Question

Highlight your answers.

1. The indirect method is used to develop Which section of the cash flow statement?

a.

Operating

b.

Investing

c.

Financing

d.

All of them.

2. How is "depreciation expense" treated in developing cash flow statement using the indirect method?

a. Add to net income in calculating cash flow from operating activities

b. Subtracted from net income in calculating cash flow from operating activities

c. It is part of investing activities as it is related to PPE

d. It is not considered as it is not a cash activity

3. How is "increase in inventory" treated in developing cash flow statement using the indirect method?

a. Add to net income in calculating cash flow from operating activities

b. Subtracted from net income in calculating cash flow from operating activities

c. It depends

d. It is part of investing activities

4. How is "loss in selling machinery" treated in developing cash flow statement using the indirect method?

a. Add to net income in calculating cash flow from operating activities

b. Subtracted from net income in calculating cash flow from operating activities

c. It is part of investing activities as it is related to PPE

d. we need to know the selling price of the machinery to decide.

5. How is "decrease in investment" treated in developing cash flow statement using the indirect method?

a. Add to net income in calculating cash flow from operating activities

b. Subtracted from net income in calculating cash flow from operating activities

c. It is part of investing activities

d. It depends on whether it's long-term or short-term investment.

Answer 1

1. The indirect method is used to develop operating, investing and financing section of the cash flow statement.

2. Depreciation expense is added to net income in calculating cash flow from operating activities as it is a non-cash expense.

3. Increase in inventory is subtracted from net income in calculating cash flow from operating activities as increase in current assets and decrease in current liabilities will reduce the net income,

4. Loss in selling machinery is added to net income in calculating cash flow from operating activities as it is a non-recurring expense and deducted from the net income so it will be added back

5. Decrease in investment will be the part of investing activities as any increase or decrease in the investment of a company will affect the investing section of cash flow statement.