Chapter 13 Practice Problems

1. The primary purpose of the statement of cash flows is to

a. provide information about the investing and financing activities during the period.
b. prove that revenues exceed expenses if there is a net income.
c. provide information about the sources and uses of cash during a period.
d. facilitate banking relationships.

2. The acquiring of land by issuing common stock is

a. a noncash transaction that is disclosed in a supplementary schedule attached to the
statement of cash flows.
b. a cash transaction that is reported in the investing section in the body of the statement of
cash flows.
c. a noncash transaction that is reported in the operating section in the body of the statement
of cash flows.
d. only reported if the statement of cash flows is prepared using the direct method.

3. Financing activities involve:

a. purchasing long-term assets.
b. payment of operating expenses.
c. selling long-term assets.
d. issuance of long-term debt.

4. Which of the following statement concerning the statement of cash flows is true?
a. The statement of cash flows is usually more accurate when using the indirect method.
b. If the direct method is used, a supplementary schedule reconciling the net income to net
cash from operating activities must still be provided.
c. The statement of cash flows reflects both earnings per share and cash per share.
d. The statement of cash flows is an optional financial statement for an SEC registered firm.

5. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is
a. added to net income.
b. deducted from net income.
c. ignored because it does not affect cash.
d. not reported on a statement of cash flows.

6. Using the indirect method, patent amortization expense for the period
a. is deducted from net income.
b. has no impact on cash flows.
c. causes cash to decrease.
d. is added to net income.

7. Which of the following would be subtracted from net income using the indirect method?
a. depreciation expense.
b. an increase in accounts receivable.
 c. an increase in accounts payable.
d. a decrease in prepaid expenses.

8. Smith and Company reported net income for the current year. Which of the following business transactions
would cause cash from operating activities to be higher than the amount of net income?
a. Cash dividends were paid to stockholders during the year.
b. Depreciation expense was recorded for the year.
c. A bank loan was repaid during the year.
d. Equipment was purchased for cash during the year.

9. The following items were reported on the balance sheets and income statement for Collin Inc.:
Accounts Receivable, December 31, 2005 $ 85,000
Accounts Receivable, December 31, 2006 78,000
Sales, 2006 750,000

How would the change in accounts receivable be reported in the operating activities section of the
statement of cash flows using the indirect method?
a. as an addition to sales.
b. as a deduction from sales.
c. as an addition to net income.
d. as a deduction from net income.

10. Tracy Company reported the following information at the end of 2005 and 2006:
2005 2006
Land $ 35,000 $ 90,000
Common Stock 200,000 255,000

An analysis of the company’s records indicated that there were no cash flow effects resulting from the
changes in the two accounts presented above. How should Tracy report the changes in these accounts on a
statement of cash flows?
a. The company should report $55,000 for the acquisition of land as an investing activity and
$55,000 for the issuance of stock as a financing activity.
b. The company should report $55,000 as a noncash investing and financing activity for the
acquisition of land by issuing common stock.
c. The company should report the issuance of common stock to acquire land in the financing
activity section with a net cash flow effect of zero.
d. The company should report the acquisition of land by issuing common stock in the
investing activity section with a net cash flow effect of zero.

11. Nelson Company’s net income last year was $18,000 and cash dividends declared and paid to the company
stockholders was $12,000. Changes in selected balance sheet accounts for the year appear below:
Increases (Decreases)
Debit balances:
Accounts receivable $( 6,000)
Inventory 5,000
Long-term investments 20,000
Credit balances:
 Accumulated Depreciation 12,000
Accounts payable 8,000
Accrued liabilities ( 7,000)
Taxes payable ( 3,000)

Based solely on this information, the net cash flows from operating activities under the indirect method
on the statement of cash flows would be:
a. $7,000.
b. $30,000.
c. $17,000.
d. $29,000.

12. The following events occurred last year at Taylor Company:

Purchase of plant & equipment $33,000
Sale of long-term investment 12,000
Stock Dividend Paid 6,000
Paid off bonds payable 15,000
Depreciation Expense 7,000
Based on the above information, the net cash flows from investing activities for the year on the statement
of cash flows would be:
a. ($21,000).
b. ($15,000).
c. ($7,000).
d. ($37,000).

13. The following events occurred last year for the Cronin Company:
Purchase of treasury stock 30,000
Issuance of common stock 50,000
Payment of dividends to common stockholders 15,000
Sale of equipment 10,000
Considering just the above transactions, the net cash flows from financing activities on the statement of
cash flows was:
a. $20,000.
b. $5,000.
c. $15,000.
d. $25,000.

14.Upon review of Susan’s Statement of Cash Flows, the following was noted:
Cash flows from operating activities $75,000
Cash flows from investing activities (135,000)
Cash flows from financing activities 125,000

From this information, the most likely explanation is that Susan is

a. using cash from operations and selling long-term assets to pay back debt.
b. using cash from operations and borrowing to purchase long-term assets.
c. using its profits to expand growth.
d. using cash from investors to provide for operations.
15.The data given below are from the accounting records of Kain Company:
Net Income $40,000
Depreciation expense 8,000
Decrease in accounts payable 1,800
Decrease in merchandise inventory 2,500
Increase in long-term liabilities 10,000
Increase in common stock 25,000
Increase in accounts receivable 4,000

Based on this information, the net cash flows from operating activities on the statement of cash flows
using the indirect method would be:
a. $51,300.
b. $50,000.
c. $42,100.
d. $44,700.