Question

On the statement of cash flows prepared by the indirect method, the cash flows from operating activities section would include ______________________.

• A. Receipt from sale of investments
• B. Amortization of premium on bonds payable
• C. Payment of cash dividends
• D. Receipt from issuance of capital stock

Answer 1

Answer: (B)

Amortization of premium on bonds payable

Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. Income statement is prepared on accrual basis it also include certain non-operating items such as interest paid and non cash items.

Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by profit and loss account for arriving at cash flows from operating activities.

Examples of such transactions are - cash receipt from royalties, fees, commissions and other revenues, cash payments for premium and claims, annuities, and other policy benefits, cash payments to suppliers for goods and services etc.