OLO1 Exam Questions 27–38

27. Whole Pine Inc. took out notes payable from the bank which are due four years from today. Where should this be classified on the balance sheet?

• Non-current asset

• Current liability

• Current asset

✓ Non-current liability

28. A company purchases equipment by taking out a bank loan. Why does this transaction keep the accounting equation balanced?

• The loan reduces owners’ equity to offset the new asset.

• The company’s expenses increase, balancing the purchase.

✓ The increase in assets is matched by an increase in liabilities.

• The company’s net income increases by the same amount.

29. A business secures a loan from a bank to finance its expansion efforts. Which section of the statement of cash flows is borrowing from the bank for this loan classified in?

• Operating activities

• Investing activities

✓ Financing activities

• Issuance of common stock

30. An organization’s board declares and pays dividends to shareholders. Which section of the cash flow statement is this transaction recorded in?

• Investing activities section

• Operating activities section

✓ Financing activities section

• Retained earnings section

31. Which basis of accounting is more efficient for small businesses that generate less than $80,000 in revenues annually?

• Accrual basis

✓ Cash basis

• Completed contract method

• Modified accrual basis

32. How does the purchase of $20,000 of inventory affect the statement of cash flows?

• Financing activities (use of cash)

• Investing activities (use of cash)

✓ Operating activities (use of cash)

• Operating activities (source of cash)

33. The income statement reports a net loss, but the statement of cash flows shows a positive cash flow from operating activities. What does this indicate?

✓ The company had significant non-cash expenses, like depreciation.

• The company paid down its long-term liabilities.

• The company received cash from issuing long-term debt.

• The company sold long-term assets during the period.

34. How would the purchase of a new piece of equipment be reflected in the statement of cash flows?

✓ As a cash outflow under investing activities

• As a cash inflow under operating activities

• As a cash inflow under financing activities

• As a cash outflow under financing activities

35. A company is looking for better ways to hold cash and decides to invest its excess cash in another company. How would this transaction be reported in the statement of cash flows?

✓ Cash outflows from investing activities

• Cash inflows from financing activities

• Cash outflows from financing activities

• Cash inflows from investing activities

36. Which financial statement report is required to be prepared first when producing a company’s financial statements?

✓ Income statement

• Statement of cash flows

• Balance sheet

• Statement of owners’ equity

37. Which formula would represent the stockholders’ equity section of the basic accounting equation?

✓ Contributed capital + retained earnings

• Revenues – expenses

• Beginning cash balance + changes in cash balances

• Current assets – current liabilities

38. Which report contains an amount in which the statement of cash flows helps to reconcile?

• Statement of changes in working capital

• Statement of owner’s equity

✓ Balance sheet

• Schedule of investments

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