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11 Multiple choice questions

  1. What a business normally does to make money.
  2. The process of finding money for the business from other sources other than normal operations.
  3. The usual method of computing cash flow from operations. It starts with net income and uses the changes in the asset and liability accounts to adjust net income into cash flow from operations.
  4. Handy trick: when calculating the change in column C, use Column (A) - Column (B) to calculate the change in asset accounts. Use Column (B) - Column (A) for the change in liability and equity accounts. The resulting positive numbers are all increases in cash, and negative numbers are all decreases in cash.
  5. The business financial statement that shows where the cash came from and where it went during the period. It has four major sections.
    1. Cash flow from operations.
    2. Cash flow from investing activities.
    3. Cash flow from financing activities.
    4. A calculation of (1) net cash flow, and (2) cash-end of period.
  6. The CLEP exam likes to test your knowledge of the interest expense rule. Remember that the interest expense is included in the net income number at the start of the cash flow from operations section and is not backed out. (There will never be a line adjusting for interest expense.) Principle paid is a negative number in the cash flow from financing activities section.
  7. The method of calculating cash flow from operations that does not start with net income, but does show cash-in and cash-out categories.
  8. Cash from operations
    + Cash from investing activities
    + Cash from financing activities
    -----------------------------------------
    = Total change in cash
    + Cash-beginning of period
    -----------------------------------------
    = Cash-end of period.
  9. There is no need to memorize whether a number should be positive or negative. Just determine whether cash is coming in or going out. (All accounting students intuitively know this.) If it is coming in, show it as a positive number. If it is going out, show it as a negative number by putting it in parentheses.
  10. Uses of money to buy assets that make more money. Long-term investments are in assets such as buildings and equiptment. Short-term investments are in assets such as certificates of deposit or stock.
  11. Know where to look for the information to make a financial statement: Balance sheet: assets, liability, and equity account. Income statement: income and expense accounts. Statement of cash flow: the change over the period in all the account.