1. How does the sale of equipment at a gain impact the statement of cash flows?

a. No adjustment is necessary to prepare the statement of cash flow under the direct method.
b. The gain is subtracted from net income from operations and added to investing cash flow.
c. The gain is subtracted from net income from operations and the cash received is added to investing cash flow.
d. The gain is subtracted from operations and the cash received is added to operations.

2. When a firm records its investment in a corporation on the equity method,

a. cash dividends require no adjustment for the statement of cash flows because they are already included in dividend income
b. the net increase (decrease) in the investment account must be subtracted (added) in preparing the statement of cash flows
c. the equity in earnings of affiliate is added to cash flow from operations
d. none of the above

3. For purposes of preparing the statement of cash flows, prepayments are treated in a manner similar to which other balance sheet item?

a. accounts receivable
b. fixed assets
c. accounts payable
d. capital stock

4. Short-term bank borrowing

a. is treated similarly to accounts payable on the statement of cash flows, and changes are recorded in the operations section
b. is treated as an investing transaction
c. is treated as a financing transaction
d. does not appear on the statement of cash flows because the cash inflow is offset by the outflow

5. Which pair of items receives similar treatment in a cash flow statement prepared using the indirect method?

a. increase in investor advances and increase in customer advances
b. acquisition of equipment and common stock
c. decrease in inventories and increase in accounts payable
d. payment of debt and payment of dividends

6. Which of the following would not be presented as an increase in cash flows from operations using the indirect method?

a. net income
b. amortization expense
c. increase in deferred income taxes
d. decrease in warranties payable

7. Noncash investing and financing transactions

a. have a positive impact on cash flows
b. are a signal for future increases and decreases in cash flow
c. are reflected as supplemental disclosures
d. are not important

8. If cash decreases by $20,000, liabilities increase by $5,000, and shareholders' equity increases by $10,000, what is the change in noncash assets for the year?

a. $35,000 decrease
b. $5,000 decrease
c. $35,000 increase
d. $5,000 increase

9. (CMA adapted, Dec 94 #18) When using the indirect method to prepare the statement of cash flows, the amortization of goodwill should be presented as a(n)

a. cash flow from investing activities
b. cash flow from financing activities
c. deduction from net income
d. addition to net income

10. (CMA adapted, Jun 95 #20) SFAS No. 95, "Statement of Cash Flows," classifies business transactions into operating, investing, and financing activities. All of the following should be classified under the operating section except a(n)

a. decrease in inventory
b. depreciation expense
c. decrease in prepaid insurance
d. purchase of land and building in exchange for a long-term note

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