 In this presentation, we will take a look at multiple choice questions related to the Statement of Cash Flows. First question. A decrease in inventory should be reported on the Statement of Cash Flows as 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. So let's go through this again. A decrease in inventory should be reported on the Statement of Cash Flows as Now, when we think about this, you can imagine us building our statement of cash flows and we have our worksheet that we're working with and we're basically taking the difference between all the balance sheet accounts from one period to another and constructing our worksheet, usually using an indirect method on meaning we're going to reconcile from net income to the cash flows from operations in the operating section. So this is dealing with inventory, the difference in inventory from one period to another. Inventory went down, inventory decreased and we're trying to figure out, okay, what is that going to do on our indirect method, typically in a cash flow statement. Now because it's a current asset and typically current asset liabilities are in the operating section, then we can think, okay, we're in the operating section and we're trying to think about this inventory. Now just by knowing that, by knowing that we're working in the operating section, you can kind of know that by looking at the journal entry related to inventory, which when we sell inventory is to debit cost of goods sold and credit inventory. So there's cost of goods sold as an income statement account and therefore you would think that whatever happens here, whether it be an increase or decrease, would be in the operating activities. So if we go through these, we could probably eliminate non-operating activities. So A says an increase in the operating activities that looks right. B says an increase in the investing activities. It doesn't look like it's investing because it's probably operating activities. C says a decrease in cash flows from operating activities. So we'll keep that for now. And D says a decrease from investing activities and E's dealing with financing activities. So it looks like it's between A and C. And now the only question is which way do we go? Is there an increase in cash flows or is there a decrease in cash flows? Now this one, I would actually think about if we don't really just memorize the rule, if we don't have the rule memorized, then I would try to analyze the most common type of change in a current asset type of account, which is accounts receivable, and then apply the same rule. So if I can't remember the rule and I'm trying to kind of remember what happens with an increase or decrease, I think about accounts receivable and then apply the same thing to inventory or any other kind of current asset and then the reverse to liabilities. If you try to reconstruct things, too many things, then you're going to spend too much time on the test. That's why I recommend just thinking, okay, accounts receivable. If I think about accounts receivable, what really happens, if there's a decrease in accounts receivable, what's the journal entry related to a decrease in accounts receivable? That would be accounts receivable is going to be credited $100, let's say, and we're going to debit the cash. That's when accounts receivable goes down. So what is that going to do to our cash flow statement? Remember what we have is net income on the cash flow statement, which is on a cruel basis. And if the accounts receivable went down, that means this journal entry happened more than the increase journal entry, which is a debit to accounts receivable and a credit to sales. So in this case, what's happening here is the accounts receivable, we're getting cash and we're not recording revenue. So that means net income here doesn't include the revenue related to this cash we received. Why? Because we recorded the cash in the prior period, but we need to under the cash method record the net income or the cash in the net income for this period if we're under a cash basis because we got the cash. So that means if we'd have to increase the net income if this asset account, the accounts receivable decreased because if accounts receivable decreased, that means we got cash. So that would have to increase net income. So then I would just apply that same rule that it's going to be an increase. If something goes down, if an asset goes down, that it's going to increase the net income. So here it is here, an increase in cash flows from operating activities. So there it is. And you might just want to memorize the rule, which is basically that if an asset goes down, we're going to increase the cash flow statement. And it's the opposite for liabilities. So if liabilities go down, we're going to decrease the cash flow statement. But it's useful to be able to think through it with at least one example. And I would use the example of accounts receivable and then apply the reverse rule to any liabilities or use accounts payable as your example for any type of liability account and then apply that same principle to all of their liabilities. If you go and think through accounts inventory, you'll get to the same result. However, because of the difference between costs you could sold and accounts payable, it's a little bit more confusing to get there. And you'd rather just get the rule and understand the rule through accounts receivable and then apply it elsewhere. Next question. Which is not included in cash flows from investing activities? A. Cash paid to purchase equipment B. Cash paid for dividends C. Cash paid for intangible assets D. Cash paid for securities E. Cash received from the sale of equipment Let's go through this again using the process of elimination. Which is not included in cash flows from investing activities? A. Cash paid to purchase equipment So for these, I would go through each one of these and basically go through our thought process, which would be to think of a journal entry and then think of an income statement account if it's related and then think if it should be investing. So here we go. Cash paid for the purchase of equipment Journal entry Debit equipment Credit cash So if we debit equipment and credit cash or either of those income statement accounts, no, no income or expenses, therefore not operating activities. Did we buy anything that was of substantial value? We did. We purchased equipment and therefore it's an investment. So it's an investing activity. B. Cash paid for dividends Journal entry Credit cash Debit retained earnings or dividends retained earnings, some kind of equity account. Are either of those going to be income statement accounts? No. No revenue. No expenses. Did we purchase anything of substantial value? No. We didn't purchase anything. We paid the owners. We gave money to the owners to the stockholders with a dividend. Or it's not operating and not investing must be financing because we're basically paying back the owner for the investments that they've put into the company. And then C. Cash paid so that looks like good. C says cash paid for intangible assets. Journal entry Credit cash debit intangible asset Are either of those accounts income statement revenue or expense? No. Therefore not operating activity. Did we buy something of value that we're going to use in the future investing in it? Yes. We did. We bought intangible. So that looks like an investing activity. D says cash paid for securities and again securities like our stocks or bonds we would think so that looks sounds like an investment. So we bought an investment. So you would think that would be an investing activity. And then E says cash received from the sale of equipment. And that one journal entry would be debit cash credit equipment debit accumulated depreciation and then possibly have a debit or credit to gain or loss depending on if there's a gain or loss. And is there an income statement account there? Yeah. There's a gain or loss. So you might think maybe that should be operating activities. So between E and B are the last two here. Let's go through this again which is not included in cash flows from investing activities between B and E. I would think that B is more secure. We're going to say that sounds pretty much like financing. And I would think that C or E would basically be investing because we're dealing with equipment which we invested in. We sold the equipment which we invested in. Now it does have an income statement account in the journal entry but that's really not a cash flow component. The cash flow component is us selling the equipment the cash that we got for the sale of equipment. The gain or loss is kind of over and above the cash we got. So in any case it's going to be the cash we got is for the sale of equipment and will be in the investing activities. Next question. The statement of cash flows does not report A. Cash flows from operating activities. B. Cash flows from financing activities C. Cash flows from investing activities D. Non-cash financing and investing activities and E. Net income on an accrual basis. Let's go through this again using the process of elimination. The statement of cash flows does not report A. Cash flows from operating activities. That's one of the major sections so I would think that it reports that B. Cash flows from financing activities. That's one of the major sections so I don't like that. C says cash flows from investing activities. Once again those are kind of like the main three sections. D says non-cash financing and investing activities. That one we might go hmm why wouldn't report non-cash stuff. Maybe not that I'll keep that for now. And then E says not net income on an accrual basis. I mean we might think well it's kind of net income like on a cash basis kind of not an accrual basis so unless with D and E. Let's go through this again. The statement of cash flows does not report either D. Non-cash financing financing and investing activities or E. Net income on an accrual basis. Now of the two it's actually I would think that E doesn't sound right because that's what the income statement does. The income statement has net income on an accrual basis. The statement of cash flows might because on the indirect method we kind of we start with net income on an accrual basis but are really what we're trying to get to is not net income on an accrual basis we're trying to get to income on a cash basis or receipts from operations cash flows from operations. So we could get technical and say well net income is on the statement of cash flows but that's not really the goal so I don't think I don't think ease what they're looking for. D doesn't sound right really but I think E is the right answer because or D is the right answer because D says non-cash financing and investing activities and those are going to be items that we're going to report either at the bottom of the cash flow statement or in the notes to the cash flow statement. Why would we report things that are non-cash on the cash flow statement or at least on notes related to the cash flow statement because these are things that are kind of like things that they just basically kind of bypass the cash. I mean if we if we for example bought equipment but we got to took a loan out and we financed the entire piece of equipment we would debit equipment for $100 and we would credit a loan payable and so what does that have anything to do with cash? Why do we need to have a note or any kind of thing dealing with cash related to that? Because what really happened is you can think of this as two different journal entries you can think of it as well we kind of just combine two transactions here which would be that we get cash of a hundred man that's that of a hundred in order to and we took out a loan of a hundred and then we turned around and took that hundred dollars and bought equipment for a hundred and we paid cash. So you can think of it as basically there is kind of you can think of it as if there were cash would be reported into journal entries and we just kind of cut out the middle person and didn't report the cash and therefore you know it's kind of like a finance this would be a financing activity and this would be an investing activity so it's kind of like we took a financing activity investing activity and netted it together and didn't have the cash flow but if we really think about it we kind of have two two things happening there that's why it's it's something that's not cash related but we still put a footnote in related to the cash flow statement for it.