EDSPIRA 1

EDSPIRA PRACTICE EXERCISES

Statement of Cash Flows
By Michael McLaughlin

1. What are the 3 sections of the statement of cash flows?

2. TRUE or FALSE? The main purpose of preparing a statement of cash flows is NOT to
figure out the company’s cash balance (because this is found on the balance sheet) but
to show why the company’s cash balance changed from one period to the next.

3. Your company’s accounts receivable balance increased $5,000 from last year to this
year. How would this be reflected in a statement of cash flows that is prepared
according to the Indirect Method?

4. Your company’s accounts payable balance increased $12,000 from last year to this year.
How would this be reflected in a statement of cash flows that is prepared according to
the Indirect Method?

5. Your company’s unearned revenue balance increased $67,000 from last year to this
year. How would this be reflected in a statement of cash flows that is prepared
according to the Indirect Method?

6. TRUE or FALSE? Depreciation expense should be added to net income as an adjustment

in the operating section of the statement of cash flows. This is because depreciation
expense reduced net income, but did not decrease the company’s cash balance.

7. TRUE or FALSE? If your company recognizes a loss on the sale of a fixed asset, this
should be added to net income as an adjustment in the operating section of the
statement of cash flows. This is because the loss reduced net income, but did not
decrease the company’s cash balance.

8. If your company pays cash to purchase equipment, in which section of the statement of
cash flows would this be recorded?

9. If your company receives cash from selling a fixed asset, in which section of the
statement of cash flows would this be recorded?
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10. If your company pays cash to purchase available-for-sale securities, in which section of
the statement of cash flows would this be recorded?

11. If your company pays cash to repurchase some of its debt, in which section of the
statement of cash flows would this be recorded?

12. If your company pays cash to repurchase some of its own stock, in which section of the
statement of cash flows would this be recorded?

13. TRUE or FALSE? You can find a company’s free cash flow by looking at its income
statement.

14. Free cash flow can be used to do all of the following except:
a. Value a company
b. Assess a company’s ability to pay dividends
c. Prepare financial statements that are consistent with GAAP
d. Assess a company’s ability to service debt

15. All the following statements about free cash flow to equity are true except:
a. It is also called levered free cash flow
b. It is the amount of cash flow theoretically available to shareholders
c. It is not affected by increases in interest expense
d. It is calculated by subtracting capital expenditures from operating cash flow
and thus adding or subtracting net borrowings

16. TRUE or FALSE? Free cash flow to the firm isn’t affected by interest expense or net
borrowings.

17. Which of the following metrics would you use to calculate a company’s enterprise
value?
a. Net income
b. Free cash flow to the firm
c. Operating cash flow
d. Free cash flow to equity
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18. The following information pertains to your firm’s financial performance:

Comparative Balance Sheets

Assets 12/31/2018 12/31/2017
Cash 19,200 20,500
Accounts Receivable 22,000 22,000
Inventory 75,000 68,000
Investments 15,000 0
Equipment 93,500 114,500
Accumulated Depreciation -19,000 -32,000
Total Assets 205,700 193,000
Liabilities & Stockholders' Equity
Accounts Payable 14,000 17,000
Wages Payable 1,500 2,500
Income Tax Payable 4,500 3,000
Notes Payable 54,000 54,000
Common Stock 106,000 100,000
Retained Earnings 25,700 16,500
Total Liabilities & Stockholders' Equity 205,700 193,000

Your firm:
• Had a net income of $21,200 for the year ended 12/31/18.
• Purchased a long-term investment for $15,000 cash during 2018
• Issued 500 shares of no-par common stock for $12/share during 2018.
• Sold some its equipment for $6,000 cash during 2018. The equipment that
was sold originally cost $21,000. At the time it was sold, it had a book value
of $5,000.
Required:
Prepare a statement of cash flows for the year ended 12/31/18.
 EDSPIRA 4

19. Use the information below to create a statement of cash flows for the year ended
12/31/18.

• Net Income was $60,000 for the year ended 12/31/18.

• The company sold equipment that had an original cost of $15,000 for $5,000
cash. The equipment had $10,000 of accumulated depreciation associated
with it.
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Solutions
1. What are the 3 sections of the statement of cash flows?
operating, investing, financing

2. TRUE or FALSE? The main purpose of preparing a statement of cash flows is NOT to
figure out the company’s cash balance (because this is found on the balance sheet) but
to show why the company’s cash balance changed from one period to the next.
True

3. Your company’s accounts receivable balance increased $5,000 from last year to this
year. How would this be reflected in a statement of cash flows that is prepared
according to the Indirect Method?
The $5,000 increase in accounts receivable would be subtracted from net
income as an adjustment in arriving at cash flow from operating activities.

4. Your company’s accounts payable balance increased $12,000 from last year to this year.
How would this be reflected in a statement of cash flows that is prepared according to
the Indirect Method?
The $12,000 increase would be added to net income as an adjustment in
arriving at cash flow from operating activities.

5. Your company’s unearned revenue balance increased $67,000 from last year to this
year. How would this be reflected in a statement of cash flows that is prepared
according to the Indirect Method?
The $67,000 increase would be added to net income as an adjustment in
arriving at cash flow from operating activities.

6. TRUE or FALSE? Depreciation expense should be added to net income as an adjustment

in the operating section of the statement of cash flows. This is because depreciation
expense reduced net income, but did not decrease the company’s cash balance.
True

7. TRUE or FALSE? If your company recognizes a loss on the sale of a fixed asset, this
should be added to net income as an adjustment in the operating section of the
statement of cash flows. This is because the loss reduced net income, but did not
decrease the company’s cash balance.
True

8. If your company pays cash to purchase equipment, in which section of the statement of
cash flows would this be recorded?
investing
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9. If your company receives cash from selling a fixed asset, in which section of the
statement of cash flows would this be recorded?
investing

10. If your company pays cash to purchase available-for-sale securities, in which section of
the statement of cash flows would this be recorded?
investing

11. If your company pays cash to repurchase some of its debt, in which section of the
statement of cash flows would this be recorded?
financing

12. If your company pays cash to repurchase some of its own stock, in which section of the
statement of cash flows would this be recorded?
financing

13. TRUE or FALSE? You can find a company’s free cash flow by looking at its income
statement.
False

14. Free cash flow can be used to do all of the following except:
a. Value a company
b. Assess a company’s ability to pay dividends
c. Prepare financial statements that are consistent with GAAP
d. Assess a company’s ability to service debt

15. All the following statements about free cash flow to equity are true except:
a. It is also called levered free cash flow
b. It is the amount of cash flow theoretically available to shareholders
c. It is not affected by increases in interest expense
d. It is calculated by subtracting capital expenditures from operating cash flow
and thus adding or subtracting net borrowings

16. TRUE or FALSE? Free cash flow to the firm isn’t affected by interest expense or net
borrowings.
True

17. Which of the following metrics would you use to calculate a company’s enterprise
value?
a. Net income
b. Free cash flow to the firm
c. Operating cash flow
d. Free cash flow to equity
 EDSPIRA 7

18. The following information pertains to your firm’s financial performance:

Comparative Balance Sheets

Assets 12/31/2018 12/31/2017
Cash 19,200 20,500
Accounts Receivable 22,000 22,000
Inventory 75,000 68,000
Investments 15,000 0
Equipment 93,500 114,500
Accumulated Depreciation -19,000 -32,000
Total Assets 205,700 193,000
Liabilities & Stockholders' Equity
Accounts Payable 14,000 17,000
Wages Payable 1,500 2,500
Income Tax Payable 4,500 3,000
Notes Payable 54,000 54,000
Common Stock 106,000 100,000
Retained Earnings 25,700 16,500
Total Liabilities & Stockholders' Equity 205,700 193,000

Your firm:
• Had a net income of $21,200 for the year ended 12/31/18.
• Purchased a long-term investment for $15,000 cash during 2018
• Issued 500 shares of no-par common stock for $12/share during 2018.
• Sold some its equipment for $6,000 cash during 2018. The equipment that
was sold originally cost $21,000. At the time it was sold, it had a book value
of $5,000.
Required:
Prepare a statement of cash flows for the year ended 12/31/18.
 EDSPIRA 8

Statement of Cash Flows

Cash flow from operating activities:
Net Income 21,200
Adjustments to reconcile NI to CFO
Depreciation Expense 3,000
Increase in Inventory -7,000
Decrease in Accounts Payable -3,000
Decrease in Wages Payable -1,000
Increase in Income Tax Payable 1,500
Gain on sale of equipment -1,000
Net cash provided by operating activities 13,700
Cash flow from investing activities:
Proceeds from sale of equipment 6,000
Purchase of long-term investment -15,000
Net cash used by investing activities -9,000
Cash flow from financing activities:
Proceeds from issuance of common stock 6,000
Payment of cash dividend -12,000
Net cash used by financing activities -6,000
Net decrease in cash -1,300
Cash, January 1, 2018 20,500
Cash, December 31, 2018 19,200

Note:
1. You use the change in retained earnings and the net income to figure out whether a
dividend was issued. 16,500 beginning RE + 21,200 NI – Dividends = 25,700 ending
RE
2. The sale of equipment generated cash proceeds of 6,000 (listed in the investing
section) and a gain of 1,000 (because: 6,000 sale price – 5,000 book value = 1,000
gain). You need to deduct the 1,000 gain in the operating section because it is a gain
on paper (you only care about the cash flow, which you account for in the investing
section).
3. You can figure the depreciation using the change in accumulated depreciation, as
follows: 32,000 – 16,000 + Depreciation = 19,000. The reason you subtract 16,000 is
because you sold equipment that had 16,000 of accumulated depreciation attached
to it. The way you know it had 16,000 of accumulated depreciation attached to it is
because you know the equipment that was sold had an original cost of 21,000 and a
book value (at the time of the sale) of 5,000. 21,000 – 16,000 = 5,000. [book value is
simply the original cost minus accumulated depreciation associated with that
particular asset]
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19. Use the information below to create a statement of cash flows for the year ended
12/31/18.

• Net Income was $60,000 for the year ended 12/31/18.

• The company sold equipment that had an original cost of $15,000 for $5,000
cash. The equipment had $10,000 of accumulated depreciation associated
with it.
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