STATEMENT OF CASH FLOWS

For each of the following activities that may take place during the accounting period, indicate
the effect on the statement of cash flows prepared using the indirect method.  Choices may be
selected as the answer for more than one question.

A. Increase cash from operating activities E. Increase cash from financing activities

B. Decrease cash from operating activities F. Decrease cash from financing activities

C. Increase cash from investing activities G. Non-cash investing and financing

supplement
D. Decrease cash from investing activities

D 1. Purchase of equipment

F 2. Repayment of long-term note payable

A 3. Amortization of intangible assets

G 4. Exchange of land for common stock

F 5. Payment of dividends

D 6. Sale of land

B 7. Gain on sale of investments

F 8. Acquisition of treasury stock

B 9. Increase in Accounts Receivable balance

B 10. Decrease in Accounts Payable balance

Identify the section of the statement of cash flows where each of the following would be
reported.

A. Operating activities C. Investing activities

B. Financing activities D. Schedule of non-cash financing and

investing

A 1. Increase in income taxes payable

A 2. Dividends received on investment (Tip: not investing)

C 3. Sale of machinery held for use by the company

B 4. Issuance of bond payable

 STATEMENT OF CASH FLOWS

C 5. Purchase of the stock of another company as investment

A 6. Decrease in inventory

D 7. Exchange of land for note payable

B 8. Payment of dividends to stockholders

A 9. Increase in accounts receivable

A 10. Loss on sale of equipment

For each transaction listed below, list the letter or letters from above that describe(s) the effect
of the transaction on a statement of cash flows for the year ending December 31, 2011. (Ignore
any income tax effects.) Any given transaction may affect a statement of cash flows (using the
indirect method) in one or more of the following ways:

A. Net income will be increased or adjusted upward.

B. Net income will be decreased or adjusted downward.

C. Increase as a result of cash inflows provided by investing activities.

D. Decrease as a result of cash outflows from investing activities.

E. Increase as a result of cash inflows provided by financing activities.

F. Decrease as a result of cash outflows from financing activities.

G. Not required to be reported in the body of the statement.

F 1. Preference shares with a carrying value of P44,000 was redeemed for P50,000 on
January 1, 2011.

G 2. Uncollectible accounts receivable in the amount of P3,000 were written off against the
allowance for doubtful accounts balance of P12,200 on December 31, 2011.

C 3. Machinery which originally cost P3,000 and has a book value of P1,800 is sold for
P1,400 on December 31, 2011. (Tip: Adjustment in operations.)

G 4. Land is acquired through the issuance of bonds payable on July 1, 2011.

E 5. 1,000 ordinary shares, stated value P10 per share, are issued for P25 per share in
2011.

G 6. An appropriation of retained earnings for treasury shares in the amount of P35,000 is

established in 2011.

F 7. A cash dividend of P8,000 is paid on December 31, 2011.

 STATEMENT OF CASH FLOWS

G 8. The portfolio of long-term investments (available-for-sale) is at an aggregate fair

value higher than aggregate cost at December 31, 2011.

The primary purpose of the statement of cash flows is to provide cash-basis

FALSE
information about the company’s operating, investing, and financing activities.
The statement of cash flows provides information to help investors and creditors
TRUE assess the cash and non-cash investing and financing transactions during the
period.
Companies classify some cash flows relating to investing or financing activities as
TRUE
operating activities.
The first step in the preparation of the statement of cash flows is to determine
FALSE
the net cash flow from operating activities.
The net increase (decrease) in cash reported on the statement of cash flows
TRUE should reconcile the beginning and ending cash balances reported in the
comparative statements of financial position.
The basis recommended by the IASB for the statement of cash flows is actually
TRUE
“cash and cash equivalents.”
IFRS does not allow flexibility regarding the classification of certain items on the
FALSE
statement of cash flows.
TRUE Most companies using IFRS show dividends paid as a financing activity.
Under the accrual basis of accounting, net income is usually the same as net cash
FALSE
flow from operating activities.
A company can convert net income to net cash flow from operating activities
TRUE
through either the direct method or the indirect method.
The direct method, also called the reconciliation method, reports cash receipts
FALSE
and cash disbursements from operating activities.
The indirect method adjusts net income for items that affected reported net
TRUE
income but did not affect cash.
FALSE The IASB encourages the use of the indirect method over the direct method.
When accounts receivable decrease during a period, cash-basis revenues are
TRUE
higher than revenues reported on an accrual basis.
When prepaid expenses decrease during a period, expenses on the accrual-basis
FALSE
are lower than they are on a cash-basis.
The IASB encourages the use of the direct method over the indirect method for
TRUE
the presentation of the statement of cash flows.
The IASB does not permit the direct method presentation of the statement of
FALSE
cash flows.
 STATEMENT OF CASH FLOWS

Cash receipts from customers are computed by adding a decrease in accounts

TRUE
receivable to revenue from sales.
Cash payments for operating expenses are computed by subtracting an increase
FALSE in prepaid expenses and a decrease in accrued expenses payable from operating
expenses.
Companies report the cash flows from purchases and sales of trading investments
TRUE
as cash flows from operating activities.
The majority of IASB members express a preference for not requiring use of the
TRUE
direct method of reporting operating cash flows.
FALSE The statement of cash flows is not one of the basic financial statements.
FALSE The statement of cash flows is an optional financial statement.
The statement of cash flows shows the effects on cash of a company's operating,
TRUE
investing, and financing activities.
The statement of cash flows reports a firm's major sources of cash receipts and
TRUE
major uses of cash payments for a period.
Cash flows from operating activities, as part of the statement of cash flows,
TRUE
include cash transactions that enter into the determination of net income.
To arrive at cash flows from operations, it is necessary to convert the income
TRUE
statement from an accrual basis to the cash basis of accounting.
Cash flows from investing activities, as part of the statement of cash flows,
TRUE
include receipts from the sale of land.
Cash flows from financing activities, as part of the statement of cash flows,
TRUE
include payments for dividends.
Cash flows from investing activities, as part of the statement of cash flows,
FALSE
include payments for the purchase of treasury stock.
Cash flows from investing activities, as part of the statement of cash flows,
FALSE
include receipts from the issuance of bonds payable.
There are two alternatives to reporting cash flows from operating activities in the
TRUE
statement of cash flows: (1) the direct method and (2) the indirect method.
The direct method of preparing the operating activities section of the statement
TRUE of cash flows reports major classes of gross cash receipts and gross cash
payments.
Under the direct method of reporting cash flows from operations, the major
TRUE
source of cash is cash received from customers.
The main disadvantage of the direct method of reporting cash flows from
TRUE
operating activities is that the necessary data are often costly to accumulate.
 STATEMENT OF CASH FLOWS

A major disadvantage of the indirect method of reporting cash flows from

FALSE operating activities is that the difference between the net amount of cash flows
from operating activities and net income is emphasized.
Cash outflows from financing activities include the payment of cash dividends, the
TRUE
acquisition of treasury stock, and the repayment of amounts borrowed.
Cash flows from investing activities, as part of the statement of cash flows,
TRUE
include payments for the acquisition of fixed assets.
The acquisition of land in exchange for common stock is an example of noncash
TRUE
investing and financing activity.
If a business issued bonds payable in exchange for land, the transaction would be
TRUE
reported in a separate schedule on the statement of cash flows.
When using the worksheet method to analyzing noncash accounts, no order of
TRUE analysis is required, but it is more efficient to start with Retained Earnings and
proceed upward in the account listing.
Rarely would the cash flows from operating activities, as reported on the
TRUE statement of cash flows, be the same as the net income reported on the income
statement.
Using the indirect method, if land costing P85,000 was sold for P145,000, the
FALSE amount reported in the financing activities section of the statement of cash flows
would be P85,000.
If land costing P145,000 was sold for P205,000, the P60,000 gain on the sale
FALSE would be added to net income in of the operating activities section of the
statement of cash flows (prepared by the indirect method).
In preparing the cash flows from operating activities section of the statement of
TRUE cash flows by the indirect method, the net decrease in inventories from the
beginning to the end of the period is added to net income for the period.
In determining the cash flows from operating activities for the statement of cash
TRUE flows by the indirect method, the depreciation expense for the period is added to
the net income for the period.
In preparing the cash flows from operating activities section of the statement of
FALSE cash flows by the indirect method, the amortization of bond discount for the
period is deducted from the net income for the period.
If cash dividends of P135,000 were paid during the year and the company sold
FALSE 1,000 shares of common stock at P30 per share, the statement of cash flows
would report net cash flow from financing activities as P165,000.
The declaration and issuance of a stock dividend would be reported on the
FALSE
statement of cash flows.
TRUE If 800 shares of P40 par common stock are sold for P43,000, the P43,000 would
be reported in the cash flows from financing activities section of the statement of
 STATEMENT OF CASH FLOWS

cash flows.
If P475,000 of bonds payable are sold at 101, P475,000 would be reported in the
FALSE
cash flows from financing activities section of the statement of cash flows.
Net income was P51,000 for the year. The accumulated depreciation balance
increased by P14,000 over the year. There were no sales of fixed assets or
FALSE
changes in noncash current assets or liabilities. Under the indirect method, the
cash flow from operations is P37,000.
Net income for the year was P29,500. Accounts receivable increased P2,500, and
TRUE accounts payable increased P5,400. Under the indirect method, the cash flow
from operations is P32,400.
A building with a cost of P153,000 and accumulated depreciation of P42,000 was
FALSE sold for a P11,000 gain. When using the indirect method, the cash generated
from this investing activity was P121,000.
Under the indirect method, expenses that do not affect cash are added to net
TRUE
income in the operating activities section of the statement of cash flows.
Cash paid to acquire treasury stock should be shown on the statement of cash
FALSE
flows from investing activities.
Repayments of bonds would be shown as a cash outflow in the investing section
FALSE
of the statement of cash flows.
Purchasing equipment by issuing a six-month note should be shown on the
FALSE
statement of cash flows under the investing activities section.
In preparing the statement of cash flows, the correct order of reporting cash
FALSE
activities is Financing, Operating, Investing.
Cash inflows and outflows are not netted in the investing or financing sections of
TRUE the statement of cash flows but are separately disclosed to give the reader full
information.
There is no difference in the Investing and Financing sections of the statement of
TRUE
cash flows using the indirect and direct method.
Under the direct method of preparing a Statement of Cash Flows, the gain on the
TRUE sale of land is not adjusted or reported as part of cash flows from operating
activities.
The manner of reporting cash flows from investing and financing activities will be
FALSE
different under the direct method as compared to the indirect method.
Sales reported on the income statement were P372,000. The accounts receivable
FALSE balance declined P4,500 over the year. The amount of cash received from
customers was P367,500.
TRUE To determine cash payments for merchandise for the cash flow statement using
the direct method, a decrease in accounts payable is added to the cost of
 STATEMENT OF CASH FLOWS

merchandise sold.
To determine cash payments for operating expenses for the cash flow statement
FALSE using the direct method, a decrease in prepaid expenses is added to operating
expenses other than depreciation.
To determine cash payments for operating expenses for the cash flow statement
FALSE using the direct method, a decrease in accrued expenses is added to operating
expenses other than depreciation.
To determine cash payments for income tax for the cash flow statement using the
FALSE direct method, an increase in income taxes payable is added to the income tax
expense.
Free cash flow is cash flow from operations, less cash used to purchase fixed
TRUE
assets to maintain productive capacity and cash used for dividends.
Free cash flow is the measure of operating cash flow available for corporate
TRUE purposes after providing sufficient fixed asset additions to maintain current
productive capacity and dividends.