Chapter 13
“How Well Am I Doing?” Statement of Cash Flows
True/False
1. An increase in long-term notes payable is considered to be a financing activity and a source of cash on
the statement of cash flows.
Level: Medium LO: 1,2 Ans: T
2. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in accounts receivable would be deducted from net income to arrive at net cash
provided by financing activities.
Level: Hard LO: 2,3 Ans: F
3. A loss on the sale of an asset would be deducted from net income in computing cash from operating
activities under the indirect method on the statement of cash flows.
Level: Hard LO: 2,3 Ans: F
4. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in accounts payable would be recorded as a deduction from net income.
Level: Medium LO: 2,3 Ans: F
5. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in inventory would be added to net income.
Level: Medium LO: 2,3 Ans: F
6. In computing the net cash provided by operating activities under the indirect method on the statement
of cash flows, a decrease in accounts payable would be added to net income.
Level: Medium LO: 2,3 Ans: F
7. An increase in a prepaid expense would be deducted from net income in computing net cash provided
by operating activities on the statement of cash flows under the indirect method.
Level: Medium LO: 2,3 Ans: T
8. A gain on the sale of equipment would be included as part of a company’s investing activities on the
statement of cash flows.
Level: Medium LO: 2 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 623
,9. Payment of cash dividends to shareholders is considered to be an operating activity on the statement of
cash flows.
Level: Medium LO: 2 Ans: F
10. Payment of accrued taxes is considered an operating activity on the statement of cash flows.
Level: Medium LO: 2 Ans: T
11. The sale of preferred stock for cash would be classified as an investing activity in the statement of
cash flows.
Level: Medium LO: 2 Ans: F
12. The collection of a long-term loan made to a supplier would be treated as an investing activity on a
statement of cash flows.
Level: Medium LO: 2 Ans: T
13. Borrowing on a long-term note would be considered a financing activity and a source of cash on the
statement of cash flows.
Level: Medium LO: 2 Ans: T
14. (Appendix) Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, an increase in inventory would be deducted from cost of goods sold to
convert cost of goods sold to a cash basis.
Level: Hard LO: 4 Ans: F
15. (Appendix) Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, a decrease in prepaid expenses would be added to operating expenses to
convert operating expenses to a cash basis.
Level: Hard LO: 4 Ans: F
Multiple Choice
16. Which of the following would be considered a "source" of cash for purposes of constructing a
statement of cash flows?
A) a decrease in accounts payable.
B) dividends paid to the company’s own shareholders.
C) an increase in accrued liabilities.
D) an increase in prepaid expenses.
Level: Medium LO: 1 Ans: C
624 Brewer, Introduction to Managerial Accounting, 3/e
,17. Which of the following would be considered a "source" of cash for purposes of constructing a
statement of cash flows?
A) a decrease in accounts receivable.
B) an increase in prepaid expenses.
C) an increase in accrued liabilities.
D) an increase in plant and equipment.
Level: Medium LO: 1 Ans: A
18. Martin Corporation uses the indirect method to prepare its statement of cash flows. If Martin
purchases additional equipment, which results in additional depreciation charges, what net effect will the
purchase of this additional equipment have on the net cash provided (used) in the following sections of
Martin’s statement of cash flows?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Hard LO: 2,3 Ans: E
19. Under the indirect method of determining net cash provided by operating activities on the statement of
cash flows, which of the following would be recorded as a deduction from net income?
A) A decrease in accounts receivable?
B) An increase in accounts payable.
C) A decrease in accounts payable.
D) An increase in deferred revenue.
Level: Medium LO: 2,3 Ans: C
20. An increase in accounts receivable of $1,000 over the course of a year would be shown on the
company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Level: Medium LO: 2,3 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 625
, 21. A decrease in the taxes payable account of $1,000 over the course of a year would be shown on the
company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Level: Medium LO: 2,3 Ans: B
22. Shoshoni Corporation prepares its statement of cash flows using the indirect method. Which of the
following would be added to net income in the operating activities section of the statement?
A) A above
B) B above
C) C above
D) D above
Level: Medium LO: 2,3 Ans: D
23. Fawn Corporation prepares its statement of cash flows using the indirect method. Which of the
following would be added to net income in the operating activities section of the statement?
A) A above
B) B above
C) C above
D) D above
Level: Hard LO: 2,3 Ans: C
626 Brewer, Introduction to Managerial Accounting, 3/e
“How Well Am I Doing?” Statement of Cash Flows
True/False
1. An increase in long-term notes payable is considered to be a financing activity and a source of cash on
the statement of cash flows.
Level: Medium LO: 1,2 Ans: T
2. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in accounts receivable would be deducted from net income to arrive at net cash
provided by financing activities.
Level: Hard LO: 2,3 Ans: F
3. A loss on the sale of an asset would be deducted from net income in computing cash from operating
activities under the indirect method on the statement of cash flows.
Level: Hard LO: 2,3 Ans: F
4. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in accounts payable would be recorded as a deduction from net income.
Level: Medium LO: 2,3 Ans: F
5. Under the indirect method of determining the net cash provided by operating activities on the statement
of cash flows, an increase in inventory would be added to net income.
Level: Medium LO: 2,3 Ans: F
6. In computing the net cash provided by operating activities under the indirect method on the statement
of cash flows, a decrease in accounts payable would be added to net income.
Level: Medium LO: 2,3 Ans: F
7. An increase in a prepaid expense would be deducted from net income in computing net cash provided
by operating activities on the statement of cash flows under the indirect method.
Level: Medium LO: 2,3 Ans: T
8. A gain on the sale of equipment would be included as part of a company’s investing activities on the
statement of cash flows.
Level: Medium LO: 2 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 623
,9. Payment of cash dividends to shareholders is considered to be an operating activity on the statement of
cash flows.
Level: Medium LO: 2 Ans: F
10. Payment of accrued taxes is considered an operating activity on the statement of cash flows.
Level: Medium LO: 2 Ans: T
11. The sale of preferred stock for cash would be classified as an investing activity in the statement of
cash flows.
Level: Medium LO: 2 Ans: F
12. The collection of a long-term loan made to a supplier would be treated as an investing activity on a
statement of cash flows.
Level: Medium LO: 2 Ans: T
13. Borrowing on a long-term note would be considered a financing activity and a source of cash on the
statement of cash flows.
Level: Medium LO: 2 Ans: T
14. (Appendix) Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, an increase in inventory would be deducted from cost of goods sold to
convert cost of goods sold to a cash basis.
Level: Hard LO: 4 Ans: F
15. (Appendix) Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, a decrease in prepaid expenses would be added to operating expenses to
convert operating expenses to a cash basis.
Level: Hard LO: 4 Ans: F
Multiple Choice
16. Which of the following would be considered a "source" of cash for purposes of constructing a
statement of cash flows?
A) a decrease in accounts payable.
B) dividends paid to the company’s own shareholders.
C) an increase in accrued liabilities.
D) an increase in prepaid expenses.
Level: Medium LO: 1 Ans: C
624 Brewer, Introduction to Managerial Accounting, 3/e
,17. Which of the following would be considered a "source" of cash for purposes of constructing a
statement of cash flows?
A) a decrease in accounts receivable.
B) an increase in prepaid expenses.
C) an increase in accrued liabilities.
D) an increase in plant and equipment.
Level: Medium LO: 1 Ans: A
18. Martin Corporation uses the indirect method to prepare its statement of cash flows. If Martin
purchases additional equipment, which results in additional depreciation charges, what net effect will the
purchase of this additional equipment have on the net cash provided (used) in the following sections of
Martin’s statement of cash flows?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Hard LO: 2,3 Ans: E
19. Under the indirect method of determining net cash provided by operating activities on the statement of
cash flows, which of the following would be recorded as a deduction from net income?
A) A decrease in accounts receivable?
B) An increase in accounts payable.
C) A decrease in accounts payable.
D) An increase in deferred revenue.
Level: Medium LO: 2,3 Ans: C
20. An increase in accounts receivable of $1,000 over the course of a year would be shown on the
company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Level: Medium LO: 2,3 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 625
, 21. A decrease in the taxes payable account of $1,000 over the course of a year would be shown on the
company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities.
D) a deduction of $1,000 under financing activities.
Level: Medium LO: 2,3 Ans: B
22. Shoshoni Corporation prepares its statement of cash flows using the indirect method. Which of the
following would be added to net income in the operating activities section of the statement?
A) A above
B) B above
C) C above
D) D above
Level: Medium LO: 2,3 Ans: D
23. Fawn Corporation prepares its statement of cash flows using the indirect method. Which of the
following would be added to net income in the operating activities section of the statement?
A) A above
B) B above
C) C above
D) D above
Level: Hard LO: 2,3 Ans: C
626 Brewer, Introduction to Managerial Accounting, 3/e
