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Which of the following is NOT a cash flow from operation?

A) dividends paid to shareholders.

B) interest payments.

C) dividends received.

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Dividends paid are a financing cash flow. Dividends received and interest paid are both operating cash flows.

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Holden Company’s fixed asset footnote included the following:

• During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an original cost of $500,000 and its accumulated depreciation was $240,000.
• At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden paid $400,000 cash. The balance was financed by the seller at 8% interest.
• Depreciation expense was $2,080,000 for the year ended 20X7.

Calculate Holden’s cash flow from investing activities for the year ended 20X7.

A) $360,000 inflow.

B) $40,000 outflow.

C) $300,000 outflow.

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Given the gain of $100,000 and book value of the machinery sold of $260,000 ($500,000 original cost – $240,000 accumulated depreciation), the proceeds from the sale of the machinery were $360,000 ($100,000 gain + $260,000 book value). For 20X7, CFI was an outflow of $40,000 ($360,000 sale proceeds – $400,000 machinery purchase). The $600,000 financed by the seller is a non-cash transaction and is reported in the notes to the cash flow statement.

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Which of the following would NOT be a component of cash flow from investing?

A) Dividends paid.

B) Purchase of equipment.

C) Sale of land.

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Dividends paid is not a component of cash flow from investing, it is a component of cash flow from financing. The other items are all components of cash flow from investing.

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What are the main components of cash flow from operations?

A) Changes in accounts receivable, inventory, accounts payable, and items that flow through the income statement.

B) Capitalization activities, sale of assets, and purchasing securities.

C) Repayment of bonds, issuance of common stock, and stock splits.

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The main components of cash flow from operations are changes in working capital items (accounts receivable, inventory, accounts payable), and items that flow through the income statement. Capitalization activities, sale of assets and purchases of securities would all be part of cash flows from investing. Repayment of bonds and issuance of common stock would also be part of cash flows from financing. The stock split would be a non-cash activity.

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Which of the following should be classified as cash flows from investing (CFI) by Elegant, Inc., which reports under U.S. GAAP?

A) Elegant's payment to purchase equipment to be used in its business.

B) Interest received by Elegant, Inc. on a bond Elegant, Inc. purchased from an outside investor.

C) Dividends received by Elegant, Inc. from an investment in another firm.

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Purchases of equipment are considered to be cash flows from investing. Interest paid or received and dividends received are considered to be cash flows from operations under U.S. GAAP.

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Which of the following items is NOT found in the financing cash flow part of the statement of cash flows?

A) Change in long-term debt.

B) Change in retained earnings.

C) Dividends paid.

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Changes in retained earnings are not included in the calculation of financing cash flows.

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Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below:

• Cash from sale of truck of $7,000.
• Cash salaries paid of $17,000.
• Cash from customers of $45,000.
• Depreciation expense of $5,500.
• Interest on bank line of credit of $1,000.
• Cash paid to suppliers of $22,000.
• Other cash expenses, including rent, of $6,300.
• No taxes due.

Using this information, what is the cash flow from operations for the month?

A) $11,200.

B) -$1,300.

C) -$300.

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The format of the question information suggests the use of the direct cash flow method. In this method, depreciation is not a component of cash flow from operations. Cash flow from operations = (all numbers in thousands of dollars) 45 – 17 – 22 – 6.3 – 1.0 = -1.3, or -$1,300.

ikoreaii

An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise	$5,000
Cash received from customers	14,000
Cash paid for purchase of equipment	22,000
Dividends paid	2,000
Cash received from issuance of preferred stock	10,000
Interest received on short-term investments	1,000
Wages paid	4,000
Repayment of loan to the bank	5,000
Cash from sale of land	12,000

Under U.S. GAAP, Xavier’s reported cash flow from operations will be:

A) -$5,000.

B) $5,000.

C) $6,000.

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Cash flow relating to operating activities includes cash paid to suppliers, cash received from customers, interest received, and wages paid. –5,000 + 14,000 + 1,000 + –4,000 = 6,000.

ikoreaii

An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise	$5,000
Cash received from customers	14,000
Cash paid for purchase of equipment	22,000
Dividends paid	2,000
Cash received from issuance of preferred stock	10,000
Interest received on short-term investments	1,000
Wages paid	4,000
Repayment of loan to the bank	5,000
Cash from sale of land	12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF

CFI

A) $3,000 -$10,000

B) $10,000 $12,000

C) $3,000 $12,000

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Cash flow relating to financing activities includes dividends paid, cash received from preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000.
Cash flow relating to investing activities includes cash paid for equipment and cash from sale of land. -22,000 + 12,000 = -10,000.

ikoreaii

An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise	$5,000
Cash received from customers	14,000
Cash paid for purchase of equipment	22,000
Dividends paid	2,000
Cash received from issuance of preferred stock	10,000
Interest received on short-term investments	1,000
Wages paid	4,000
Repayment of loan to the bank	5,000
Cash from sale of land	12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF

CFI

A) $3,000 -$10,000

B) $10,000 $12,000

C) $3,000 $12,000

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Cash flow relating to financing activities includes dividends paid, cash received from preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000.
Cash flow relating to investing activities includes cash paid for equipment and cash from sale of land. -22,000 + 12,000 = -10,000.