FAC Cash Flow Management 2

Question 1

Which method of preparing the cash flow statement starts with net income and adjusts for non-cash items?

Accepted Answer

Indirect method

Answer

The indirect method begins with net income and adjusts for non-cash items like depreciation and changes in working capital.

Question 2

A company collects $50,000 from customers but recorded $60,000 in sales. Which statement best explains the $10,000 difference?

Accepted Answer

Accounts receivable increased by $10,000

Answer

When collections are less than sales, accounts receivable increases by the difference.

Question 3

Under US GAAP, where is interest paid classified on the cash flow statement?

Accepted Answer

Operating activities

Answer

Under US GAAP, interest paid is classified as an operating activity, unlike IFRS which allows financing classification.

Question 4

A firm has net income of $100,000, depreciation of $20,000, and an increase in inventory of $15,000. What is operating cash flow?

Accepted Answer

$105,000

Answer

Operating cash flow = $100,000 + $20,000 (add back depreciation) – $15,000 (inventory increase uses cash) = $105,000.

Question 5

What does a negative cash flow from investing activities most commonly indicate?

Accepted Answer

The company is investing in long-term assets

Answer

Negative investing cash flow typically signals capital expenditures or acquisitions, which represent investment in growth.

(FAC) Finance and Accounting Certification Practice Test