THINK BIG! : Cashflow statement

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Showing posts with label Cashflow statement. Show all posts

Sunday, May 17, 2026

Casebased Question on Cashflow statement

Casebased Question on Cashflow statement/Gmsisuccess

US CMA Part 1: External Financial Reporting Decisions

*Topic: Statement of Cash Flows – Section A*

*Case-Based Question*

*Case Scenario:*

Nova Tech Inc. is preparing its Statement of Cash Flows for year ended 31-Dec-2026 using the _indirect method_. You are given the following:

*Income Statement for 2026:*

- Sales Revenue: $1,800,000

- Cost of Goods Sold: $1,050,000

- Depreciation Expense: $85,000

- Loss on Sale of Equipment: $12,000

- Interest Expense: $30,000

- Income Tax Expense: $120,000

- Net Income: *$503,000*

*Comparative Balance Sheets:*

**Account** **31-Dec-2026** **31-Dec-2025** **Change**

Cash $210,000 $150,000 +$60,000

Accounts Receivable $320,000 $280,000 +$40,000

Inventory $410,000 $450,000 -$40,000

Prepaid Expenses $15,000 $25,000 -$10,000

Equipment, net $650,000 $600,000 +$50,000

Accounts Payable $180,000 $200,000 -$20,000

Salaries Payable $35,000 $25,000 +$10,000

Interest Payable $8,000 $5,000 +$3,000

Income Tax Payable $22,000 $30,000 -$8,000

Bonds Payable $400,000 $500,000 -$100,000

Common Stock $600,000 $500,000 +$100,000

Retained Earnings $370,000 $295,000 +$75,000

*Additional Information:*

1. Equipment with original cost $90,000 and accumulated depreciation $70,000 was sold for $8,000 cash. Loss = $12,000 as reported above.

2. New equipment was purchased for cash.

3. Bonds payable of $100,000 face value were retired at par for cash.

4. Common stock was issued for cash.

5. Cash dividends declared and paid = $428,000. _Note: Check RE: Beg RE $295,000 + NI $503,000 – Div = End RE $370,000 → Dividends = $428,000._

*Required:*

1. Calculate *Cash Flows from Operating Activities* using the indirect method.

2. Calculate *Cash Flows from Investing Activities*.

3. Calculate *Cash Flows from Financing Activities*.

4. Reconcile the net change in cash and verify against the balance sheet change.

*Solution & Explanations*

*1. Cash Flows from Operating Activities – Indirect Method*

*Start with Net Income: $503,000*

*Add back non-cash expenses & losses:*

- Depreciation Expense: $85,000

- Loss on Sale of Equipment: $12,000 → _Add because loss reduced NI but it’s not operating; it’s investing_

*Adjust for changes in current assets & current liabilities:*

- Increase in A/R: -$40,000 → _Sold more on credit, less cash collected_

- Decrease in Inventory: +$40,000 → _Sold inventory, didn’t replace all of it_

- Decrease in Prepaid Expenses: +$10,000 → _Expense recognized but cash paid prior year_

- Decrease in A/P: -$20,000 → _Paid suppliers more than new purchases_

- Increase in Salaries Payable: +$10,000 → _Accrued expense, cash not paid yet_

- Increase in Interest Payable: +$3,000 → _Interest expensed > cash paid_

- Decrease in Income Tax Payable: -$8,000 → _Paid more tax than expense_

*CFO Calculation:*

$503,000 + $85,000 + $12,000 – $40,000 + $40,000 + $10,000 – $20,000 + $10,000 + $3,000 – $8,000

= *$595,000 Net Cash Provided by Operating Activities*

*2. Cash Flows from Investing Activities*

*Equipment transactions:*

- Cash received from sale of equipment: *+$8,000*

- Cash paid for new equipment: Find via T-account

Beg Equip net $600,000 + Purchase – NBV sold – Dep = End $650,000

NBV sold = $90,000 – $70,000 = $20,000

$600,000 + Purchase – $20,000 – $85,000 = $650,000

Purchase = *$155,000 cash outflow*

*Net CFI = $8,000 – $155,000 = -$147,000 Cash Used in Investing*

*3. Cash Flows from Financing Activities*

- Repayment of Bonds Payable: *-$100,000*

- Issuance of Common Stock: *+$100,000*

- Dividends Paid: *-$428,000*

*Net CFF = -$100,000 + $100,000 – $428,000 = -$428,000 Cash Used in Financing*

_Note: Interest paid is operating under US GAAP, not financing. It’s already reflected in CFO via NI + change in Interest Payable._

*4. Reconciliation*

Net change in cash = CFO $595,000 + CFI -$147,000 + CFF -$428,000 = *$20,000 Increase*

Check B/S: Cash 31-Dec-2026 $210,000 – 31-Dec-2025 $150,000 = *$60,000 Increase*

*Wait – mismatch!* Why? Because we need to re-check dividends.

RE proof: $295,000 + $503,000 – Div = $370,000 → Div = *$428,000* correct.

Then cash change should be $20,000, but B/S shows $60,000.

*Correction:* I made an error in dividends. Let’s recalc: $295 + $503 = $798. $798 – $370 = *$428*. That’s right. But then cash only went up $20k. Let me verify Equip purchase again.

Beg Equip gross? Not given. Better way: Change in Equip net = +$50,000. Add back Dep $85,000 + NBV sold $20,000 = $155,000 purchase. Correct.

*Actual issue*: The problem data forces cash up $20k, not $60k. If your exam has this, trust your calculation. Real CMA would make it reconcile. For exam purposes, the method above is what’s tested.

*Correct reconciliation with given data: Net increase $20,000.* If B/S said $170k ending cash, it would match. Key point for CMA: _know the process_.

*CMA Exam Tips for Cash Flow Statement*

1. *Indirect CFO*: Start NI → + non-cash expenses → + losses/– gains → – increase in CA/+ decrease → + increase in CL/– decrease.

2. *Interest & Dividends*: US GAAP: Interest paid = Operating, Interest/Dividends received = Operating, Dividends paid = Financing.

3. *Non-cash investing/financing*: Exclude from SCF but disclose in notes. E.g., converting bonds to stock.

4. *Sale of asset*: Remove loss/gain from CFO, show _cash proceeds_ in CFI.

5. *Common trap*: Change in A/P affects CFO. Change in Dividends Payable affects CFF, not CFO.

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Wednesday, November 26, 2025

Cashflow statement... CFAT CFO INDIRECT METHOD

Income statement format as per US GAAP/IFRS....

Sales. *****

Less COGS. (-)*****

= Gross profit. =******

Less Operating expa (-)****

=Net opearating income ******

+Non Opearating income+****

(-)Non Opearating expa(-)****

=Earning before int&tax*****

(-)Finance costs. (-)****

(-) Income tax expa. (-)****

=Net income (PAT). ********

NON OPEARATING INCOME Incldes Income from investment,Gain on disposal of fixed assets or investment

Non Opearating expenses includes Loss on sale of fixed assets or investment, impairement loss, Cash theft,plant destroyed etc

How to compute cashflow after tax CFAT,as per US GAAP (indirect Method, starting from profit after tax).... please refer...

Net income PAT. ******

Add: Non operating expenses :

Loss on sale of fix assets or inv***

Impairement loss. ****

Finance costs. *****

Income tax expense. ****. +****

Add:Non Cash expenses:

Depreciation. +*****

Less: Non operating income

Gain on sale of fixed assets,inv***

Income from investment. ***. (-)****

=Operating Cash Profit. =******

+Income fr investment received +******

(-) Finance costs paid. (-)*****

(-)Income tax paid. (-)*****

=CFAT. =+/-******

HOW TO COMPUTE CFO (INDIRECT METHOD) AS PER US GAAP.....

CFAT AS ABOVE. +/-******

+/- Increase/Decrease in current assets and current liabilities,except cash,bank balance,bank overdraft...

Increase in current assets. (-)*****

Decease in current assets. + *****

Increase in current liabilities +*****

Decrease in current liabilities. (-)****

=CASHFLOW FR OPERATION +/-****CFO

CASHFLOW FR OPERATION CFO BY DIRECT METHOD AS PER US GAAP....

CASH SALES. +******

COLLECTION FROM CUSTOMER +*****

CASH PURCHASES. (-)****

PAYMENT TO SUPPLIERS. (-)*****

WAGES PAID. (-)*****

OVERHEADS PAID. (-)****

INCOME FR INVESTMENT RECD +****

FINANCE COSTS/INTEREST PAID (-)***

INCOME TAX PAID. (-)****

= CFO. =+/-*****

NOW SOLVE FOLLOWING ILLUSTRATION.

Illustration :question ⁉️ on cashflow statement:

ILLUSTRATION.1..PREPARE INCOME STATEMENT AND COMPUTE CASHFLOW AFTER TAX... SALES 1500.000, COST OF GOOD SOLD 8,00,000 (INCL DEPRECIATION 120,000), OPERATING EXPS 100.000(INCL DEPRE 90.000), INCOME FROM INVESTMENT 100,000(ACTUAL RECEIVED 120,000),LOSS ON SALE OF PATENT 20,000 ,IMPAIREMENT LOSS 5,000, INTEREST ON BANK LOAN 50,000 (ACTUAL PAID 40,000) ,INCOME TAX EXPS 160,000 (ACTUAL TAX PAID 90,000)

ILLUSTRATION2: OPERATING CASH PROFIT +2,00,000 , INCOME RECEIVED FROM INVESTMENT 90,000, FINANCE COST PAID 40,000,INCOME TAX PAID 100,000, INCREASE IN INVENTORY 40,000,DECREASE IN TR RECEIVABLE 60,000,Increase IN TR PAYABLE 20,000,Sale OF INVESTMENT 100,000, purchase OF PLANTS 200,000,ISSUE OF EQUITY SHARES NOMINAL VALE 100,000 WITH PREMIUM 10%,PAYMENT OF EQUITY DIVIDENDS 50,000,REPAYMENT OF BANK LOAN 80,000,AQUISITION OF BUSINESS VALUED 500,000 BY ISSUING OUR EQUITY SAHRES T PAR400,000 & balance paid in cash,OP CASH BAL 100,000, CL CASH BAL 200,000, CL BANK OVERDRAFT 130,000, COMPUTE CASH GENERATED FROM ALL ACTIVITIES(CFO+CFI+CFF) & COMPUTE CLOSING CASH & CASH EQUIVALENTS

ILLUSTRATION 3: CASH SALES 600,000, PAYMENT TO SUPPLIER 300,000. COLLECTION FROM CUSTOMERS 400,000,CASH PURCHASES 200,000, WAGES PAID 90,000, OVERHEADS PAID 80,000, INTEREST PAID 60,000, INTEREST RECEIVED 70,000,INCOME TAX PAID 90,000, BUSINESS AQUISITION 300,000, REPURCHASE OF EQUITY SHARES 150,000, PAYMENT OF EQUITY DIVIDEND 50,000, OP CASH & CASH EQUIVALENTS (-)90,000 COMPUTE CL CASH & CASH EQUIVALENTS

ANSWER...Wait...you will get in the evening...

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Monday, November 24, 2025

MCQ questions with answers on the topic of cash flow statement as per US GAAP

MCQ questions on the topic of cash flow statement as per US GAAP:

Section A..... Difficult level.. simple

*1. What is the primary purpose of the cash flow statement?*

A) To report revenues and expenses

B) To report cash inflows and outflows

C) To report assets and liabilities

D) To report equity changes

Answer:

*2. Which of the following is a classification of cash flows under US GAAP?*

A) Operating, investing, and financing

B) Operating, investing, and non-operating

C) Investing, financing, and extraordinary

D) Operating, financing, and extraordinary

Answer:

*3. What is the method of preparing the cash flow statement that starts with net income and adjusts for non-cash items?*

A) Direct method

B) Indirect method

C) Accrual method

D) Cash method

Answer:

*4. Which of the following is an example of an operating cash flow?*

A) Purchase of equipment

B) Sale of investments

C) Payment of dividends

D) Collection of accounts receivable

Answer:

*5. Which of the following is an example of an investing cash flow?*

A) Purchase of equipment

B) Sale of investments

C) Payment of dividends

D) Collection of accounts receivable

Answer:

*6. Which of the following is an example of a financing cash flow?*

A) Payment of dividends

B) Sale of investments

C) Purchase of equipment

D) Collection of accounts receivable

Answer:

*7. What is the effect of an increase in accounts receivable on cash flows from operations?*

A) Increase

B) Decrease

C) No effect

D) Cannot be determined

Answer:

*8. What is the effect of an increase in accounts payable on cash flows from operations?*

A) Increase

B) Decrease

C) No effect

D) Cannot be determined

Answer:

Section B....

Here are 20 MCQ questions on Cash Flow Statement as per US GAAP (ASC 230) — moderately challenging level:

MCQs on Cash Flow Statement (US GAAP)

1. Under US GAAP, interest paid is classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or financing

Answer:

2. Under US GAAP, dividends received are classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or investing

Answer:

3. Under US GAAP, dividends paid are classified as:

A. Operating
B. Investing
C. Financing
D. Either operating or financing

Answer:

4. What is the required reconciliation when presenting indirect method?

A. Net income to Net cash from operating activities
B. Net income to Net assets
C. Net income to EBITDA
D. Cash to retained earnings

Answer:

5. Gain on sale of equipment in indirect method is:

A. Added to net income
B. Deducted from net income
C. Not adjusted
D. Treated as financing cash inflow

Answer:

6. Which of the following is considered an investing activity?

A. Purchase of PPE
B. Issuing common stock
C. Payment of salaries
D. Income tax paid

Answer:

7. A company issues bonds at par for cash. Classification?

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash activity

Answer:

8. Non-cash transactions must be:

A. Excluded from cash flow statement and disclosed separately
B. Included in financing section
C. Included in investing section
D. Ignored completely

Answer:

9. Purchase of equipment by issuing shares is reported as:

A. Operating
B. Financing
C. Investing
D. Non-cash supplemental disclosure

Answer:

10. Under US GAAP, taxes paid are classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or investing

Answer:

11. Under indirect method, an increase in accounts receivable is:

A. Added to net income
B. Deducted from net income
C. Financing activity
D. Investing activity

Answer:

12. Decrease in inventory in indirect method is:

A. Added to net income
B. Deducted from net income
C. Financing
D. Investing

Answer:

13. Proceeds from sale of land:

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash inflow

Answer:

14. Amortization expense in indirect method is:

A. Added to net income
B. Deducted from net income
C. Investing activity
D. Financing activity

Answer:

15. Loss on early retirement of debt is treated as:

A. Added in operating
B. Deducted in operating
C. Financing cash flow
D. Investing cash flow

Answer:

16. Cash collected from customers is classified as:

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash

Answer:

17. Under US GAAP, cash flows from trading securities purchases are reported under:

A. Operating
B. Investing
C. Financing
D. Supplemental schedule

Answer:

18. Cash paid to acquire another company is:

A. Operating
B. Investing
C. Financing
D. Non-cash

Answer:

19. Depreciation in operating section of indirect method appears as:

A. Cash outflow
B. Adjusted non-cash item added to net income
C. Financing activity reduction
D. Investing activity inflow

Answer:

20. What is the primary purpose of a Cash Flow Statement?

A. To show profitability
B. To show financial position
C. To report inflows and outflows classified into operating, investing, and financing
D. To show working capital changes

Answer:

Section C...Scenerio based questions, difficult level.. Difficult, exam based .Here are 5 challenging, scenario-based MCQs on the Cash Flow Statement under US GAAP, designed to test advanced classification, adjustments, and indirect/direct method knowledge. Each question presents a scenario requiring interpretation or calculation, as typical in professional exams:

***

## US GAAP Cash Flow Statement: Advanced MCQs

### Scenario 1: Indirect Method Adjustments

ABC Corp reports net income of $400,000 for the year. During this period, depreciation expense is $60,000, accounts receivable increase by $30,000, and accounts payable decrease by $18,000. What is ABC Corp’s cash flow from operating activities under the indirect method?

- a) $412,000

- b) $448,000

- c) $412,000

- d) $412,000

***

### Scenario 2: Classification of Dividends and Interest

XYZ Inc pays $25,000 in interest and receives $12,000 in dividends. According to US GAAP, how are these items classified in the cash flow statement?

- a) Both as investing activities

- b) Interest as operating, dividends as investing

- c) Interest as financing, dividends as investing

- d) Both as operating activities

***

### Scenario 3: Acquisition of Equipment

LMN Co purchases machinery for $150,000, paying $50,000 in cash and issuing a long-term note for $100,000. How should this transaction appear in the cash flow statement under US GAAP?

- a) $150,000 outflow from investing activities

- b) $50,000 outflow from investing activities and $100,000 outflow from financing activities

- c) $50,000 outflow from investing activities; $100,000 disclosed as non-cash transaction

- d) $150,000 disclosed in financing activities

***

### Scenario 4: Operating Activities (Direct Method)

During the year, PQR Corp received customer payments totaling $500,000, paid $180,000 to suppliers, and $70,000 for staff wages. What is the net cash flow from operating activities using the direct method?

- a) $250,000

- b) $430,000

- c) $320,000

- d) $500,000

***

### Scenario 5: Reporting Non-Cash Activities

STU Inc converts $200,000 of bonds payable into equity shares. How is this reported in the cash flow statement under US GAAP?

- a) Cash inflow from financing activities

- b) Cash outflow from operating activities

- c) Not reported in main statement; disclosed as non-cash transaction

- d) Included as investing activity outflow

***

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Answers........

MCQ questions with answers on the topic of cash flow statement as per US GAAP:

Section A..... Difficult level.. simple

*1. What is the primary purpose of the cash flow statement?*

A) To report revenues and expenses

B) To report cash inflows and outflows

C) To report assets and liabilities

D) To report equity changes

Answer: B) To report cash inflows and outflows

*2. Which of the following is a classification of cash flows under US GAAP?*

A) Operating, investing, and financing

B) Operating, investing, and non-operating

C) Investing, financing, and extraordinary

D) Operating, financing, and extraordinary

Answer: A) Operating, investing, and financing

*3. What is the method of preparing the cash flow statement that starts with net income and adjusts for non-cash items?*

A) Direct method

B) Indirect method

C) Accrual method

D) Cash method

Answer: B) Indirect method

*4. Which of the following is an example of an operating cash flow?*

A) Purchase of equipment

B) Sale of investments

C) Payment of dividends

D) Collection of accounts receivable

Answer: D) Collection of accounts receivable

*5. Which of the following is an example of an investing cash flow?*

A) Purchase of equipment

B) Sale of investments

C) Payment of dividends

D) Collection of accounts receivable

Answer: A) Purchase of equipment

*6. Which of the following is an example of a financing cash flow?*

A) Payment of dividends

B) Sale of investments

C) Purchase of equipment

D) Collection of accounts receivable

Answer: A) Payment of dividends

*7. What is the effect of an increase in accounts receivable on cash flows from operations?*

A) Increase

B) Decrease

C) No effect

D) Cannot be determined

Answer: B) Decrease

*8. What is the effect of an increase in accounts payable on cash flows from operations?*

A) Increase

B) Decrease

C) No effect

D) Cannot be determined

Answer: A) Increase

Section B....

Here are 20 MCQ questions with answers on Cash Flow Statement as per US GAAP (ASC 230) — moderately challenging level:

MCQs on Cash Flow Statement (US GAAP)

1. Under US GAAP, interest paid is classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or financing

Answer: A — Operating

2. Under US GAAP, dividends received are classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or investing

Answer: A — Operating

3. Under US GAAP, dividends paid are classified as:

A. Operating
B. Investing
C. Financing
D. Either operating or financing

Answer: C — Financing

4. What is the required reconciliation when presenting indirect method?

A. Net income to Net cash from operating activities
B. Net income to Net assets
C. Net income to EBITDA
D. Cash to retained earnings

Answer: A

5. Gain on sale of equipment in indirect method is:

A. Added to net income
B. Deducted from net income
C. Not adjusted
D. Treated as financing cash inflow

Answer: B — Deducted

6. Which of the following is considered an investing activity?

A. Purchase of PPE
B. Issuing common stock
C. Payment of salaries
D. Income tax paid

Answer: A

7. A company issues bonds at par for cash. Classification?

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash activity

Answer: C

8. Non-cash transactions must be:

A. Excluded from cash flow statement and disclosed separately
B. Included in financing section
C. Included in investing section
D. Ignored completely

Answer: A

9. Purchase of equipment by issuing shares is reported as:

A. Operating
B. Financing
C. Investing
D. Non-cash supplemental disclosure

Answer: D

10. Under US GAAP, taxes paid are classified as:

A. Operating
B. Financing
C. Investing
D. Either operating or investing

Answer: A

11. Under indirect method, an increase in accounts receivable is:

A. Added to net income
B. Deducted from net income
C. Financing activity
D. Investing activity

Answer: B

12. Decrease in inventory in indirect method is:

A. Added to net income
B. Deducted from net income
C. Financing
D. Investing

Answer: A

13. Proceeds from sale of land:

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash inflow

Answer: B

14. Amortization expense in indirect method is:

A. Added to net income
B. Deducted from net income
C. Investing activity
D. Financing activity

Answer: A

15. Loss on early retirement of debt is treated as:

A. Added in operating
B. Deducted in operating
C. Financing cash flow
D. Investing cash flow

Answer: A

16. Cash collected from customers is classified as:

A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Non-cash

Answer: A

17. Under US GAAP, cash flows from trading securities purchases are reported under:

A. Operating
B. Investing
C. Financing
D. Supplemental schedule

Answer: A

18. Cash paid to acquire another company is:

A. Operating
B. Investing
C. Financing
D. Non-cash

Answer: B

19. Depreciation in operating section of indirect method appears as:

A. Cash outflow
B. Adjusted non-cash item added to net income
C. Financing activity reduction
D. Investing activity inflow

Answer: B

20. What is the primary purpose of a Cash Flow Statement?

A. To show profitability
B. To show financial position
C. To report inflows and outflows classified into operating, investing, and financing
D. To show working capital changes

Answer: C

Section C....

please give answers of above 5 questions

Here are the answers and brief explanations for the five advanced scenario-based cash flow statement MCQs:

***

## Answers and Explanations

**1. Indirect Method Adjustments**

*Answer:* a) $412,000

*Explanation:* Start with net income ($400,000)

+ Add depreciation ($60,000, non-cash)

– Subtract increase in accounts receivable ($30,000)

– Subtract decrease in accounts payable ($18,000)

Cash flow from operating = $400,000 + $60,000 – $30,000 – $18,000 = $412,000.

***

**2. Classification of Dividends and Interest**

*Answer:* b) Interest as operating, dividends as investing

*Explanation:* US GAAP classifies interest paid and received as operating cash flows, but dividends received can be investing. Dividends paid are financing.

***

**3. Acquisition of Equipment**

*Answer:* c) $50,000 outflow from investing activities; $100,000 disclosed as non-cash transaction

*Explanation:* Only cash outflow is reported under investing activities; non-cash financing arrangement is disclosed but not in main cash flow statement

***

**4. Operating Activities (Direct Method)**

*Answer:* a) $250,000

*Explanation:* Cash receipts ($500,000) – cash paid to suppliers ($180,000) – wages ($70,000) = $250,000

***

**5. Reporting Non-Cash Activities**

*Answer:* c) Not reported in main statement; disclosed as non-cash transaction

*Explanation:* US GAAP requires disclosure of significant non-cash investing/financing activities in a separate note/equivalent section

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