Financial Accounting Quiz: Statement Of Cash Flows Indirect Method
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Statement Of Cash Flows Indirect MethodQuestion 1 of 20

Northern Tech reported net income of $120,000 for 2024. The company's balance sheet showed that bonds payable increased by $50,000, common stock increased by $25,000, and retained earnings increased by $105,000 during the year. The company also reported depreciation expense of $30,000 and had working capital changes that resulted in a net $8,000 decrease in operating cash flows.

Based on this information, what can be determined about the company's dividend payments during 2024?

No dividends were paid because retained earnings increased during the year
Dividends paid were $25,000, equal to the increase in common stock during the year
Dividends paid cannot be determined without additional information about stock transactions
Dividends paid were $15,000, calculated as the difference between net income and the retained earnings increase
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Financial Accounting Quiz

Financial Accounting Quiz: Statement Of Cash Flows Indirect Method

Practice Statement Of Cash Flows Indirect Method 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 Statement Of Cash Flows Indirect Method, 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

Northern Tech reported net income of $120,000 for 2024. The company's balance sheet showed that bonds payable increased by $50,000, common stock increased by $25,000, and retained earnings increased by $105,000 during the year. The company also reported depreciation expense of $30,000 and had working capital changes that resulted in a net $8,000 decrease in operating cash flows.

Based on this information, what can be determined about the company's dividend payments during 2024?

  1. No dividends were paid because retained earnings increased during the year
  2. Dividends paid were $25,000, equal to the increase in common stock during the year
  3. Dividends paid cannot be determined without additional information about stock transactions
  4. Dividends paid were $15,000, calculated as the difference between net income and the retained earnings increase (correct answer)
Explanation: When you encounter questions about retained earnings changes, remember that retained earnings connects net income to dividends through a fundamental relationship: the change in retained earnings equals net income minus dividends paid. The key insight here is using the retained earnings equation to work backwards and find dividend payments. Since Northern Tech's retained earnings increased by $105,000 and they reported net income of $120,000, you can calculate: Dividends Paid = Net Income - Change in Retained Earnings = $120,000 - $105,000 = $15,000. Let's examine why the other answers miss the mark. Choice A incorrectly assumes that any increase in retained earnings means no dividends were paid. However, retained earnings can still increase when dividends are paid, as long as net income exceeds the dividend amount. Choice B incorrectly links dividend payments to the common stock increase, but these are completely unrelated transactions—stock issuances don't determine dividend amounts. Choice C suggests you need more information, but the retained earnings change gives you everything needed to calculate dividends when you know net income. Note that the other information in the passage (bonds payable increase, depreciation expense, working capital changes) relates to different financial statement activities and doesn't affect the dividend calculation. Study tip: Master the retained earnings formula: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends. When you know any three of these components, you can always solve for the fourth. This relationship appears frequently on financial accounting exams.

Question 2

For the year, a company reported interest expense of $45,000. The company's bonds were issued at a premium, and the amortization of the bond premium for the year was $5,000. In preparing the operating activities section of the statement of cash flows using the indirect method, what adjustment is required for these items?

  1. Add $5,000 to net income.
  2. Subtract $50,000 from net income.
  3. Subtract $45,000 from net income.
  4. Subtract $5,000 from net income. (correct answer)
Explanation: Amortization of a bond premium reduces interest expense, thereby increasing net income. Since this reduction in expense ($5,000) is a non-cash item, it must be subtracted from net income to arrive at cash flow from operations. The cash paid for interest was $45,000 (expense) + $5,000 (premium amortization) = $50,000. The adjustment isolates the non-cash portion.

Question 3

Phoenix Industries had the following account balances at December 31:

2024: Cash $45,000, Accounts Receivable $32,000, Inventory $28,000, Equipment (net) $85,000 2023: Cash $38,000, Accounts Receivable $29,000, Inventory $31,000, Equipment (net) $72,000

During 2024, the company reported net income of $42,000, depreciation expense of $18,000, and purchased equipment for $31,000. No equipment was sold during the year.

Based on the information provided, what was the cash flow from investing activities for 2024?

  1. $(31,000) (correct answer)
  2. $(13,000)
  3. $(49,000)
  4. $(18,000)
Explanation: Cash flow from investing activities includes only the purchase and sale of long-term assets. The company purchased equipment for $31,000, which is a cash outflow. The change in net equipment from $72,000 to 85,000(85,000 (13,000 increase) reflects both the $31,000 purchase and 18,000depreciation(18,000 depreciation (31,000 - $18,000 = $13,000 net increase). Since no equipment was sold, the only investing activity is the $31,000 equipment purchase, resulting in $(31,000) cash flow from investing activities.

Question 4

During the year, a company had credit sales of $800,000. The beginning and ending balances of Accounts Receivable (net) were $70,000 and $95,000, respectively. The company also wrote off $5,000 of uncollectible accounts against its allowance account. Bad debt expense for the year was $12,000. In its statement of cash flows, what adjustment for accounts receivable should be made to net income?

  1. A subtraction of $20,000.
  2. A subtraction of $25,000. (correct answer)
  3. A subtraction of $30,000.
  4. A subtraction of $13,000.
Explanation: When using the indirect method, the adjustment for changes in operating assets is based on the change in the account balance on the balance sheet. The net Accounts Receivable balance increased from $70,000 to $95,000, an increase of $25,000. An increase in an operating asset represents a use of cash, so it must be subtracted from net income. The write-off of an account is irrelevant for this specific adjustment as it affects both the gross receivable and the allowance, with no impact on net receivables or net income. Bad debt expense is a separate non-cash adjustment.

Question 5

For the year ended December 31, a company reported net income of $180,000. During the year, its deferred tax liability account increased by $12,000, and its accounts receivable balance increased by $25,000. No other adjustments were necessary. What is the company's net cash flow from operating activities?

  1. $143,000
  2. $167,000 (correct answer)
  3. $193,000
  4. $217,000
Explanation: Net cash flow from operations is calculated by adjusting net income. An increase in a deferred tax liability indicates that tax expense on the income statement was greater than the cash taxes paid, so this non-cash portion of the expense must be added back. An increase in an operating asset like accounts receivable represents revenue earned but not yet collected in cash, so it is subtracted. Net Income: $180,000 Add: Increase in deferred tax liability: +$12,000 Subtract: Increase in accounts receivable: -$25,000 Net cash flow from operating activities: $180,000 + $12,000 - $25,000 = $167,000.

Question 6

A company's cost of goods sold for the year was $600,000. The inventory balance increased by $50,000, and the accounts payable balance increased by $35,000 during the year. When reconciling net income to net cash flow from operations, what is the net adjustment required for these two items?

  1. A net subtraction of $85,000.
  2. A net addition of $15,000.
  3. A net subtraction of $15,000. (correct answer)
  4. A net addition of $85,000.
Explanation: In the indirect method, we adjust net income for changes in operating assets and liabilities. An increase in inventory (an asset) means the company spent cash to acquire more goods than it sold, so this increase is subtracted from net income. An increase in accounts payable (a liability) means the company paid less cash to suppliers than the expense it incurred, so this increase is added to net income. Adjustment = (Increase in Inventory) + (Increase in Accounts Payable) = -$50,000 + 35,000=−35,000 = -15,000 (a net subtraction).

Question 7

A company is calculating the net adjustment for changes in its working capital accounts for its statement of cash flows. It noted the following changes during the period:

  • Increase in accounts receivable: $50,000
  • Decrease in inventory: $30,000
  • Increase in accounts payable: $25,000
  • Increase in short-term notes payable to a bank: $40,000

What is the total adjustment for changes in operating assets and liabilities?

  1. A net addition of $45,000.
  2. A net addition of $5,000. (correct answer)
  3. A net subtraction of $35,000.
  4. A net addition of $95,000.
Explanation: The adjustment for working capital changes includes only operating assets and liabilities. Short-term notes payable to a bank is a financing activity and should be excluded. The calculation is: Subtract: Increase in accounts receivable: -$50,000 Add: Decrease in inventory: +$30,000 Add: Increase in accounts payable: +$25,000 Total adjustment: -$50,000 + $30,000 + 25,000=+25,000 = +5,000 (a net addition).

Question 8

When preparing a statement of cash flows using the indirect method, which of the following is added to net income to calculate net cash flow from operating activities?

  1. A decrease in accounts payable.
  2. A gain on the sale of equipment.
  3. Amortization of a bond premium.
  4. An increase in a deferred tax liability. (correct answer)
Explanation: An increase in a deferred tax liability is added to net income. It signifies that the income tax expense recorded on the income statement is higher than the actual cash paid for taxes. A decrease in accounts payable, a gain on sale of equipment, and amortization of a bond premium are all subtracted from net income in the operating section.

Question 9

A company acquired a new building by issuing 50,000 shares of its $1 par value common stock. The fair value of the building on the date of acquisition was determined to be $800,000. How should this transaction be reported on the company's statement of cash flows?

  1. As an $800,000 cash outflow from investing activities and an $800,000 cash inflow from financing activities.
  2. As a financing inflow of $50,000 and an investing outflow of $50,000, based on the par value of the stock.
  3. As an $800,000 cash outflow in the operating section, adjusted from net income.
  4. The transaction should not be reported on the statement of cash flows but should be disclosed in a separate schedule of non-cash activities. (correct answer)
Explanation: Significant investing and financing activities that do not involve cash are excluded from 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. Acquiring an asset by issuing stock is a classic example of a significant non-cash transaction.

Question 10

A company's balance sheet shows that gross Accounts Receivable increased by $40,000, while its Allowance for Doubtful Accounts increased by $7,000. The income statement reports Bad Debt Expense of $10,000. In reconciling net income to net cash flow from operations, what is the total adjustment required for these items?

  1. A net subtraction of $23,000. (correct answer)
  2. A net subtraction of $30,000.
  3. A net subtraction of $33,000.
  4. A net subtraction of $40,000.
Explanation: Two adjustments are needed. First, the non-cash Bad Debt Expense must be added back to net income (+10,000).Second,thechangeinnetAccountsReceivablemustbeadjustedfor.NetA/R=GrossA/R−Allowance.ThechangeinnetA/RisthechangeinGrossA/R(10,000). Second, the change in net Accounts Receivable must be adjusted for. Net A/R = Gross A/R - Allowance. The change in net A/R is the change in Gross A/R (+40,000) minus the change in the Allowance (+7,000),whichisanetincreaseof+7,000), which is a net increase of 33,000. An increase in an operating asset is subtracted from net income (-33,000).Thetotaladjustmentis+$10,000−33,000). The total adjustment is +$10,000 - 33,000 = -$23,000.

Question 11

A company reported net cash flow from operating activities of $180,000. The operating section of its statement of cash flows included adding back depreciation of $50,000, subtracting a gain on sale of assets of $10,000, and adding a decrease in inventory of $20,000. What was the company's net income?

  1. $120,000 (correct answer)
  2. $140,000
  3. $220,000
  4. $240,000
Explanation: This question requires working backwards from net cash flow from operations to find net income. The formula is: Net Income + Adjustments = CFO. So, NI = CFO - Adjustments. The total adjustment is +$50,000 (Depreciation) - $10,000 (Gain) + 20,000(InventoryDecrease)=+20,000 (Inventory Decrease) = +60,000. Therefore, Net Income = $180,000 - $60,000 = $120,000.

Question 12

Zenith Corp. is preparing its statement of cash flows. Net income was $400,000. The income statement included stock-based compensation expense of $50,000. The company's balance sheet showed an increase in inventory of $30,000 and an increase in prepaid expenses of $10,000. What is the net cash flow from operating activities?

  1. $310,000
  2. $360,000
  3. $410,000 (correct answer)
  4. $490,000
Explanation: The calculation for net cash flow from operating activities begins with net income. Adjustments include adding back non-cash expenses like stock-based compensation and accounting for changes in operating assets and liabilities. Net Income: $400,000 Add: Stock-based compensation expense: +$50,000 Subtract: Increase in inventory: -$30,000 Subtract: Increase in prepaid expenses: -$10,000 Net cash flow from operating activities: $400,000 + $50,000 - $30,000 - $10,000 = $410,000.

Question 13

Apex Corporation reported net income of $250,000 for the current year. The following information was also available:

  • Depreciation expense: $60,000
  • Gain on sale of equipment: $15,000
  • Increase in accounts receivable: $35,000
  • Decrease in accounts payable: $20,000

What is Apex Corporation's net cash flow from operating activities?

  1. $240,000 (correct answer)
  2. $270,000
  3. $310,000
  4. $345,000
Explanation: To calculate net cash flow from operating activities using the indirect method, start with net income and adjust for non-cash items and changes in operating assets and liabilities. The calculation is as follows: Net Income: $250,000 Add: Depreciation expense: +$60,000 Subtract: Gain on sale of equipment: -$15,000 Subtract: Increase in accounts receivable: -$35,000 Subtract: Decrease in accounts payable: -$20,000 Net cash flow from operating activities: $250,000 + $60,000 - $15,000 - $35,000 - $20,000 = $240,000.

Question 14

Momentum Inc. reported net income of $500,000. The company's financial statements also showed patent amortization expense of $40,000 and an increase in accounts receivable of $60,000. The carrying value of the patent decreased from $300,000 to $260,000. What is the net cash flow from operating activities?

  1. $400,000
  2. $440,000
  3. $520,000
  4. $480,000 (correct answer)
Explanation: The calculation for net cash flow from operating activities starts with net income. Patent amortization is a non-cash expense, similar to depreciation, and must be added back. An increase in accounts receivable, an operating asset, must be subtracted. The change in the patent's carrying value is simply the result of the amortization and is not a separate adjustment. Net Income: $500,000 Add: Patent amortization expense: +$40,000 Subtract: Increase in accounts receivable: -$60,000 Net cash flow from operating activities: $500,000 + $40,000 - $60,000 = $480,000.

Question 15

Catalyst Corp. reported net income of $320,000. The following items were included in the calculation of net income:

  • Depreciation expense: $75,000
  • Loss on sale of a delivery truck: $8,000
  • Increase in inventory: $40,000

Proceeds from the sale of the delivery truck were $22,000. What is Catalyst's net cash flow from operating activities?

  1. $341,000
  2. $363,000 (correct answer)
  3. $385,000
  4. $401,000
Explanation: The calculation starts with net income and adjusts for non-cash items and changes in operating accounts. The loss on sale is added back because it is a non-cash expense that reduced net income. The proceeds from the sale are an investing cash inflow, not an operating activity. Net Income: $320,000 Add: Depreciation expense: +$75,000 Add: Loss on sale of truck: +$8,000 Subtract: Increase in inventory: -$40,000 Net cash flow from operating activities: $320,000 + $75,000 + $8,000 - $40,000 = $363,000.

Question 16

A company presented the following information from its financial records for the year:

Net Income: $500,000 Depreciation and Amortization: $80,000 Gain on Sale of Land: $25,000 Increase in Accounts Receivable: $40,000 Decrease in Inventory: $15,000 Increase in Accounts Payable: $20,000 Issuance of Common Stock for cash: $100,000 Purchase of Treasury Stock: $30,000 Payment of Dividends: $50,000

Based on the information in the passage, what is the net cash flow from operating activities?

  1. $420,000
  2. $550,000 (correct answer)
  3. $570,000
  4. $620,000
Explanation: To calculate net cash flow from operations, start with net income and adjust for non-cash items and changes in operating assets and liabilities. The issuance of common stock, purchase of treasury stock, and payment of dividends are financing activities and are irrelevant to the operating cash flow calculation. Net Income: $500,000 Add: Depreciation and Amortization: +$80,000 Subtract: Gain on Sale of Land: -$25,000 Subtract: Increase in Accounts Receivable: -$40,000 Add: Decrease in Inventory: +$15,000 Add: Increase in Accounts Payable: +$20,000 Net Cash Flow from Operations: $500,000 + $80,000 - $25,000 - $40,000 + $15,000 + $20,000 = $550,000.

Question 17

Below are selected data for a company:

Income Statement: Net Income: $150,000 Income Tax Expense: $40,000

Balance Sheet (changes during the year): Accounts Receivable increased by $20,000 Inventory decreased by $15,000 Income Taxes Payable increased by $5,000

Note Disclosure: Cash paid for income taxes: $35,000

Using the indirect method and the information in the passage, what is the net cash provided by operating activities?

  1. $110,000
  2. $145,000
  3. $150,000 (correct answer)
  4. $180,000
Explanation: When using the indirect method, start with Net Income and adjust for changes in operating balance sheet accounts. The amount of 'cash paid for taxes' is a direct method component or a supplemental disclosure; it is not used in the reconciliation itself. The reconciliation uses Income Tax Expense (already in NI) and the change in Income Taxes Payable. Net Income: $150,000 Subtract: Increase in Accounts Receivable: -$20,000 Add: Decrease in Inventory: +$15,000 Add: Increase in Income Taxes Payable: +$5,000 Net Cash Flow from Operations: $150,000 - $20,000 + $15,000 + $5,000 = $150,000.

Question 18

A company reported net income of $200,000, which included insurance expense of $40,000. The prepaid insurance account on the balance sheet decreased from $18,000 to $12,000 during the year. In the operating activities section of the statement of cash flows (indirect method), what net adjustment to net income is required for insurance-related items?

  1. An addition of $6,000. (correct answer)
  2. A subtraction of $34,000.
  3. A subtraction of $40,000.
  4. An addition of $46,000.
Explanation: In the indirect method, we start with net income, which has already been reduced by all expenses, including insurance expense. Therefore, the only adjustment needed is for the change in the related balance sheet account. Prepaid insurance is an operating asset. A decrease in an operating asset is added to net income. The decrease was $18,000 - $12,000 = $6,000. Thus, $6,000 is added to net income.

Question 19

Maple Corp's comparative balance sheets showed the following changes during 2024: Accounts Receivable increased $8,000, Inventory decreased $5,000, Prepaid Insurance increased $3,000, Accounts Payable increased $4,000, Wages Payable decreased $2,000, and Interest Payable increased $1,000. The company reported net income of $65,000, which included a $15,000 gain on sale of investments and depreciation expense of $22,000.

In preparing the operating activities section using the indirect method, what is the total adjustment needed for changes in current assets and current liabilities?

  1. $3,000 decrease in cash flow (correct answer)
  2. $3,000 increase in cash flow
  3. $6,000 decrease in cash flow
  4. $0 net effect on cash flow
Explanation: Current asset increases reduce cash flow, while decreases increase cash flow. Current liability increases increase cash flow, while decreases reduce cash flow. Adjustments: A/R increase $(8,000), Inventory decrease $5,000, Prepaid Insurance increase $(3,000), A/P increase $4,000, Wages Payable decrease $(2,000), Interest Payable increase $1,000. Total: $(8,000) + $5,000 + $(3,000) + $4,000 + $(2,000) + $1,000 = $(3,000). The working capital changes result in a $3,000 decrease in operating cash flow.

Question 20

In preparing a statement of cash flows using the indirect method, which of the following adjustments to net income would be made in the operating activities section for a company that wrote off uncollectible accounts receivable during the year?

  1. Subtract the write-off amount because it represents a cash outflow that was included in net income
  2. Add back the write-off amount because it represents a non-cash charge that reduced net income
  3. No adjustment is needed because the write-off was already recorded using the allowance method (correct answer)
  4. Subtract the write-off amount and add back any related bad debt expense recorded during the year
Explanation: When accounts receivable are written off under the allowance method, the entry debits Allowance for Doubtful Accounts and credits Accounts Receivable. This transaction does not affect net income (no expense is recorded) and does not affect cash. The bad debt expense that impacts net income was recorded in a prior period when the allowance was established. Since the write-off itself is neither a cash transaction nor an income statement item, no adjustment to net income is needed in the operating activities section.