 50 Multiple-Choice Questions

1. What is the primary purpose of the statement of cash flows?

2. Which financial statement classifies cash flows into operating, investing, and financing activities?

3. Which of the following is not one of the three main sections of the statement of cash flows?

4. Which description best defines cash equivalents?

5. Which item is most likely to be classified as a cash equivalent?

6. Which of the following is generally not considered a cash equivalent?

7. Which of the following is an operating activity?

8. Which of the following is an investing activity?

9. Which of the following is a financing activity?

10. Which transaction is a financing inflow?

11. Under the indirect method, the operating section begins with:

12. Which statement best describes the direct method of reporting operating cash flows?

13. Which item is added back to net income when using the indirect method?

14. In the indirect method, an increase in accounts receivable is:

15. In the indirect method, a decrease in inventory is:

16. In the indirect method, an increase in accounts payable is:

17. In the indirect method, a decrease in accrued expenses payable is:

18. Under the indirect method, a gain on the sale of equipment is:

19. Under the indirect method, a loss on the sale of equipment is:

20. Cash received from the sale of equipment is reported as:

21. Cash paid to purchase a patent is classified as:

22. Cash received from selling a long-term investment in bonds is classified as:

23. Cash received from issuing common shares is classified as:

24. Repayment of the principal on bonds payable is classified as:

25. Under U.S. GAAP, dividends paid are classified as:

26. Under U.S. GAAP, interest paid is generally classified as:

27. Under U.S. GAAP, interest received is generally classified as:

28. Under U.S. GAAP, dividends received are classified as:

29. Income taxes paid are usually classified as:

30. A company acquires equipment by issuing a note payable. How should this be reported?

31. The conversion of bonds payable into common stock should be reported as:

32. Which of the following is not reported in the main body of the statement of cash flows?

33. Which of the following increases operating cash flow under the indirect method?

34. Which of the following decreases operating cash flow under the indirect method?

35. In the indirect method, deferred income tax expense is usually:

36. Under the direct method, cash collected from customers equals:

37. Under the direct method, cash paid to suppliers equals:

38. Under the direct method, cash paid for operating expenses equals:

39. Beginning cash is $50, operating cash flow is +$80, investing cash flow is -$45, and financing cash flow is -$20. What is ending cash?

40. The ending cash balance on the statement of cash flows must equal:

41. Free cash flow is often calculated as:

42. Which action can improve operating cash flow in the short term?

43. Which of the following is not an operating cash flow under U.S. GAAP?

44. Under IFRS, interest paid may be classified as:

45. Under IFRS, dividends paid may be classified as:

46. A company reports positive net income but negative operating cash flow. Which explanation is most likely?

47. Which item appears in the investing section?

48. Which item appears in the financing section?

49. Which transaction should be disclosed as a noncash investing and financing activity?

50. Which statement about the direct and indirect methods is true?