ACC 501 Review Questions – Statement of Cash Flows Circle the letter of the correct answer for each question. 1. Which of the following statements is true? a. Cash flows from operations is calculated under the direct method by starting with the accrual net income figure and adjusting it for changes in related asset and liability accounts. b. Depreciation expense is subtracted from net income to arrive at cash flows from operations under the indirect method. c. Under the indirect method, the preparer identifies only the cash part of each item on the income statement. d. The FASB prefers the direct method, because it shows operating receipts and payments in a way that is easier for investors to understand. e. The direct method is more commonly used than the indirect method. 2. Riley Company disposed of a building that cost $400,000 and had Accumulated Depreciation of $270,000. The income statement shows a $10,000 Gain on Sale of Building. The cash inflow from the sale was: $144,300 $140,000 $130,000 $120,000 $ 10,000 3. On its 2004 Statement of Cash Flows, Hawk, Inc. reported that it paid $87,600 for interest. Hawk reported $98,600 of Interest Expense on the 2004 Income Statement. The balance in Interest Payable on the 2004 Balance Sheet was $13,200. What was the balance in Interest Payable on the 2003 Balance Sheet? a. $ 2,200 b. $ 5,200 c. $13,200 d. $24,200 e. Unable to tell from the information given. Questions 4 and 5 are based on the following information: Hadley Corp. incurred the following items during the current year: Common stock issued $300,000 Dividends paid to shareholders 30,000 Interest paid on Notes Payable 45,000 Notes issued to borrow funds 120,000 Proceeds from the sale of old equipment 600,000 Purchase of plant and equipment 180,000 4. What amount will be reported as cash provided/(used) by investing activities for the year? $570,000 $420,000 c. $390,000 d. ($75,000) e. None of the above. 5. What amount will be reported as cash provided/(used) by financing activities for the year? a. $450,000 b. $420,000 c. $390,000 d. ($75,000) e. None of the above. Solutions: 1. D. The direct method specifically states the cash received from customers and the cash paid for various operating activities. Therefore, the user of the financial statements does not have to perform any account analysis to determine the cash received or disbursed for those operating activities. 2. B. The building had a book value of $400,000 ─ $270,000 = $130,000. Therefore, if the company realized a gain of $10,000 on the sale, the cash proceeds must have been $140,000. 3. A. Analyze the Interest Payable account: 2003 ending balance + $98,600 Interest Expense - $87,600 Interest Paid = $13,200 ending balance for 2004. Thus, 2003 ending balance = $2,200. 4. B. Proceeds from the sale of old equipment of $600,000 minus cash used to purchase plant equipment of $180,000 = net $420,000 cash provided by investing activities. 5. C. Common stock issued of $300,000 minus cash dividends paid of $30,000 plus $120,000 cash received from note payable = $390,000.