Financial Accounting Quiz: Classifying Cash Flows
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Classifying Cash FlowsQuestion 1 of 20

A company made a cash payment of $25,000 on a finance lease obligation. The portion of the payment attributable to interest was $5,000, while the remaining $20,000 reduced the principal of the lease liability. How should this payment be classified on the statement of cash flows under U.S. GAAP?

A $25,000 outflow from financing activities.
A $25,000 outflow from operating activities.
A $20,000 outflow from financing activities and a $5,000 outflow from operating activities.
A $20,000 outflow from investing activities and a $5,000 outflow from operating activities.
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Financial Accounting Quiz

Financial Accounting Quiz: Classifying Cash Flows

Practice Classifying Cash Flows in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Classifying Cash Flows, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A company made a cash payment of $25,000 on a finance lease obligation. The portion of the payment attributable to interest was $5,000, while the remaining $20,000 reduced the principal of the lease liability. How should this payment be classified on the statement of cash flows under U.S. GAAP?

  1. A $25,000 outflow from financing activities.
  2. A $25,000 outflow from operating activities.
  3. A $20,000 outflow from financing activities and a $5,000 outflow from operating activities. (correct answer)
  4. A $20,000 outflow from investing activities and a $5,000 outflow from operating activities.
Explanation: For a finance lease, payments have two components. The portion that reduces the principal of the lease liability is classified as a financing activity, similar to repaying a loan. The portion that represents interest on the liability is classified as an operating activity under U.S. GAAP. Therefore, $20,000 is a financing outflow and $5,000 is an operating outflow.

Question 2

A company received a cash payment of $52,000 from a customer on a long-term note receivable. The payment comprised $50,000 of principal and $2,000 of interest. The company follows U.S. GAAP. How should this cash receipt be classified on the statement of cash flows?

  1. A $52,000 inflow from investing activities.
  2. A $52,000 inflow from operating activities.
  3. A $50,000 inflow from investing activities and a $2,000 inflow from operating activities. (correct answer)
  4. A $50,000 inflow from financing activities and a $2,000 inflow from operating activities.
Explanation: Making and collecting loans (notes receivable) are investing activities. However, this applies only to the principal portion of the loan. Under U.S. GAAP, interest received is classified as an operating activity. Therefore, the $50,000 principal collection is an investing cash inflow, and the $2,000 interest collection is an operating cash inflow.

Question 3

A U.S. corporation, adhering strictly to U.S. GAAP, paid a total of $120,000 in cash for interest charges during the year. Of this amount, $20,000 was capitalized as part of the cost of a self-constructed asset, and the remaining $100,000 was recognized as interest expense. What is the total cash outflow that should be classified as an operating activity on the statement of cash flows?

  1. A $100,000 outflow from operating activities.
  2. A $120,000 outflow from operating activities. (correct answer)
  3. A $100,000 outflow from operating activities and a $20,000 outflow from investing activities.
  4. A $120,000 outflow from financing activities.
Explanation: Under U.S. GAAP, all cash payments for interest are classified as operating activities, regardless of whether the interest is expensed or capitalized for financial reporting purposes. Therefore, the entire $120,000 cash payment is an operating cash outflow.

Question 4

A company sells equipment with a book value of $50,000 for $65,000 in cash. The company uses the indirect method for its statement of cash flows. How should this transaction be reflected in the statement of cash flows?

  1. A $65,000 inflow in the investing section and a $15,000 deduction from net income in the operating section. (correct answer)
  2. A $15,000 inflow in the operating section and a $50,000 inflow in the investing section.
  3. A $65,000 inflow in the operating section and a $15,000 addition to net income in that section.
  4. A $15,000 inflow in the investing section and no adjustment in the operating section.
Explanation: The cash received from the sale of property, plant, and equipment is classified as an investing activity. Therefore, the full $65,000 cash proceeds is an inflow in the investing section. The 15,000gain(15,000 gain (65,000 proceeds - $50,000 book value) is included in net income but is not an operating cash flow. Using the indirect method, this non-operating gain must be subtracted from net income to arrive at cash flow from operations.

Question 5

On December 31, a company induced bondholders to convert $500,000 of its convertible bonds into 50,000 shares of its $1 par value common stock. No cash was exchanged in the transaction. How should this event be reflected in the company's statement of cash flows for the year?

  1. As a $500,000 cash inflow from financing and a $500,000 cash outflow from financing, resulting in a net zero effect.
  2. It should not be reported in the operating, investing, or financing sections, but disclosed as a significant non-cash transaction. (correct answer)
  3. As a $500,000 cash inflow from financing activities from the issuance of common stock.
  4. As a $500,000 cash outflow from financing activities from the retirement of bonds.
Explanation: The conversion of debt to equity is a non-cash transaction because no cash is exchanged. Significant non-cash investing and financing activities are not reported in the body of the statement of cash flows. Instead, they must be disclosed in a separate schedule or in the notes to the financial statements.

Question 6

A company using the indirect method reported net income of $500,000. The following changes occurred in selected balance sheet accounts: Accounts Receivable increased by $40,000; Inventory decreased by $15,000; and Accounts Payable increased by $20,000. During the year, the company also purchased treasury stock for $50,000 cash. Based on this information, what is the net cash provided by operating activities?

  1. $495,000 (correct answer)
  2. $445,000
  3. $575,000
  4. $425,000
Explanation: To calculate net cash from operating activities using the indirect method, start with net income and adjust for changes in operating working capital accounts. An increase in an operating asset like Accounts Receivable is a use of cash (subtracted). A decrease in an operating asset like Inventory is a source of cash (added). An increase in an operating liability like Accounts Payable is a source of cash (added). The purchase of treasury stock is a financing activity and does not affect the operating section. Calculation: $500,000 (Net Income) - $40,000 (A/R Increase) + $15,000 (Inventory Decrease) + $20,000 (A/P Increase) = $495,000.

Question 7

A corporation issues bonds with a par value of $1,000,000 and receives cash proceeds of $980,000, reflecting a discount. In connection with the issuance, the corporation paid $15,000 in cash to its underwriters. What is the net cash flow from financing activities that should be reported for this transaction?

  1. A $980,000 inflow.
  2. A $1,000,000 inflow.
  3. A $965,000 inflow. (correct answer)
  4. A $985,000 inflow.
Explanation: Cash flow from financing activities should reflect the net cash received. The corporation received $980,000 from the bond investors but immediately paid out $15,000 for issuance costs. The net cash inflow is the proceeds less the costs paid: $980,000 - $15,000 = $965,000. The par value and the discount are used for amortization over the bond's life but do not represent the initial cash flow.

Question 8

A company repurchased 1,000 shares of its own common stock for $50 per share. Later in the year, it resold 600 of these treasury shares for $58 per share. There were no other treasury stock transactions during the year. What is the net cash flow from financing activities related to these treasury stock transactions?

  1. A $4,800 inflow.
  2. A $15,200 outflow. (correct answer)
  3. A $50,000 outflow.
  4. A $34,800 inflow.
Explanation: Both the purchase and sale of a company's own stock (treasury stock) are financing activities. The cash outflow for the repurchase is 1,000 shares * $50/share = $50,000. The cash inflow from the resale is 600 shares * $58/share = 34,800.Thenetcashflowisthecombinationofthesetwotransactions:−34,800. The net cash flow is the combination of these two transactions: -50,000 + 34,800=−34,800 = -15,200, or a net cash outflow of $15,200.

Question 9

A company sold a building for its fair value of $800,000 cash, recognizing a gain on the sale. Immediately, the company leased the building back under a contract classified as a finance lease. During the year, the company made its first lease payment of $70,000, which consisted of $50,000 principal and $20,000 interest. What is the net cash inflow from investing activities for the year related to this building?

  1. $800,000 (correct answer)
  2. $730,000
  3. $750,000
  4. $200,000
Explanation: The cash received from the sale of an asset, such as a building, is classified as a cash inflow from investing activities. The full proceeds of $800,000 are reported in this section. The subsequent leaseback is a separate transaction. The lease payments consist of a financing outflow (principal) and an operating outflow (interest), but these do not affect the investing activities section. Therefore, the net cash inflow from investing is simply the $800,000 proceeds from the sale.

Question 10

A company reported net income of $250,000. Included in net income was a gain on sale of land of $30,000, depreciation expense of $50,000, and amortization of a bond premium of $5,000. The cash proceeds from the sale of land were $110,000. Based only on this information, what is the net cash flow from operating activities calculated using the indirect method?

  1. $155,000
  2. $275,000
  3. $345,000
  4. $265,000 (correct answer)
Explanation: Using the indirect method, start with net income and adjust for non-cash items and non-operating gains/losses. The gain on sale is subtracted because it is a non-operating gain included in income. Depreciation is a non-cash expense and is added back. Amortization of a bond premium reduces interest expense but is a non-cash item, so it must be subtracted. The cash proceeds from the sale of land are an investing cash flow and do not belong in the operating section reconciliation. Calculation: $250,000 (Net Income) - $30,000 (Gain) + $50,000 (Depreciation) - $5,000 (Premium Amortization) = $265,000.

Question 11

A company's only bank account went from a positive balance of $2,000 at the beginning of the year to an overdraft of $8,000 at year-end. Under U.S. GAAP, this type of overdraft is treated as a form of short-term borrowing and not as a component of cash and cash equivalents. Which of the following describes a component of this change in the statement of cash flows?

  1. A net $10,000 decrease in the ending cash balance.
  2. An $8,000 cash inflow from financing activities. (correct answer)
  3. A reclassification of cash to a current liability with no cash flow effect.
  4. A $10,000 cash outflow from operating activities.
Explanation: Under U.S. GAAP, a bank overdraft is treated as a liability (a short-term loan) rather than negative cash. Therefore, creating or increasing an overdraft is economically equivalent to receiving a loan. This is classified as a cash inflow from financing activities. The cash balance itself went from $2,000 to $0, and a loan of $8,000 was created. The creation of the $8,000 loan is an $8,000 cash inflow from financing.

Question 12

A company's reconciliation of net income to net cash from operating activities is prepared using the indirect method. The income statement showed income tax expense of $90,000. The balance sheet showed that the deferred tax liability account increased by $15,000 during the year, and there were no changes in income taxes payable. What was the amount of cash paid for income taxes?

  1. $90,000
  2. $105,000
  3. $15,000
  4. $75,000 (correct answer)
Explanation: Cash paid for taxes can be determined by adjusting income tax expense for changes in related balance sheet accounts. An increase in a deferred tax liability means that the tax expense recognized on the income statement is greater than the taxes currently payable. Therefore, cash paid for taxes is income tax expense minus the increase in the deferred tax liability. Calculation: $90,000 (Income Tax Expense) - $15,000 (Increase in DTL) = $75,000.

Question 13

A company holds a 30% interest in an affiliate, accounting for the investment using the equity method. During the year, the affiliate reported net income of $100,000 and paid total dividends of $40,000. The investor company follows U.S. GAAP. What amount should the investor company report in its statement of cash flows related to this investment?

  1. A $30,000 cash inflow from operating activities.
  2. A $12,000 cash inflow from investing activities.
  3. A $12,000 cash inflow from operating activities. (correct answer)
  4. An $18,000 cash inflow from operating activities.
Explanation: The statement of cash flows reports actual cash movements. The investor's share of the affiliate's net income ($100,000 * 30% = $30,000) is recognized in the investor's net income but is a non-cash item that is reversed in the operating section (indirect method). The actual cash received is the dividend, which is $40,000 * 30% = $12,000. Under U.S. GAAP, dividends received are classified as operating cash inflows.

Question 14

A company factored $100,000 of its accounts receivable without recourse, which qualifies as a sale. The factor charged a 2% fee and retained 5% of the balance for sales returns, to be remitted later if not used. The company received an immediate cash payment. What is the cash flow and classification the company should report from this transaction?

  1. A $100,000 cash inflow from operating activities.
  2. A $93,000 cash inflow from operating activities. (correct answer)
  3. A $93,000 cash inflow from financing activities.
  4. A $98,000 cash inflow from operating activities.
Explanation: Factoring receivables without recourse is essentially a sale of the receivables, which accelerates cash collection from customers. Therefore, it is an operating activity. The cash flow is the net amount of cash received. The company receives the face amount less the fee and the amount retained by the factor. Cash received = 100,000−(100,000 - (100,000 * 2%) - ($100,000 * 5%) = $100,000 - $2,000 - $5,000 = $93,000.

Question 15

An investment firm purchased a portfolio of equity securities, which it properly classified as trading securities, for a total price of $500,000. The firm paid $100,000 in cash and signed a $400,000 note payable for the remainder. How should this acquisition be reported on the firm's statement of cash flows?

  1. A $500,000 outflow from operating activities.
  2. A $100,000 outflow from investing activities and disclosure of a $400,000 non-cash transaction.
  3. A $100,000 outflow from operating activities and a $400,000 inflow from financing activities.
  4. A $100,000 outflow from operating activities and disclosure of a $400,000 non-cash transaction. (correct answer)
Explanation: Cash flows related to the purchase and sale of trading securities are classified as operating activities because they are part of the firm's principal revenue-producing activities. The cash portion of the transaction is the $100,000 paid, which is an operating outflow. The $400,000 financed via a note payable is a significant non-cash transaction and must be disclosed separately, not reported as a cash flow.

Question 16

A software company incurred $2,000,000 in cash expenditures for its research and development activities. Based on accounting standards, $500,000 was expensed as research, while the remaining $1,500,000 was capitalized as an intangible asset. How should the total $2,000,000 in cash payments be classified on the statement of cash flows?

  1. A $2,000,000 outflow from operating activities.
  2. A $2,000,000 outflow from investing activities.
  3. A $500,000 outflow from operating activities and a $1,500,000 outflow from investing activities. (correct answer)
  4. A $1,500,000 outflow from investing activities, with the remaining $500,000 having no cash flow effect.
Explanation: The classification of cash flows follows the nature of the activity. Cash payments to acquire, create, or develop long-term assets (including capitalized software costs) are investing activities. Therefore, the $1,500,000 capitalized is an investing outflow. The $500,000 expensed portion relates to the principal revenue-producing activities of the business and is classified as an operating outflow.

Question 17

Apex Manufacturing's income statement showed depreciation expense of $450,000 and a gain on sale of equipment of $85,000. The company sold equipment with an original cost of $600,000 and accumulated depreciation of $280,000 for $405,000 cash. During the year, Apex also purchased new equipment for $750,000, paying $200,000 cash and signing a note payable for the remainder.

What amounts should be reported in the investing activities section related to these equipment transactions?

  1. Cash inflow of $405,000 and cash outflow of $750,000
  2. Cash inflow of $320,000 and cash outflow of $200,000
  3. Cash inflow of $405,000 and cash outflow of $200,000 (correct answer)
  4. Cash inflow of $490,000 and cash outflow of $750,000
Explanation: Investing activities include only cash flows: $405,000 cash received from equipment sale (inflow) and $200,000 cash paid for equipment purchase (outflow). The $550,000 note payable portion is non-cash and disclosed separately. Choice A incorrectly includes the full purchase price. Choice B uses net book value instead of cash received. Choice D incorrectly adds the gain to cash received and includes the full purchase price.

Question 18

Titan Corp. acquired 100% of Saturn Inc. by paying $5,000,000 in cash. At the time of acquisition, Saturn's balance sheet included cash of $400,000, inventory of $1,200,000, and property, plant, and equipment of $3,400,000. What is the net cash outflow from investing activities that Titan Corp. should report for this acquisition?

  1. $5,000,000
  2. $3,400,000
  3. $4,600,000 (correct answer)
  4. $1,600,000
Explanation: When reporting a business combination, the cash paid is classified as an investing outflow. However, the cash acquired in the transaction is netted against the cash paid. The net cash outflow is the total cash paid less the cash balance of the acquired company. Calculation: $5,000,000 (cash paid) - $400,000 (cash acquired) = $4,600,000 net cash outflow from investing activities.

Question 19

A company's investment portfolio includes securities classified as "trading" and securities classified as "available-for-sale" (AFS). During the year, the company sold trading securities for $50,000 cash and sold AFS securities for $80,000 cash. What is the total cash inflow from investing activities related to these sales?

  1. $80,000 (correct answer)
  2. $130,000
  3. $50,000
  4. $95,000
Explanation: Cash flows from the purchase and sale of available-for-sale (AFS) and held-to-maturity (HTM) securities are classified as investing activities. Cash flows from the purchase and sale of trading securities are classified as operating activities because they are part of the entity's principal trading activities. Therefore, only the $80,000 proceeds from the sale of AFS securities is an investing cash inflow.

Question 20

Millbrook Industries completed several transactions during the current year involving its subsidiary, Oakdale Corp., in which it holds an 80% interest:

• Received $120,000 cash dividend from Oakdale • Oakdale reported net income of $200,000 • Purchased additional 10% interest in Oakdale for $350,000 cash • Received $45,000 in management fees from Oakdale

How should Millbrook classify these cash flows in its statement of cash flows?

  1. Operating: $45,000 inflow; Investing: 230,000outflow(230,000 outflow (350,000 less $120,000)
  2. Operating: $45,000 inflow; Investing: 470,000outflow(470,000 outflow (350,000 + $120,000)
  3. Operating: 205,000inflow(205,000 inflow (165,000 + $40,000 noncontrolling interest); Investing: $350,000 outflow
  4. Operating: 165,000inflow(165,000 inflow (120,000 + $45,000); Investing: $350,000 outflow (correct answer)
Explanation: When you encounter cash flow classification questions involving subsidiaries, focus on the nature of each transaction rather than the consolidation relationship. Each cash flow should be classified based on what it represents to the parent company. The correct approach is to analyze each transaction separately. The $120,000 dividend received from Oakdale represents a return on Millbrook's investment in its subsidiary, which classifies as operating cash flow under the indirect method since dividends received are operating activities for the recipient. The $45,000 management fees are clearly operating cash flows as they represent revenue from services provided. Together, these create a $165,000 operating inflow. The $350,000 purchase of additional equity interest is an investment in securities, making it an investing outflow. Answer A incorrectly nets the dividend against the stock purchase, treating them as a single investing transaction. This is wrong because dividends received are operating activities, not investing activities. Answer B makes the same netting error but in the opposite direction, inflating the investing outflow by incorrectly adding the dividend to the stock purchase cost. Answer C attempts to incorporate noncontrolling interest calculations, but cash flow classification doesn't involve breaking down transactions by ownership percentages - you simply record the actual cash flows as they occur to the reporting entity. Remember that cash flow classification depends on the nature of the transaction to the reporting company, not the relationship between the companies. Dividends received are always operating activities, while purchases of equity securities are always investing activities - keep these categories separate.