 In this presentation, we will take a look at multiple choice questions related to the statement of cash flows. First question, which is included in the cash flows from financing activities? Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. A. Interest revenue B. Sale of equipment C. Interest expense D. Payment of principal portion of a note payable E. Purchase of stock in another company Let's go through this again using the process of elimination, which is included in the cash flows from financing activities. A. Interest revenue If we think of the journal entry between interest for interest revenue, we would debit cash and we would credit revenue. Now are either of those going to be income statement accounts? Yeah, the revenue is and therefore it's an operating activity typically we would think it would be in the operating activities. Little confusing because of course interest revenue would indicate that we had a you know we loaned money so we might think it be somewhat like an investment or financing but the interest portion then it's going to be part of our operations and therefore operating activity typically. B says sale of equipment journal entry is going to be that we were going to have a sale of equipment so we're going to debit cash, we're going to credit equipment, debit accumulated depreciation and then have a debit or credit to the gain or loss. So is there something that has to do with the income statement there? Possibly the gain or loss but then we're also dealing with the equipment. We sold equipment so you would think that would be investing activities. So in any case you may think operating or investing it's actually going to be investing but it's not going to be financing you would think. So we're dealing with the sale of an asset here so we invested in the asset we sold the asset therefore investing activity not financing and then C says interest expense journal entry there would be to credit cash and debit interest expense are either of those going to be income statement accounts yeah interest expense is an income statement account and therefore it's probably part of our operating activities and not financing and then D says payment for principal portion of note payable journal entry is going to be credit cash and debit note payable are either of those going to be income statement accounts no because there's not revenue or expenses are either of those going to be dealing with equipment that we purchased or sold or some type of large asset that we purchased or sold no we didn't buy equipment we didn't buy investments we're not selling equipment or investments we're paying back alone so you would think then that that's not operating not investing but financing so in this case this looks like the one D and then E says purchase of stock in another company so if we purchase stock in another company in the debit that journal would typically be we're going to debit investment stock in you know stocks upon these aren't stocks that we're issuing that would be different and that might be financing but in this case we're buying stocks as like as we would just like a normal investor debit an asset and crediting the cash and that sounds like an investing activity a normal type of investment so D looks like the one final answer which is included in cash flows from financing activities D payment of principal portion of a note payable next question the indirect method a separately lists each item of operating cash receipts and cash payments B reconciles net income to net cash provided by operating activities C reports a different amount of cash flows from operations than if the indirect method is used D results in a differently formatted investing activities section and E is not often used who all right let's go through that again the indirect method a separately lists which item of operating cash receipts and cash payments so the indirect method now the indirect method we can compare and contrast when you hear indirect method you want to compare and contrast it to the direct method and this first one we might think what it's separately it's it lists each item of operating cash receipts you know it does list a lot of items either method lists items so maybe we don't really I'm gonna keep that for now B says reconciles net income to net cash provided by operating activities and again we may not totally know what the answer is but we know that the end result is should be cash provided by operating activities so I'm gonna keep that for now C says reports a different amount of cash flows from operations than if the indirect method is used and that's one that that's not going to be true because the two methods should report the same bottom line number just different method to get to the bottom line number so C I don't think is right because we should get to the same results just using different methods D says results in a differently reported investing activities section now when we think of these two methods we want to remember that they only deal with the operating section so that the investing and financing activities will remain the same whether using an indirect or direct method therefore it's not D and E says is not often used and that's not true the the indirect method is probably used more than the than the direct method which is recommended as well so I would think that of the two the indirect method would be used more because it's often required to be used more often so I don't think it's E so it's between a and B the indirect method a separately lists each item of operating cash receipts and cash payments or B reconciles net income to net cash provided by operating activities now of the two be actually sounds exactly like what it does I mean we start with net income and we end with operating you know cash provided by operating activities so B sounds like you know the correct answer here a separately lists each item of operating cash receipts and cash payments that's not really what it does it does list items but it but it lists you know the change in items whereas the direct method lists each item kind of like we had if we had sales on a cash basis and then cost gets sold on a cash basis or in other words cash receipts from customers and cash paid for inventory so a sounds kind of like more like the direct method e sounds more like the indirect method final answer B the indirect method B reconciles net income to net cash provided by operating activities next question when using the indirect method which is subtracted from net income a decrease in income wages payable b decrease depreciation expense c amortization of intangible assets d utilities expense e decrease in inventory here we go again when using the indirect method which is subtracted from net income so we're trying to think of the things that are going to make net income go down when we think about this process we typically you know think about our worksheet and we're usually looking at differences in our worksheet to see what will decrease you know taking those differences and increasing or decreasing net income kind of backing into the cash flows from operations so if we think about each of these we're going to say if there's a decrease in income wages payable now i would i would go through this thought process and think of if we haven't memorized if you can just memorize the rule it's basically if you know if there's a change in assets current assets if the current assets go up we're going to bring down the cash flows if current if there's a current asset that goes down we're going to bring up the cash flows and it's the opposite for liabilities if if liabilities change and liabilities go up then we're going to increase the cash flows and the opposite if it goes down now if you can't remember that i would try to work out just one account which is accounts receivable and then apply the rule to everything else meaning if we look at the change from accounts receivable from the prior period to the current period and the change increased what would that mean that would mean that accounts receivable got debited the journal entry accounts receivable debit and we would credit sales or revenue that would be the journal entry now revenue in this case would be increasing so the question is what are we going to do to net income well if revenue is going up but no cash was received that would be mean that revenue is too high and therefore if if that went up we'd have to decrease if accounts receivable went up with that's why we would have to decrease net income we would be bringing the income account down so that applies to any kind of uh of asset account current asset account and then of course the offset is true if accounts receivable goes down or any kind of current asset account then net income is going to increase now the opposite is going to be true for any liability any current liability so if a liability goes down we're going to increase net income if a liability uh i'm sorry if a liability goes up we're going to increase net income if a liability goes down we're going to decrease net income so if we go through these then we're going to say decrease in in income wages payable, that's a liability. If the liability change goes down, it's gonna be the opposite of what happens here. Net income is gonna go down. So it looks like A is actually the one. V says depreciation expense. Now this is a little bit tricky because you can think of the depreciation expense as the difference in accumulated depreciation. But we also can think of depreciation expense as it's in net income, it's in net income. But there was no cash involved. And what did it do to net income? It decreased net income. And therefore we're gonna have to increase net income to get to a cash basis. So depreciation expense doesn't have anything to do with cash, it brought net income down. So we're gonna have to increase it to make net income on a cash basis. Therefore this would be an increase and not a decrease. C says amortization of intangible asset. Pretty much the same argument for depreciation except this is an intangible. So we would be increasing the net income, not decreasing it. Utilities expense. Utilities isn't something that we're gonna have directly on the indirect method. That would be on the direct method we would be dealing with trying to convert an expense line by line. So it's not really, this isn't really something that we would have on the indirect method. So decrease in inventory. If there's a decrease in inventory, that's gonna be something that's gonna be an asset. So it's gonna be similar to accounts receivable. So if an asset like accounts, similar to accounts receivable inventory went down, we would be increasing net income, not decreasing it. So that wouldn't be it. So we're left with A here. So final answer, when using the indirect method which is subtracted from net income, A decrease in income wages payable. Next question. The first line item in the operating activities section using the indirect method is A, cash and cash equivalent. B, cash received from customers. C, cash provided by operating activities. D, net income. E, gross profit. Let's go through this again using the process of elimination. The first line item in the operating activities section using the indirect method is A, cash and cash equivalents. Now the cash is gonna be at the very bottom of the whole statement of cash flows. That's what we're gonna, that's what we wanna get to at the end. So it's not what we're, what we're typically gonna start with. So it's not A. And you might think that we would start with beginning cash, but really we do the whole thing to calculate the change and then use the beginning cash to get to the ending cash. And then B says cash received from customers. Now you might think that that would be the case. I'll keep that for now. C says cash provided by operating activities. And that's like the whole section that we start off with, but this is within the operating activities. So that doesn't look right. D says net income. And that sounds like it could be it. And E says, I'll keep that for now. E says gross profit. And gross profit is sales minus cost of goods sold. That's a subtotal in the income statement. Probably that's not the same as net income. So it's not that one. So we're left with B and D. We go through this again. The first line item in the operating activities section using the indirect method is either B, cash received from customers, or D, net income. And of these two, the first one cash received from customers is what we would use in the direct method because we would be converting revenue to cash received from customers. The indirect, so it's not that because we're using the indirect method, which would start with net income. The more common method that we would see would mean that we're gonna start with net income and then reverse everything out. So we're gonna start with the net income and then reverse out what we need to get to flows, cash flows from operating activities. So final answer, the first line item in the operating activities section using the indirect method is D, net income.