Operating Cash Flow Quiz

QUESTIONS

1. The statement of cash flows tracks...

        A) The physical flow of cash in and out of the business

        B) The projected future cash flows of the business

 

2. The statement of cash flows can be referred to as a...

        A) Reconciliation between the income statement and the balance sheet

        B) Substitution for the balance sheet

 

3. An increase in accounts receivable will cause a...

        A) Positive effect on cash flow

        B) Negative effect on cash flow

 

4. An increase in notes payable will cause a...

        A) Positive effect on cash flow

        B) Negative effect on cash flow

 

5. True or False: Operating cash flow can be higher than net income.

        A) True

        B) False

 

6. Are assets directly or indirectly related to cash flow?

        A) Directly (move in same direction)

        B) Indirectly (move in opposite directions)

 

7. Are liabilities directly or indirectly related to cash flow?

        A) Directly (move in same direction)

        B) Indirectly (move in opposite directions)

 

8. When calculating operating cash flow, non-cash expenses like depreciation need to be...

        A) Added back to net income

        B) Subtracted from net income

 

9. A decrease in prepaid expenses will cause a...

        A) Positive effect on cash flow

        B) Negative effect on cash flow

 

10. A decrease in salaries payable will cause a...

        A) Positive effect on cash flow

        B) Negative effect on cash flow

 

ANSWER KEY:

1A, 2A, 3B, 4B, 5A, 6B, 7A, 8A, 9A, 10B

 

PRACTICE PROBLEMS

 

1. Company X has the following facts for the year 2020. What is the company's cash flow provided by operating activities?

Net Income: $1,000,000

Depreciation Expense: $2,500

Increase in Accounts Receivable: $20,000

Increase in Prepaid Expenses: $10,000

Increase in Notes Payable: $50,000

Increase in Accounts Payable: $16,000

 

2. A company has $500,000 in net income with no depreciation expense. It started the year with $55,000 in accounts receivable, which it collected in March. In September, it sold $350,000 worth of merchandise with an agreement to collect half immediately and the other half in six months. Assuming no other facts, what is the company's cash flow provided by operating activities for the year?

3. A company has $500,000 in net income with no depreciation expense. In June, it paid $120,000 upfront for a rental contract that covers one year. Assuming no other facts, what is the company's cash flow provided by operating activities for the year?

 

ANSWER KEY:

1.

Net Income: $1,000,000

Add back depreciation expense (non-cash entry) +$2,500

Increased accounts receivable (asset) has negative effect -$20,000

Increased prepaid expenses (asset) has negative effect -$10,000

Increased notes payable (liability) has positive effect +$50,000

Decreased accounts payable (liability) has negative effect -$16,000

Cash flow provided by operating activities = $1,006,500

 

2.

Net Income $500,000

Increase in accounts receivable (asset) has negative effect -$120,000*

Cash flow provided by operating activities = $380,000

 

Accounts receivable balance at 1/1: $55,000

Accounts receivable balance at 12/31: $175,000

 

3.

Net Income $500,000

Increase in prepaid expenses (asset) has negative effect -$60,000*

Cash flow provided by operating activities = $440,000

 

*The journal entry to record paying the cash for the rental contract on July 1 would be:

Prepaid Expenses $120,000

        Cash ($120,000)

 

At the end of the year, the accountant would need to do an adjusting journal entry reflecting that half of those prepaid expenses have been incurred.

Rent Expense $60,000

        Prepaid Expenses ($60,000)

 

Prepaid expenses balance at 1/1: $0

Prepaid expenses balance at 12/31: $60,000