CHAPTER 12

STATEMENT OF CASH FLOWS

CHAPTER LEARNING OBJECTIVES

1. Discuss the usefulness and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period.

Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items.

2. Prepare a statement of cash flows using the indirect method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset, liability and stockholders’ equity accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree.

3. Analyze the statement of cash flows. During the introductory stage, cash provided by operating activities and cash from investing activities are negative, and cash from financing activities is positive. During the growth stage, cash provided by operating activities becomes positive but is still not sufficient to meet investing needs. During the maturity stage, cash provided by operating activities exceeds investing needs, so the company begins to retire debt. During the decline stage, cash provided by operating activities is reduced, cash from investing becomes positive (from selling off assets), and cash from financing becomes more negative. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of dividends or for expansion.

*4. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and stockholders' equity accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities.

*5. Use a worksheet to prepare the statement of cash flows using the indirect method. When there are numerous account adjustments, a worksheet can be a helpful tool in preparing a statement of cash flows. Key guidelines for using a worksheet are as follows. (1) List accounts with debit balances separately from those with credit balances. (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits. (3) Do not enter reconciling items in any journal or account but use them only to help prepare the statement of cash flows.

The steps in preparing the worksheet are: (1) Enter the beginning and ending balances of balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the increase or decrease in cash in two places as a balancing amount.

*6. Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) following the steps in Illustration 12C.1, enter debit and credit amounts as needed.

Difficulties:

Easy: 129

Medium: 113

Hard: 11

Question List by Section

Usefulness and Format of the Statement of Cash Flows: 1, 2, 48, 49, 50

Usefulness of the Statement of Cash Flows: 3, 4 ,5, 6, 45, 46, 47, 57, 83, 84, 86, 88, 246, 255

Classification of Cash Flows: 7, 8, 9, 10, 13, 14, 15, 16, 17, 18, 19, 53, 54, 55, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 72, 73, 74, 75, 77, 78, 80, 201, 202, 232, 247

Significant Noncash Activities: 11, 12, 51, 56, 71, 76, 81, 82, 85, 87, 203

Format of the Statement of Cash Flows: 20, 52, 79, 231

Preparing the Statement of Cash Flows—Indirect Method: 25, 27, 90, 91, 100, 140, 248, 251, 254

Indirect and Direct Methods: 115, 132, 139, 156, 233, 245, 250

Indirect Method: 112, 116, 117, 118, 120, 121, 123, 126, 127, 128, 129, 130, 131, 206, 217, 218, 221, 222, 223, 224, 244

Step 1: Operating Activities: 89, 92, 204, 205, 207, 215, 216, 219, 220, 234

Determine Net Cash Provided/Used by Operating Activities by Converting Net Income from an Accrual Basis to a Cash Basis

Depreciation Expense: 114, 125, 147, 155, 249

Loss (Gain) on Disposal of Plant Assets: 23, 24, 119, 124, 136, 137, 148

Changes to Noncash Current Asset and Current Liability Accounts: 108, 109, 110, 111

Changes in Noncash Current Assets: 26, 101, 102, 103, 104, 113, 235

Changes in Current Liabilities: 21, 105, 106, 107

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method: 149, 150, 151, 152, 154

Step 2: Investing and Financing Activities: 93, 94, 95, 96, 97, 99, 122

Analyze Changes in Noncurrent Asset and Liability Accounts and Stockholders’ Equity Accounts and Report as Investing and Financing Activities, or as Noncash Investing and Financing Activities

Increase (Decrease) in Land: 146

Increase (Decrease) in Buildings: 142, 143, 144

Increase (Decrease) in Equipment: 98, 141, 145, 153, 236

Increase (Decrease) in Bonds Payable: 133, 134

Increase in Common Stock: 22

Increase (Decrease) in Retained Earnings: 135

Step 3: Net Change in Cash: 138

Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree

Analyzing the Statement of Cash Flows:

The Corporate Life Cycle: 28, 29, 31, 32, 33, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 237, 238, 252

Free Cash Flow: 30, 34, 168, 169, 170, 171, 172, 225, 239

Statement of Cash Flows—Direct Method: 226, 228

Step 1: Operating Activities: 187, 188, 208, 209, 210, 211, 212, 227, 229, 230, 240, 243

Determine Net Cash Provided/Used by Operating Activities by Converting Net Income Components from an Accrual Basis to a Cash Basis: 37

Cash Receipts from Customers: 177, 178, 179, 181, 253

Cash Payments to Suppliers: 35, 38, 173, 174, 175, 176, 182, 183, 189

Cash Payments for Operating Expenses: 39, 185, 241

Adjustments for Prepaid Expenses: 180

Adjustments for Accrued Expenses: 190, 192, 194

Depreciation Expense and Loss (Gain) on Disposal of Plant Assets: 184

Cash Payments for Interest: 191, 193

Cash Payments for Income Taxes: 36, 186, 242

Step 2: Investing and Financing Activities: 40

*Worksheet for the Indirect Method:

Preparing the Worksheet: 41, 42, 198, 213

Determining the Reconciling Items

Accounts Receivable: 196

Prepaid Expenses: 197

Accounts Payable: 195

*Statement of Cash Flows—T-Account Approach: 43, 44, 199, 200, 214

TRUE-FALSE STATEMENTS

1. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

2. For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

3. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

4. The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period.

5. A statement of cash flows indicates the sources and uses of cash during a period.

6. The statement of cash flows shows the effects on net income of a company’s operating, investing, and financing activities for an accounting period.

7. Operating activities include the cash effects of transactions that create revenues and expenses.

8. The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders’ equity only.

9. The statement of cash flows (indirect method) explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.

10. In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.

11. Noncash investing and financing activities must be reported in the body of a statement of cash flows.

12. Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are reflected either in a schedule separate from the statement of cash flows or in a separate note to the financial statements.

13. The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

14. The sale of land for cash would be classified as a cash inflow from an investing activity.

15. Cash flows from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.

16. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

17. The payment of interest on bonds payable is classified as a cash outflow from operating activities.

18. Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.

19. The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

20. Restricted cash should be excluded from the beginning and ending balances of cash in preparing a statement of cash flows.

21. Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

22. In preparing a statement of cash flows, an increase in the Common Stock account during a period would be an investing activity.

23. A loss on the sale of equipment is added to net income in determining cash provided by operations under the indirect method.

24. Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.

25. Cash provided by operations is generally equal to operating income.

26. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

27. A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.

28. The growth phase of the corporate life cycle occurs when the company is purchasing plant assets and beginning to produce and sell.

29. During the maturity phase of the corporate life cycle, cash from operations and net income are approximately the same.

30. Free cash flow is cash from operating activities less dividends.

31. Cash used in operations will exceed cash generated by operations in the maturity phase of the corporate lifecycle.

32. During the introductory phase of the corporate life cycle, cash from operations and cash from investing activities are expected to be negative.

33. During the decline phase of the corporate life cycle, cash from investing activities may be negative while cash from financing activities may be positive as the company issues new stock or debt.

34. The measurement of free cash flow provides additional insight regarding a company's cash-generating ability.

35. During a period, cost of goods sold plus an increase in inventory plus an increase in accounts payable equals cash paid to suppliers.

36. During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable increased by $1,500; therefore, the cash paid for income taxes was $11,000.

37. In computing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

38. An increase in inventory would be added to cost of goods sold to determine net purchases for the period.

39. As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

40. Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

*41. A worksheet can be prepared in place of the statement of cash flows.

*42. The first step in preparing the worksheet is to enter the beginning and ending balances of balance sheet accounts.

*43. When using the T-account approach, the change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.

*44. When the T-account approach is used, an analysis of the changes in all of the noncash balance sheet accounts will explain the change in the Cash account.

MULTIPLE CHOICE QUESTIONS

45. The statement of cash flows

a. must be prepared on a daily basis.

b. summarizes the cash provided by or used by the operating, financing, and investing activities of an entity.

c. is another name for the income statement.

d. is a special section of the income statement.

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

a. provide information about the investing and financing activities during a period.

b. prove that revenues exceed expenses if there is a net income.

c. provide information about the cash receipts and cash payments during a period.

d. facilitate banking relationships.

47. If a company reports a net loss, it

a. may still have a net increase in cash.

b. will not be able to pay cash dividends.

c. will not be able to get a loan.

d. will not be able to make capital expenditures.

48. In addition to the three basic financial statements, which of the following is also a required financial statement?

a. Cash Budget

b. Statement of Cash Flows

c. Statement of Cash Inflows and Outflows

d. Cash Reconciliation

49. The statement of cash flows will not report the

a. amount of checks outstanding at the end of the period.

b. sources of cash in the current period.

c. uses of cash in the current period.

d. change in the cash balance for the current period.

50. All of the following statements are true regarding cash flow presentations except:

a. The balance sheet provides only limited information about a company's cash flows.

b. The balance sheet provides information about how property, plant, and equipment were financed.

c. The income statement does not show how much cash was generated by operating activities.

d. If cash from operations is compared to net income, information about the quality of reported net income is revealed.

51. The acquisition of land by issuing common stock is

a. a noncash transaction that is not reported in the body of a statement of cash flows.

b. a cash transaction and would be reported in the body of a statement of cash flows.

c. a noncash transaction and would be reported in the body of a statement of cash flows.

d. only reported if the statement of cash flows is prepared using the direct method.

52. The order of presentation of activities on the statement of cash flows is

a. operating, investing, and financing.

b. operating, financing, and investing.

c. financing, operating, and investing.

d. financing, investing, and operating.

53. Financing activities involve

a. lending money.

b. acquiring investments.

c. issuing debt.

d. acquiring long-lived assets.

54. Investing activities include

a. collecting cash on loans made.

b. obtaining cash from creditors.

c. obtaining capital from owners.

d. repaying money previously borrowed.

55. Generally, the most important category on the statement of cash flows is cash flows from

a. operating activities.

b. investing activities.

c. financing activities.

d. significant noncash activities.

56. Which one of the following transactions does not affect cash?

a. Retirement of bonds payable

b. Declaring stock dividends

c. Acquisition of treasury stock

d. Issuance of common stock

57. What information does the statement of cash flows not help investors and creditors assess?

a. The entity’s ability to generate future cash flows

b. The entity’s ability to pay dividends

c. The reason that net income differs from cash provided or used by operating activities

d. The entity’s ability to generate future profits

58. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

a. cash flows from operating activities.

b. cash flows from investing activities.

c. cash flows from financing activities.

d. usually different from year to year.

59. Cash receipts from interest and dividends are classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either financing or investing activities.

60. Cash flows from operating activities, as reported on the statement of cash flows under the indirect method, would include

a. receipts from the sale of investments.

b. net income.

c. payments for dividends.

d. receipts from the issuance of capital stock.

61. The issuance of debt to purchase assets would be classified as a(n)

a. operating activity.

b. investing activity.

c. financing activity.

d. non-cash investing and financing activity.

62. The payment of a cash dividend would be classified as a(n)

a. operating activity.

b. investing activity.

c. financing activity.

d. significant noncash activity.

63. Which of the following activities would be classified as an investing activity?

a. Cash received from interest revenue

b. Cash paid (loaned) to a borrower as a loan

c. Cash received from dividend revenue

d. Cash paid to reacquire capital stock

64. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, a stock dividend declared and issued would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

65. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, an accounts receivable decrease would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

66. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, an inventory increase would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

67. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, long-term debt retired with cash would be reported on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

68. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, a decrease in Income Taxes Payable would be reported on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

69. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, stock issued for equipment would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

70. Acme Supply Company purchased a building by issuing long-term notes payable. How will Acme report this transaction in the statement of cash flows?

a. As a cash outflow in the financing section and a cash inflow in the investing activities section of the statement of cash flows

b. As a cash outflow in the investing section of the statement of cash flows

c. As a cash outflow in the operating section of the statement of cash flows

d. As a significant noncash activity

71. What type of transaction is the acquisition of equipment by the issuance of a note payable?

a. A cash flow from financing activities

b. A cash flow from operating activities

c. A cash outflow from investing activities

d. A noncash investing and financing activity

72. A1 Corporation uses the direct method to prepare the statement of cash flows. Indicate where, if at all, dividends received on securities held would be reported on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

73. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, income taxes paid would be reported on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

74. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, common stock issued for cash would be classified.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

75. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, land purchased for cash would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

76. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, land and building purchased with a mortgage would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

77. A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, treasury stock purchased with cash would be classified on the statement of cash flows.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

78. Which of the following is not an operating activity?

a. Cash paid for interest on loans

b. Cash received from customers on account

c. Cash paid to suppliers for purchases made during prior months

d. Cash paid for dividends

79. Of the items below, the one that appears first on the statement of cash flows is

a. noncash investing and financing activities.

b. net increase (decrease) in cash.

c. cash at the end of the period.

d. cash at the beginning of the period.

80. Which of the following transactions does not affect cash during a period?

a. Write-off of an uncollectible account

b. Collection of accounts receivable

c. Sale of common stock

d. Redeeming bonds before maturity

81. Significant noncash transactions would not include

a. conversion of bonds into common stock.

b. asset acquisition through bond issuance.

c. treasury stock acquisition.

d. exchange of plant assets.

82. Common stock issued in exchange for land would be reported in the statement of cash flows in

a. the cash flows from financing activities section.

b. the cash flows from investing activities section.

c. a separate schedule or note to the financial statements.

d. the cash flows from the operating section.

83. Which type of activity is generally considered to be the best measure of a company's ability to continue as a going concern?

a. Cash flows from operating activities

b. Cash flows from investing activities

c. Cash flows from financing activities

d. Cash flows from operating activities and cash flows from investing activities

84. Which one of the following is not one of the major purposes of the statement of cash flows?

a. It provides information about the company’s ability to pay dividends.

b. It provides information about the firm's ability to meet its obligations.

c. It provides information about the firm's resources and claims against those resources.

d. It provides information about the company’s ability to generate cash flows.

85. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in

a. the financing section.

b. the income section.

c. a separate schedule or note to the financial statements.

d. the stockholders' equity section.

86. The statement of cash flows will not provide insight into

a. why dividends were not increased.

b. whether cash flow is greater than net income.

c. the exact proceeds of a future bond issue.

d. how the retirement of debt was accomplished.

87. Which of the following would not create a cash flow?

a. Sale of equipment at book value

b. Purchase of a delivery truck

c. Payment of a cash dividend

d. Conversion of bonds into common stock.

88. The statement of cash flows

a. is prepared instead of an income statement under generally accepted accounting principles.

b. is used to assess an entity's ability to pay dividends and meet obligations.

c. is prepared from comparative income statements.

d. reflects earnings per share figures on a cash basis and an accrual basis in the body of the statement.

89. Which of the following is the first step in preparing the statement of cash flows?

a. Determine the net cash provided by operating activities

b. Determine the net cash provided by investing activities

c. Determine the net cash provided by financing activities

d. Determine the net increase (decrease) in cash

90. The information to prepare the statement of cash flows comes from all of the following sources except

a. comparative balance sheets.

b. additional transaction data about cash provided or used during the period.

c. adjusted trial balance.

d. current income statement.

91. Which one of the following items is not generally used in preparing a statement of cash flows?

a. Adjusted trial balance.

b. Comparative balance sheets.

c. Current income statement.

d. Additional transaction information.

92. Acme Corporation had the following transactions during 2025:

1. Issued $250,000 of par value common stock for cash.

2. Recorded and paid salaries and wages expense of $120,000.

3. Acquired land by issuing common stock valued at $100,000.

4. Declared and paid a cash dividend of $20,000.

5. Sold land (cost $6,000) for cash of $6,000.

6. Recorded cash sales of $800,000.

7. Bought inventory for cash of $320,000.

8. Acquired equipment for cash of $42,000.

9. Converted $1,000,000 in bonds payable to common stock .

10. Repaid a 6-year note payable with a face amount of $440,000.

What is the net cash provided by operating activities?

a. $610,000.

b. $580,000.

c. $480,000.

d. $360,000.

93. Acme Corporation had the following transactions during 2025:

1. Issued $250,000 of par value common stock for cash.

2. Recorded and paid salaries and wages expense of $120,000.

3. Acquired land by issuing common stock valued at $100,000.

4. Declared and paid a cash dividend of $20,000.

5. Sold land (cost $6,000) for cash of $6,000.

6. Recorded cash sales of $800,000.

7. Bought inventory for cash of $320,000.

8. Acquired equipment for cash of $42,000.

9. Converted $1,000,000 in bonds payable to common stock.

10. Repaid a 6-year note payable with a face amount of $440,000.

What is the net cash provided (used) by financing activities?

a. $(210,000)

b. $790,000

c. $(1,210,000)

d. $230,000

94. Acme Corporation had the following transactions during 2025:

1. Issued $250,000 of par value common stock for cash.

2. Recorded and paid salaries and wages expense of $120,000.

3. Acquired land by issuing common stock valued at $100,000.

4. Declared and paid a cash dividend of $20,000.

5. Sold land (cost $6,000) for cash of $6,000.

6. Recorded cash sales of $800,000.

7. Bought inventory for cash of $320,000.

8. Acquired equipment for cash of $42,000.

9. Converted $1,000,000 of bonds payable to common stock

10. Repaid a 6-year note payable with a face amount of $440,000.

What is the net cash provided (used) by investing activities?

a. $864,000.

b. $424,000

c. ($36,000).

d. ($136,000).

95. A1 Pet Supply Company issued 20,000 shares of $1 par common stock for $40 per share during 2025. The company paid dividends of $48,000 and issued a long-term note payable for $440,000 during the year. What amount of cash flows from financing activities will be reported on the statement of cash flows?

a. $12,000 net cash inflow.

b. $352,000 net cash inflow.

c. $705,000 net cash outflow.

d. $1,192,000 net cash inflow.

96. Acme Furniture Company purchased treasury stock with a cost of $55,000 during 2025. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $876,000. Cash flows from financing activities for 2025 total

a. $856,000 net cash inflow.

b. $911,000 net cash inflow.

c. $75,000 net cash outflow.

d. $801,000 net cash inflow.

97. Ace Service Company issued common stock for proceeds of $558,000 during 2025. The company paid dividends of $99,000 and issued a long-term note payable for $375,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $81,000. The financing section of the statement of cash flows will report net cash inflows of

a. $378,000.

b. $834,000.

c. $459,000.

d. $753,000.

98. During 2025, A1 Office Supply Company sold equipment with a book value of $120,000 for proceeds of $145,000. The company purchased new equipment for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2025. The investing section of the statement of cash flows will report

a. net cash outflows of $295,000.

b. net cash outflows of $175,000.

c. net cash inflows of $145,000.

d. net cash inflows of $25,000.

99. During 2025, Acme Supply Company’s land account decreased by $270,000 because of a cash sale for $270,000. The equipment account increased $90,000 as a result of a cash purchase, and the bonds payable account increased $300,000 from issuance for cash at face value. The net cash provided by investing activities is

a. $270,000.

b. $480,000.

c. $180,000.

d. $210,000.

100. Which one of the following items is not necessary for preparing a statement of cash flows?

a. Determine the change in cash

b. Determine the cash provided by operations

c. Determine cash from financing and investing activities

d. Determine the cash in each of the bank accounts

101. If accounts receivable have increased during the period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. revenues on an accrual basis are greater than revenues on a cash basis.

c. revenues on an accrual basis are the same as revenues on a cash basis.

d. expenses on an accrual basis are greater than expenses on a cash basis.

102. A1 Company’s accounts receivable amounted to $120,000 at the beginning of fiscal year 2025 and $105,000 at the end of the year, respectively. The company’s net income for the year was $457,000. Assuming that these are the only required adjustments, what are the cash flows from operating activities to be reported on the statement of cash flows?

a. $457,000.

b. $472,000.

c. $562,000.

d. $442,000.

103. Assume that accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of 2025, respectively. Income reported on the company’s income statement for the year was $223,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is

a. $223,000.

b. $228,000.

c. $258,000.

d. $218,000.

104. Acme, Inc.’s accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of 2025, respectively. Income reported on the income statement for 2025 was $252,000. Assuming that these are the only required adjustments, what amount of cash flows from operating activities will be reported on the statement of cash flows for 2025?

a. $252,000.

b. $242,000.

c. $262,000.

d. $332,000.

105. If accounts payable have increased during a period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. expenses on an accrual basis are less than expenses on a cash basis.

c. expenses on an accrual basis are greater than expenses on a cash basis.

d. expenses on an accrual basis are the same as expenses on a cash basis.

106. If income taxes payable have increased during a period,

a. sales revenues on an accrual basis are less than sales revenues on a cash basis.

b. income tax expense on an accrual basis is less than income tax expense on a cash basis.

c. income tax expense on an accrual basis is greater than income tax expense on a cash basis.

d. income tax expense on an accrual basis is the same as income tax expense on a cash basis.

107. Which one of the following affects cash during a period?

a. Recording depreciation expense

b. Declaration of a cash dividend

c. Write-off of an uncollectible account receivable

d. Payment of accounts payable

108. A1 Service Company’s net income for 2025 was $290,000. At the end of the year, the company’s accounts receivable balance was $21,000 higher than at the beginning of the year. The accounts payable balance was $9,000 lower than at the beginning of the year and the company reported depreciation expense of $45,000. Net cash provided by operating activities for the year is

a. $305,000.

b. $275,000.

c. $257,000.

d. $290,000.

109. Ace Supply Company reported net income of $90,000 for the year 2025. During 2025, accounts receivable increased by $6,000, accounts payable decreased by $4,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for 2025 is

a. $100,000.

b. $80,000.

c. $82,000.

d. $90,000.

110. Ace Marine Company’s income statement for the year ended December 31, 2025 reported a net loss of $15,000. Additional information for the period is as follows:

• • The cash balance increased by $5,000 from the beginning to the end of the year.
  • The accounts receivable balance decreased by $7,500 from the beginning to the end of the year.
  • The inventory balance increased by $12,000 from the beginning to the end of the year.
  • The accounts payable balance increased by $15,000 from the beginning to the end of the year.
  • Depreciation expense for 2025 was $9,000.

During 2025, operating activities

a. used net cash of $4,500.

b. used net cash of $10,500.

c. provided net cash of $4,500.

d. provided net cash of $10,500.

111. A1 Lawn Service Company reported a net loss of $12,000 for the year ended December 31, 2025. During the year, accounts receivable decreased $28,000, inventory increased $20,000, accounts payable increased by $30,000, and depreciation expense of $24,000 was recorded. During 2025, operating activities

a. used net cash of $14,000.

b. used net cash of $50,000.

c. provided net cash of $50,000.

d. provided net cash of $74,000.

112. Computing cash flows from operating activities by starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the

a. direct method.

b. indirect method.

c. working capital method.

d. cost-benefit method.

113. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is

a. deducted from net income.

b. added to net income.

c. ignored because it does not affect income.

d. ignored because it does not affect expenses.

114. Using the indirect method, patent amortization expense for the period

a. is deducted from net income.

b. causes cash to increase.

c. causes cash to decrease.

d. is added to net income.

115. In developing the cash flows from operating activities, most companies in the United States

a. use the direct method.

b. use the indirect method.

c. present both the indirect and direct methods in their financial reports.

d. prepare the operating activities section on the accrual basis.

116. 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

117. Which of the following would be added to net income using the indirect method?

a. An increase in accounts receivable

b. An increase in prepaid expenses

c. Depreciation expense

d. A decrease in accounts payable

118. Which of the following would not be an adjustment to net income using the indirect method?

a. Depreciation Expense

b. An increase in Prepaid Insurance

c. Amortization Expense

d. An increase in Land

119. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n)

a. subtraction from net income.

b. addition to net income.

c. addition to cash flow from investing activities.

d. subtraction from cash flow from investing activities.

120. Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is correct?

Add to Net Income Deduct from Net Income

a. Accounts Receivable increase decrease

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Taxes Payable decrease increase

121. Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is incorrect?

Add to Net Income Deduct from Net Income

a. Accounts Receivable decrease increase

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Accounts Payable increase decrease

122. Ace Marine Supply Company reported a loss of $1,300 for the sale of equipment for cash. The equipment had a cost of $32,000 and accumulated depreciation of $29,500. How much will Ace report in the cash flows from investing activities section of its statement of cash flows?

a. $1,200

b. $1,300

c. $30,700

d. $3,800

123. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income?

a. Gain on Disposal of Equipment

b. Depreciation Expense

c. Amortization Expense

d. Depletion Expense

124. Using the indirect method, if equipment is sold at a gain, the

a. sale proceeds received are deducted in the operating activities section.

b. sale proceeds received are added in the operating activities section.

c. amount of the gain is added in the operating activities section.

d. amount of the gain is deducted in the operating activities section.

125. On the statement of cash flows using the indirect method, patent amortization expense will

a. be added to net income in the operating activities section.

b. be deducted from net income in the operating activities section.

c. appear as an inflow of cash in the investing activities section.

d. appear as an outflow of cash in the investing activities section.

126. A company had net income of $890,000 for the year ending 12/31/2025. Depreciation expense for 2025 is $110,000. During the year, accounts receivable and inventory increased by $60,000 and $160,000, respectively. Prepaid expenses and accounts payable decreased by $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities in 2025?

a. $760,000

b. $784,000

c. $1,080,000

d. $1,128,000

127. Ace Service Company’s income statement reported net income of $282,000 for the year 2025. Amortization expense for the period was $26,000. During the year, accounts receivable and inventory increased by $15,000 and $40,000, respectively. Supplies and accounts payable decreased by $2,000 and $14,000, respectively. There was also a loss on the sale of investments of $17,000. What was the company’s cash provided by operating activities for 2025?

a. $258,000

b. $241,000

c. $318,000

d. $339,000

128. The net income reported on the income statement of A1 Discount Supply Company for the current year was $1,360,000. Depreciation recorded on plant assets was $257,000. Accounts receivable and inventories increased by $72,000 and $48,000, respectively. Prepaid expenses and accounts payable decreased by $6,000 and $66,000, respectively. How much cash was provided by operating activities during the year?

a. $1,380,000

b. $1,500,000

c. $1,437,000

d. $1,797,000

129. Acme Corporation’s net income for the current year was $510,000. Depreciation recorded on plant assets was $46,000 and amortization expense was $30,000. Accounts receivable and inventories increased by $40,000 and $16,000, respectively. Supplies and accounts payable decreased by $2,000 and $32,000, respectively. The equipment account balance increased by $55,000 and a $500,000 convertible bond was retired through the issuance of common stock. How much cash was provided by operating activities?

a. $480,000

b. $500,000

c. $464,000

d. $672,000

130. A company’s net income for the current year was $480,000. Depreciation was $62,000. Accounts receivable and inventories decreased by $20,000 and $32,000, respectively. Prepaid expenses and salaries payable increased, respectively, by $2,000 and $16,000. Equipment was sold at a gain of $8,000. How much cash was provided by operating activities?

a. $536,000

b. $600,000

c. $576,000

d. $476,000

131. Net income reported on the income statement for the current year was $240,000. Depreciation was $52,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $14,000. Investments were sold at a loss of $20,000. How much cash was provided by operating activities?

a. $307,500

b. $317,500

c. $345,500

d. $258,500

132. The indirect and direct methods of preparing the statement of cash flows are identical except for the

a. significant noncash activity section.

b. operating activities section.

c. investing activities section.

d. financing activities section.

133. If $2,500,000 of bonds are issued during the year but $4,000,000 of previously issued bonds are retired during the year, the statement of cash flows will s a(n)

a. net increase in cash of $1,500,000.

b. net decrease in cash of $1,500,000.

c. increase in cash of $2,500,000 and a decrease in cash of $4,000,000.

d. net loss on retirement of bonds of $1,500,000.

134. During 2025, A1 Company issued $1,200,000 of bonds during the year and used the proceeds, along with additional cash on hand, to retire $2,500,000 of previously issued bonds. A1’s statement of cash flows for 2025 will report a(n)

a. net increase in cash of $1,300,000.

b. net decrease in cash of $1,200,000.

c. increase in cash of $1,200,000 and a decrease in cash of $2,500,000.

d. net loss on retirement of bonds of $1,300,000.

135. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows?

a. Declaration and payment of a cash dividend during the period

b. Net income for the period

c. Purchase of land in exchange for a long-term note payable

d. Gain on sale of investments

136. 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.

137. In calculating cash flows from operating activities using the indirect method, a loss 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.

138. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of

a. the adjusted trial balance.

b. a comparative retained earnings statement.

c. a comparative balance sheet.

d. a comparative income statement.

139. To determine the net cash provided (used) by operating activities, it is necessary to analyze

a. the current year's income statement.

b. a comparative balance sheet.

c. additional transaction information.

140. Which of the following would not be needed to determine net cash provided by operating activities?

a. Depreciation expense

b. Change in accounts receivable

c. Payment of cash dividends

d. Change in prepaid expenses

141. When equipment is sold for cash, the amount received is reflected as a cash

a. inflow in the operating section.

b. inflow in the financing section.

c. inflow in the investing section.

d. outflow in the operating section.

142. During 2025, Acme Company sold equipment with a book value of $900,000 for cash and recorded a gain of $225,000. What is the total amount reported in the cash flows from investing activities section of the statement of cash flows with regard to this transaction?

a. $675,000.

b. $900,000.

c. $1,125,000.

d. $225,000.

143. If a loss of $108,000 is realized when selling (for cash) a building having a book value of $800,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is

a. $692,000.

b. $800,000.

c. $908,000.

d. $108,000.

144. If Ace Imports Corporation realizes a gain of $81,000 on a cash sale of a building having a book value of $600,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is

a. $519,000.

b. $681,000.

c. $600,000.

d. $81,000.

145. Suppose that Target realizes a loss of $9,000 on a cash sale of office equipment having a book value of $90,000. The total amount reported in the cash flows from investing activities section of the statement of cash flows is

a. $81,000.

b. $90,000.

c. $99,000.

d. $9,000.

146. Land costing $125,000 was sold for $355,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land?

a. $155,000.

b. $355,000.

c. $310,000.

d. $230,000.

147. When using the indirect method to compute cash provided by operating activities

a. income taxes payable may be ignored.

b. depreciation expense is added to net income.

c. decreases in inventory are subtracted from net income.

d. increases in accounts receivable are added to net income.

148. A transaction involving a gain on the sale of equipment affects cash provided (used) by

a. financing and investing activities.

b. operating and financing activities.

c. operating and investing activities.

d. operating, financing, and investing activities.

149. A company reported net income of $200,000 for the year ended December 31, 2025. During the year, inventories decreased by $40,000, accounts payable decreased by $60,000, depreciation expense was $45,000 and a gain on disposal of equipment of $15,000 was recorded. Net cash provided by operating activities in 2025 using the indirect method was

a. $280,000.

b. $210,000.

c. $245,000.

d. $240.000.

150. All of the following adjustments are added to net income in computing net cash provided by operating activities except

a. amortization expense.

b. a decrease in accounts receivable.

c. an increase in accounts payable.

d. an increase in prepaid expenses.

151. All of the following adjustments would be deducted in determining net cash provided by operating activities except a(n)

a. increase in inventories.

b. depreciation expense.

c. gain on disposal of plant assets.

d. decrease in accrued expenses payable.

152. Each of the following is an adjustment to convert net income to net cash provided by operating activities except

a. adding back noncash expenses.

b. adding gains and deducting losses.

c. analyzing changes to noncash current asset and current liability accounts.

153. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the ______________ in the investing activities section.

a. two cash effects must be netted and presented as one item

b. cash inflow and cash outflow must be reported separately

c. cash outflow is only presented

d. cash inflow and cash outflow can either be reported separately or presented as one item

154. On the statement of cash flows, the cash flows from operating activities section would be affected by

a. receipts from the issuance of capital stock.

b. receipts from the sale of investments.

c. payments for the acquisition of investments.

d. cash receipts from sales activities.

155. In calculating net cash provided by operating activities using the indirect method, why is there an adjustment to net income for the amount of depreciation expense?

a. Depreciation is a cash amount that will not be paid during the current year.

b. Depreciation is a cash outflow that reduces the amount of income.

c. Depreciation is not a cash amount and was deducted to determine net income, so it must be added back to determine the net cash flows.

d. Depreciation is a cash expense that was deducted to determine net income, so it must be added back to determine the net cash flows.

156. To determine net cash provided by operating activities, a company must convert net income from an accrual basis to a cash basis under

a. the direct method only.

b. the indirect method only.

c. both the direct method and the indirect method.

d. neither the direct nor the indirect method.

157. Cash from investing becomes less positive and cash from financing becomes more negative during the

a. introductory phase of the corporate life cycle.

b. growth phase of the corporate life cycle.

c. maturity phase of the corporate life cycle.

d. decline phase of the corporate life cycle.

158. Cash generated from operations exceeds investing needs, and the company can begin retiring debt during the

a. introductory phase of the corporate life cycle.

b. growth phase of the corporate life cycle.

c. maturity phase of the corporate life cycle.

d. decline phase of the corporate life cycle.

159. Collections on accounts receivable will lag behind sales, and accrual sales during a period will exceed cash collections during the

a. introductory phase of the corporate life cycle.

b. growth phase of the corporate life cycle.

c. maturity phase of the corporate life cycle.

d. decline phase of the corporate life cycle.

160. A company would be expected to generate small amounts of cash from operations during the

a. introductory phase of the corporate life cycle.

b. growth phase of the corporate life cycle.

c. maturity phase of the corporate life cycle.

d. decline phase of the corporate life cycle.

161. During which of the following phases of the corporate life cycle does a company generate the largest amount of cash flows from operating activities?

1. Introductory phase
2. Maturity phase
3. Decline phase
4. Growth phase

162. A company’s net cash provided by operating activities is approximately the same as its net income. Which phase of the corporate life cycle is this company most likely in?

1. Introductory phase
2. Maturity phase
3. Decline phase
4. Growth phase

163. The phase in the corporate life cycle when a company is purchasing plant assets and beginning to produce and sell is the

a. introductory phase.

b. growth phase.

c. maturity phase.

d. decline phase.

164. Cash from operations and net income are approximately the same during which phase of the corporate life cycle?

a. introductory phase

b. growth phase

c. maturity phase

d. decline phase

165. Which of the following is not typically a characteristic experienced by a company during the introductory phase of the corporate life cycle?

a. Cash used in operations will exceed cash generated by operations.

b. Considerable cash will be used to purchase productive assets.

c. Cash from investing is positive.

d. Cash from financing is positive.

166. Which of the following is not typically a characteristic experienced by a company during the growth phase of the corporate life cycle?

a. Cash from operations on the statements of cash flows will be less than net income on the income statement.

b. Collections on accounts receivable will lag behind sales.

c. Cash from investing is positive.

d. Cash from financing is positive.

167. The information in the following table is from the statement of cash flows for a company at four different points in the corporate life cycle (Period 1, Period 2, Period 3, and Period 4). Negative values are presented in parentheses.

Based on this information, which of the following answers most likely corresponds with the introductory phase, growth phase, maturity phase, or decline phase?

a. Period 2, Period 1, Period 3, Period 4.

b. Period 1, Period 4, Period 3, Period 2.

c. Period 3, Period 4, Period 1, Period 2.

d. Period 4, Period 3, Period 2, Period 1.

168. Free cash flow provides an indication of a company’s ability to

a. generate cash to invest in capital expenditures.

b. generate net income.

c. generate cash to pay dividends.

d. generate cash to invest in capital expenditures and to pay dividends.

169. During 2025, Acme Industries reported cash provided by operations of $794,000, cash used in investing of $686,000, and cash used in financing of $190,000. In addition, cash spent on plant assets during the period was $276,000. Average current liabilities were $650,000 and average total liabilities were $1,716,000. No dividends were paid. Based on this information, what was Acme's free cash flow?

a. ($144,000).

b. $108,000.

c. $518,000.

d. ($604,000).

170. A1 Media Company had the following transactions during the year 2025:

I. Recorded credit sales of $2,500.

II. Collected $1,500 from customers.

III. Recorded sales returns of $500 and credited the customer's account.

What is the total effect of these transactions on free cash flow?

a. Increase

b. Decrease

c. No Effect

d. Cannot be determined

171. A1 Media Company had the following transactions during the year 2025:

I. Paid amount owing to suppliers $2,750.

II. Purchased new equipment for $5,000 by signing a long-term note payable.

III. Purchased a patent and paid $15,000 cash for the asset.

How what is the total effect of these transactions on free cash flow?

a. Increase

b. Decrease

c. No Effect

d. Cannot be determined

172. All of the following statements about free cash flow are false except:

a. Significant free cash flow indicates less potential to finance new investment.

b. Free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends.

c. Free cash flow is not reported on the statement of cash flows.

d. Significant free cash flow indicates less potential to pay additional dividends.

173. A company reports a $48,000 increase in inventory and a $12,000 increase in accounts payable during the year. Cost of goods sold for the year was $285,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were

a. $285,000.

b. $321,000.

c. $249,000.

d. $237,000.

174. Cost of goods sold during the year was $305,000. Inventory decreased by $10,000 during the year and accounts payable decreased by $12,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total

a. $317,000.

b. $307,000.

c. $283,000.

d. $327,000.

175. Ace Beverage Supply Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $282,000. If the direct method of reporting cash flows from operating activities is used, what are the company’s cash payments made to suppliers?

a. $282,000.

b. $262,000.

c. $307,000.

d. $257,000.

176. Cost of goods sold during the year was $380,000. Inventory increased by $12,000 during the year and accounts payable decreased by $19,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total

a. $399,000.

b. $361,000.

c. $387,000.

d. $411,000.

177. A1 Import Company had credit sales of $1,600,000. The beginning accounts receivable balance was $165,000 and the ending accounts receivable balance was $280,000. Using the direct method of reporting cash flows from operating activities, what were the cash collections from customers during the period?

a. $1,815,000.

b. $1,600,000.

c. $1,485,000.

d. $1,765,000.

178. Ace Marine Supply Co. reported credit sales of $640,000 during 2025. The accounts receivable balance increased during the year. Which statement is true?

a. Customers paid more cash than the amount of sales generated during the year.

b. The company sold more goods during the year than it had in previous years.

c. The cash collected was less than the amount of sales generated during the year.

d. Customers owe less at the end of the year compared to the amount they owed at the beginning of the year.

179. During 2025, Acme Company had $130,000 in cash sales and $1,020,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2024, and 2025, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2025?

a. $1,418,000.

b. $1,642,000.

c. $1,182,000.

d. $1,118,000.

180. The following information relates to Ace Company:

Prepaid Insurance, December 31, 2024 $ 302,000

Prepaid Insurance, December 31, 2025 280,000

Insurance expense for 2025 1,600,000

Using the direct method of reporting cash flows from operating activities, what was the amount of cash paid for insurance premiums by Ace during 2025?

a. $1,578,000.

b. $1,622,000.

c. $1,880,000.

d. $1,622,000.

181. Cash receipts from customers are greater than sales revenues when there is a(n)

a. increase in accounts receivable.

b. decrease in accounts receivable.

c. increase in cost of goods sold.

d. decrease in cost of goods sold.

182. Ace Company had an increase in inventory of $120,000. The cost of goods sold was $560,000. There was a $30,000 decrease in accounts payable from the prior period. Using the direct method of reporting cash flows from operating activities, what were Ace's cash payments to suppliers?

a. $710,000.

b. $650,000.

c. $440,000.

d. $380,000.

183. A1 Products reported cost of goods sold of $620,000 for the year ended December 31, 2025. During the year, inventories increased by $8,000, accounts payable decreased $12,000, and sales increased by $23,000. How much cash did A1 Products pay to suppliers in 2025?

a. $616,000

b. $624,000

c. $600,000

d. $640,000

184. Which of the following items does not appear in the statement of cash flows under the direct method?

a. Cash payments to suppliers

b. Cash collections from customers

c. Depreciation Expense

d. Cash from the sale of equipment

185. Acme Supply Company has other operating expenses of $360,000. There has been a decrease in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Acme's cash payments for operating expenses?

a. $368,000

b. $352,000

c. $320,000

d. $400,000

186. A company reports income tax expense of $270,000. There has been a $30,000 decrease in federal income taxes payable and a $42,000 increase in state income taxes payable during the year. Using the direct method of reporting cash flows from operating activities, what is the company's cash payment for income taxes?

a. $270,000

b. $258,000

c. $198,000

d. $342,000

187. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method?

a. Cash receipts from customers.

b. Cash paid for income taxes.

c. Gain on sale of equipment.

d. Cash paid to employees.

188. Which of the following statements 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 external reporting purposes.

189. Ace Supply Company reports the following:

End of Year Beginning of Year

Inventory $25,000 $40,000

Accounts Payable 30,000 10,000

If cost of goods sold for the year is $240,000, the amount of cash paid to suppliers using the direct method is

a. $245,000.

b. $235,000.

c. $205,000.

d. $280,000.

190. During the year 2025, Salaries Payable decreased by $12,000. Using the direct method of reporting cash flows from operating activities, if Salaries Expense amounted to $450,000 for the year, the cash paid to employees for the year is

a. $462,000.

b. $438,000.

c. $450,000.

d. $454,000.

191. During 2025, the Interest Payable account decreased by $24,000. Using the direct method of reporting cash flows from operating activities, if the balance in Interest Expense was $400,000 at year-end, the cash paid for interest during the year is

a. $276,000.

b. $400,000.

c. $448,000.

d. $424,000.

192. Ace Supply Company reports the following for the current year:

End of Year Beginning of Year

Utilities Payable $2,500 $4,000

If utilities expense for the year is $24,000, the amount of cash paid for utilities using the direct method is

a. $24,000.

b. $21,500.

c. $25,500.

d. $22,500.

193. Ace Supply Company reports the following for the current year:

End of Year Beginning of Year

Interest Payable $11,500 $10,000

If the interest expense reported on Ace’s income statement is $125,000, the amount of cash paid for interest using the direct method is

a. $125,000.

b. $123,500.

c. $126,500.

d. $135,000.

194. Ace Supply Company reports the following for the current year:

End of Year Beginning of Year

Salaries Payable $26,100 $23,700

If Ace’s income statement reports Salaries Expense of $625,000, the amount of cash paid to employees for salaries using the direct method is

a. $598,900.

b. $627,400.

c. $622,600.

d. $625,000.

1. Common stock is sold for cash above par value.

2. Bonds payable are issued for cash at a discount.

3. Interest on a short-term note receivable is collected.

4. Merchandise is sold to customers for cash.

5. Cash is paid to purchase inventory.

6. Equipment is purchased by signing a 3-year, 10% note payable.

7. Cash dividends on common stock are declared and paid.

8. One hundred shares of Amazon.com common stock are purchased for cash.

9. Land is sold for cash at book value.

10. Bonds payable are converted into common stock.

Instructions

Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

Ex. 215

Ace Supply Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of Year

Cash $22,000 $15,000

Accounts receivable 17,000 32,000

Inventory 55,000 65,000

Prepaid insurance 7,500 5,000

Accounts payable 11,000 18,000

Income taxes payable 600 1,200

Instructions

Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method.

Ex. 216

Using the indirect method, calculate the amount of cash flows from operating activities from the following data:

Net income $199,000

Beginning accounts receivable 22,000

Ending accounts receivable 29,000

Beginning prepaid insurance 5,000

Ending prepaid insurance 2,000

Beginning accounts payable 15,000

Ending accounts payable 14,000

Depreciation expense 50,000

Amortization of intangible asset 6,000

Dividends declared and paid 11,000

Ex. 217

Net income $401,000 Beginning accounts payable $119,000

Depreciation expense 97,000 Ending accounts payable 146,000

Beginning accounts receivable 420,000 Purchase of long-term assets 612,000

Ending accounts receivable 439,000 Issuance of long-term debt 220,000

Beginning inventory 516,000 Issuance of stock for cash 180,000

Ending inventory 550,000 Issuance of stock for long-term assets 110,000

Beginning prepaid insurance 42,000 Purchase of treasury stock 64,000

Ending prepaid insurance 48,000 Sale of long-term investment at cost 56,000

1. Calculate the amount of cash flows from operating activities. _____________
2. Calculate the amount of cash flows from investing activities. _____________
3. Calculate the amount of cash flows from financing activities. _____________
4. Calculate the net change in cash. _____________

Ex. 218

The following information is available for A1 Consulting Corporation for the year ended December 31, 2025:

Collection of principal on long-term loan to a supplier $16,000

Acquisition of equipment for cash 10,000

Proceeds from the sale of long-term investment at book value 22,000

Issuance of common stock for cash 20,000

Depreciation expense 25,000

Redemption of bonds payable at carrying (book) value 34,000

Payment of cash dividends 6,000

Net income 30,000

Purchase of land by issuing bonds payable 40,000

In addition, the following information is available from the comparative balance sheet for A1 at the end of 2025 and 2024:

2025 2024

Cash $148,000 $91,000

Accounts receivable (net) 25,000 15,000

Prepaid insurance 19,000 13,000

Total current assets $192,000 $119,000

Accounts payable $ 30,000 $19,000

Salaries and wages payable 6,000 7,000

Total current liabilities $ 36,000 $26,000

Instructions

Prepare A1's statement of cash flows for the year ended December 31, 2025 using the indirect method.

Ex. 219

Acme Office Supply Company prepared the tabulation below at December 31, 2025.

Net Income $323,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense, $27,000

Increase in accounts receivable, $75,000

Decrease in inventory, $18,000

Amortization of patent, $4,000

Increase in accounts payable, $7,500

Decrease in interest receivable, $4,000

Increase in prepaid insurance, $7,000

Decrease in income taxes payable, $2,500

Gain on disposal of plant assets, $11,000

Net cash provided (used) by operating activities

Instructions

Show how each item should be reported in the statement of cash flows. Use parentheses for deductions.

Ex. 220

The current sections of Ace Marine Inc.'s balance sheets at December 31, 2024 and 2025 are presented here.

Ace Marine's net income for 2025 was $216,000. Depreciation expense was $34,000.

Instructions

Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2025 using the indirect method.

Ex. 221

The following information is available for Ace Pet Supply Corporation for the year ended December 31, 2025.

Instructions

Prepare a statement of cash flows using the indirect method.

Ex. 222

The three accounts shown below appear in the general ledger of Ace Media Corp. during 2025.

Instructions

From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale equipment was $7,000.

Ex. 223

The comparative balance sheets for Acme Company appear below:

ACME COMPANY

Comparative Balance Sheets

Dec. 31, 2025 Dec. 31, 2024

Assets

Cash $ 38,000 $13,000

Accounts receivable 18,000 14,000

Inventory 25,000 15,000

Prepaid insurance 7,000 9,000

Stock investments -0- 18,000

Equipment 60,000 30,000

Accumulated depreciation—equipment (18,000) (14,000)

Total assets $130,000 $85,000

Liabilities and Stockholders' Equity

Accounts payable $ 25,000 $ 7,000

Bonds payable 37,000 45,000

Common stock 40,000 23,000

Retained earnings 28,000 10,000

Total liabilities and stockholders' equity $130,000 $85,000

Additional information:

1. Net income for the year ending December 31, 2025, was $30,000.

2. Cash dividends of $12,000 were declared and paid during the year.

3. Stock investments that had a book value of $18,000 were sold for $13,000.

4. Sales for 2025 are $130,000.

Instructions

Prepare a statement of cash flows for the year ended December 31, 2025 using the indirect method.

Ex. 224

The comparative balance sheets for the A1 Beauty Supply Corporation is presented below:

A1 BEAUTY SUPPLY CORPORATION

Comparative Balance Sheets

2025 2024

Assets

Cash $ 37,000 $ 31,000

Accounts receivable (net) 80,000 60,000

Prepaid insurance 22,000 17,000

Land 18,000 40,000

Equipment 70,000 60,000

Accumulated depreciation—equipment (20,000) (13,000)

Total Assets $207,000 $195,000

Ex. 224 (Cont.)

Liabilities and Stockholders' Equity

Accounts payable $ 12,000 $ 6,000

Bonds payable 27,000 19,000

Common stock 140,000 115,000

Retained earnings 28,000 55,000

Total liabilities and stockholders' equity $207,000 $195,000

Additional information:

1. Net loss for 2025 is $12,000. Net sales for 2025 are $250,000.

2. Cash dividends of $15,000 were declared and paid in 2025.

3. Land was sold for cash at a loss of $2,000. This was the only land transaction during the year.

4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.

5. $12,000 of bonds were retired during the year at carrying (book) value.

6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000.

Instructions

Prepare a statement of cash flows for the year ended 2025 using the indirect method.

Ex. 225

Information for two companies in the same industry, Corporation A and Corporation B, is presented here.

Instructions

Compute the free cash flow for each company.

*Ex. 226

Condensed financial data of Ace Supply Company appear below:

ACE SUPPLY COMPANY

Comparative Balance Sheets

December 31

2025 2024

Assets

Cash $ 70,000 $ 35,000

Accounts receivable 82,000 53,000

Inventories 120,000 132,000

Prepaid expenses 19,000 25,000

Investments 80,000 65,000

Plant assets 310,000 250,000

Accumulated depreciation—Plant Assets (65,000) (60,000)

Total $616,000 $500,000

Liabilities and Stockholders' Equity

Accounts payable $ 85,000 $ 75,000

Accrued expenses payable 22,000 24,000

Bonds payable 130,000 150,000

Common stock 245,000 170,000

Retained earnings 134,000 81,000

Total $616,000 $500,000

ACE SUPPLY COMPANY

Income Statement

For the Year Ended December 31, 2025

Sales $480,000

Less:

Cost of goods sold $290,000

Operating expenses (excluding depreciation) 60,000

Depreciation expense 17,000

Income taxes 15,000

Interest expense 13,000

Loss on disposal of plant assets 8,000 403,000

Net income $ 77,000

Additional information:

1. New plant assets costing $85,000 were purchased for cash in 2025.

2. Old plant assets costing $25,000 were sold for $5,000 cash when book value was $13,000.

3. Bonds with a face value of $20,000 were converted into $20,000 of common stock.

4. A cash dividend of $24,000 was declared and paid during the year.

5. Accounts payable pertain to merchandise purchases.

Ex. 226 (Cont.)

Instructions

Prepare a statement of cash flows for the year using the direct method.

*Ex. 227

The income statement of Ace Company is shown below:

ACE COMPANY

Income Statement

For the Year Ended December 31, 2025

Sales $8,500,000

Cost of goods sold 5,300,000

Gross profit 3,200,000

Operating expenses

Selling and administrative expenses $1,210,000

Depreciation expense 70,000

Amortization expense 30,000 1,310,000

Net income $1,890,000

Additional information:

1. Accounts receivable increased by $600,000 during the year.

2. Inventory increased by $250,000 during the year.

3. Prepaid expenses increased by $150,000 during the year.

4. Accounts payable to merchandise suppliers increased by $125,000 during the year.

5. Accrued expenses payable increased by $180,000 during the year.

Instructions

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2025 for Ace Company using the direct method.

Ex. 228

The financial statements of A1 Outfitters appear below:

A1 OUTFITTERS

Comparative Balance Sheets

December 31

2025 2024

Assets

Cash $ 47,000 $ 25,000

Accounts receivable 21,000 34,000

Inventory 22,000 15,000

Property, plant, and equipment 50,000 78,000

Accumulated depreciation (20,000) (24,000)

Total $120,000 $128,000

Liabilities and Stockholders' Equity

Accounts payable $ 12,000 $ 31,000

Income taxes payable 13,000 10,000

Bonds payable 10,000 25,000

Common stock 41,000 24,000

Retained earnings 44,000 38,000

Total $120,000 $128,000

A1 OUTFITTERS

Income Statement

For the Year Ended December 31, 2025

Sales $350,000

Cost of goods sold 280,000

Gross profit 70,000

Selling expenses $20,000

Administrative expenses 16,000 36,000

Income from operations 34,000

Interest expense 4,000

Income before income taxes 30,000

Income tax expense 8,000

Net income $ 22,000

Ex. 228 (Cont.)

The following additional data were provided:

1. Dividends declared and paid were $16,000.

2. During the year, equipment was sold for $12,000 cash. This equipment cost $28,000 originally and had a book value of $12,000 at the time of sale.

3. All depreciation expense is in the selling expense category.

4. All sales and purchases are on account.

5. Accounts payable pertain to merchandise suppliers.

6. All operating expenses except for depreciation were paid in cash.

Instructions

Prepare a statement of cash flows for A1 Outfitters using the direct method.

Ex. 229

Ace Water Sports Company completed its first year of operations on December 31, 2025. Its initial income statement showed that the company had revenues of $207,000 and operating expenses of $108,000. Accounts receivable and accounts payable balances at year-end reflected increases of $80,000 and $28,000, respectively. Assume that accounts payable related to operating expenses. Ignore income taxes.

Instructions

Compute net cash provided by operating activities using the direct method.

Ex. 230

In a recent year, the income statement for McDonald's Corporation reported cost of goods sold $6,175.6 million and operating expenses (including depreciation expense of $1,214.1 million) $18,907.6 million. The comparative balance sheet for the year shows that inventory increased $12.9 million, prepaid expenses increased $102.9 million, accounts payable (merchandise suppliers) decreased $44.6 million, and accrued expenses payable increased $162.4 million.

Instructions

Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses.