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Quizzes > Business & Finance > Finance & Economics

ACCT 202 Final Review Quiz: How Well Do You Know Cash Flows?

Think you can ace the ACCT 202 practice test? Challenge yourself with this cash flow statement quiz.

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art cash flow quiz with coins bills arrows on dark blue background for ACCT 202 exam review

Are you ready to conquer your accounting challenges? This quiz on free cash flow is designed specifically to help acct 202 students like you ace your acct 202 exam 1 while deepening your mastery of cash flow concepts. In this interactive cash flow statement quiz, you'll apply techniques from your acct 202 practice test materials, reinforce your understanding of operating, investing, and financing activities, and identify common pitfalls before the final. Whether you're fresh off our acc 202 exam 1 modules or want to strengthen foundational skills with an accounting chapter 1 test, this is the ultimate prep tool. Jump in now, measure your progress, power up your acct 202 study guide, and challenge yourself today for guaranteed exam success!

What is the standard formula for calculating free cash flow?
Net Income + Depreciation - Change in Working Capital
Gross Profit - Operating Expenses
EBIT - Taxes + Depreciation
Operating Cash Flow - Capital Expenditures
Free cash flow is defined as cash generated from operations less capital expenditures required to maintain or expand the asset base. This shows the cash a company can actually distribute after investment in fixed assets. It's widely used to assess corporate liquidity and valuation. Investopedia
Why is depreciation added back when computing free cash flow?
It's an actual cash outflow
It's a non?cash expense deducted in net income
It reduces working capital
It increases capital expenditures
Depreciation is a non?cash expense that reduces net income but does not involve cash outlay, so it must be added back to operating cash flows. This adjustment ensures free cash flow reflects actual cash generated. Understanding this concept is key for correct FCF calculation. CFI
Which of the following is subtracted from cash flow from operations to arrive at free cash flow?
Depreciation
Dividend payments
Capital Expenditures
Amortization of goodwill
Capital expenditures represent cash outlays for property, plant, and equipment that are necessary to maintain or grow operations. FCF equals cash flow from operations minus these outlays. Therefore, CAPEX is the correct subtraction when computing FCF. AccountingTools
If a company reports operating cash flow of $500,000 and capital expenditures of $150,000, what is its free cash flow?
$150,000
$350,000
$650,000
$500,000
Free cash flow = Operating cash flow - Capital expenditures = $500,000 - $150,000 = $350,000. This calculation shows the actual cash left after necessary investments. It's a core metric for financial analysis. Investopedia
Free cash flow is most useful for evaluating:
Sales growth only
Gross margin trends
A company's ability to generate shareholder value
Inventory turnover
Free cash flow shows how much cash a company can return to shareholders or reinvest after maintaining its asset base. It's widely used in valuation models like discounted cash flow (DCF). Tracking FCF over time provides insight into sustainable value creation. CFI
Which line item in the statement of cash flows typically requires adjustments when calculating free cash flow?
Issuance of debt
Proceeds from sale of investments
Purchases of property, plant, and equipment
Dividends paid
Purchases of property, plant, and equipment (CAPEX) are deducted from operating cash flow to compute free cash flow. Financing activities like debt issuance are not included in the FCF formula. This keeps the focus on operations and reinvestment. AccountingTools
True or False: Free cash flow can be negative even if net income is positive.
False
True
Free cash flow can be negative if capital expenditures exceed cash flow from operations, even when net income is positive. Net income includes non?cash expenses and timing differences. FCF focuses on actual cash flows available. Investopedia
Which of these is NOT included in calculating free cash flow?
Capital expenditures
Changes in working capital
Issuance of new equity
Depreciation
Issuance of new equity is a financing activity and is not part of the FCF calculation. FCF uses operating cash flow and subtracts investing cash outflows related to fixed assets. Financing activities are excluded. CFI
What effect does an increase in working capital have on free cash flow?
It increases free cash flow
It only affects net income
No effect on free cash flow
It reduces free cash flow
An increase in working capital uses cash, which reduces operating cash flow and thus free cash flow. Working capital adjustments ensure FCF reflects cash tied up in day?to?day operations. It's a key component of the operating section. Investopedia
If a firm's operating cash flow is $1,000,000, CAPEX is $300,000, and increase in working capital is $100,000, what is free cash flow?
$900,000
$600,000
$400,000
$700,000
FCF = Operating cash flow - CAPEX - Increase in working capital = $1,000,000 - $300,000 - $100,000 = $600,000. You subtract the working capital increase because it uses cash. This captures true free cash flow. CFI
Which document provides the raw figures to compute free cash flow?
Statement of Shareholders' Equity
Statement of Cash Flows
Balance Sheet
Income Statement
The statement of cash flows gives operating cash flow and capital expenditure details needed for FCF. The income statement and balance sheet inform inputs but do not directly show cash movements. Hence, the cash flow statement is primary. Investopedia
True or False: Dividends paid are included in the free cash flow calculation.
True
False
Dividends are a financing cash outflow, not part of operating or investing activities used in FCF. Free cash flow focuses on cash from operations minus CAPEX. Dividend payments occur after computing FCF. AccountingTools
Which of these adjustments increases operating cash flow when calculating FCF?
Decrease in depreciation
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
A decrease in accounts receivable releases cash, increasing operating cash flow. Increases in inventory or payables absorb cash or do not adjust like receivables. Depreciation is non?cash and already added back. Investopedia
Free cash flow is often used in which valuation method?
Price/Earnings Ratio
Gross Profit Margin
Asset Turnover Ratio
Discounted Cash Flow (DCF)
DCF valuation projects future free cash flows and discounts them to present value. This method relies on FCF as the cash available to investors. Other metrics do not directly use FCF in valuation. CFI
Which of the following BEST describes why analysts track free cash flow?
It indicates sales growth trends
It measures profitability after tax
It shows cash available for dividends, debt reduction, or growth
It reflects inventory management efficiency
FCF highlights the cash a company can use for dividends, debt payment, or reinvestment. It excludes non?cash items and focuses on real cash generation. That's why analysts prioritize it. Investopedia
If a firm reports net income of $400,000, depreciation of $50,000, an increase in accounts receivable of $30,000, and capital expenditures of $120,000, what is its free cash flow?
$400,000
$350,000
$420,000
$300,000
FCF = Net income + Depreciation - Increase in AR - CAPEX = $400,000 + $50,000 - $30,000 - $120,000 = $300,000. Working capital changes and CAPEX must be subtracted. This adjustment yields the correct free cash flow. AccountingTools
How does a decrease in accounts payable during a period affect free cash flow?
Increases free cash flow
Only affects net income
No effect
Reduces free cash flow
A decrease in accounts payable means cash was used to pay down payables, reducing operating cash flow and thus free cash flow. Changes in payables directly impact cash availability. This adjustment must be included in FCF analysis. Investopedia
Which scenario would most likely increase a company's free cash flow?
Lower capital expenditures with stable operating cash flow
Higher capital expenditures with rising operating cash flow
Large dividend payments
Increased inventory purchases
Reducing CAPEX while maintaining operating cash flow raises free cash flow. Higher CAPEX consumes cash, and inventory purchases use operating cash. Dividend payments are financing, not part of FCF. CFI
A company has operating cash flow of $800,000, capital expenditures of $200,000, and issues debt of $100,000. What is its free cash flow?
$600,000
$900,000
$700,000
$900,000
Free cash flow excludes debt issuance (a financing activity). FCF = $800,000 - $200,000 = $600,000. Debt issues do not affect the FCF calculation. Investopedia
Which of the following adjustments is appropriate when converting net income to cash flow from operations in FCF?
Subtract increase in inventory
Add increase in fixed assets
Add dividend payments
Subtract depreciation
An increase in inventory ties up cash and must be subtracted from net income to derive operating cash flow. Fixed asset increases (CAPEX) are accounted separately. Depreciation is added back, and dividends are financing. Investopedia
How does recognizing an impairment charge on goodwill impact free cash flow?
Is treated as CAPEX
No direct effect, since it's non?cash
Reduces free cash flow
Increases free cash flow
Goodwill impairment is a non?cash charge that reduces net income but does not affect operating cash flow. FCF starts with cash flow from operations, so impairments have no direct cash impact. It's only an accounting adjustment. Investopedia
When forecasting free cash flow for a DCF model, which item is typically projected last?
Capital expenditures
Tax rate
Revenue growth
Depreciation
CAPEX is often estimated after revenue, operating margins, working capital, and depreciation projections because it depends on the firm's growth and asset needs. It's one of the final inputs in FCF forecasting. CFI
A decline in which of the following would directly increase free cash flow?
Revenue
Depreciation expense
Capital expenditures
Profit margin
Lower capital expenditures reduce cash outflow, thus increasing free cash flow. Depreciation is non?cash, and revenue or margins are operational metrics not directly adjusted in FCF. Investopedia
Which statement is true regarding working capital changes in FCF?
Only inventory changes matter
An increase in current liabilities increases FCF
Working capital changes are ignored
An increase in current liabilities decreases FCF
An increase in current liabilities, like accounts payable, releases cash and increases operating cash flow and FCF. All working capital components matter. Ignoring them misstates cash flows. Investopedia
When analyzing a company with seasonal sales, how should free cash flow be computed?
Ignore working capital
Use a single quarter's data
Use trailing twelve?month CF and CAPEX
Average revenue over seasons
Seasonality requires using full-year or trailing twelve?month data for both operating cash flow and CAPEX to smooth out peaks and troughs. A single quarter misstates FCF in seasonal businesses. CFI
Which of these non?cash charges would NOT be added back in computing FCF?
Amortization
Stock?based compensation
Depreciation
Loss on sale of equipment
Loss on sale of equipment often accompanies actual cash proceeds in investing, so it's netted against the investing cash flows rather than simply added back. Depreciation, amortization, and stock compensation are non?cash and added back. Investopedia
A firm's working capital falls by $40,000 during the year. How does this affect FCF?
No effect on FCF
Only affects net income
Reduces FCF by $40,000
Increases FCF by $40,000
A decrease in working capital frees up cash, raising operating cash flow and FCF by the same amount. Working capital changes are critical adjustments to cash conversions. Investopedia
Which ratio compares free cash flow to net income to assess quality of earnings?
Cash Flow Coverage Ratio
Quick Ratio
FCF/Net Income Ratio
Debt Service Coverage Ratio
The FCF/Net Income Ratio shows how much net income converts into free cash flow and gauges earnings quality. A ratio above 1 indicates strong cash conversion. Other ratios measure liquidity or debt coverage. CFI
In a discounted cash flow model, why might an analyst use unlevered free cash flow rather than levered free cash flow?
To value the firm's assets independent of capital structure
Levered FCF excludes taxes
Unlevered FCF includes dividend payments
Because debt payments are unpredictable
Unlevered free cash flow excludes interest and debt repayments, making valuation independent of financing choices. This allows comparison across firms with different capital structures. Levered FCF reflects financing and is used for equity valuation only. Investopedia
How do changes in deferred tax liabilities affect operating cash flow and FCF?
Increase in DTL decreases operating cash flow
Only affects tax expense
Increase in DTL increases operating cash flow
No effect on operating cash flow
An increase in deferred tax liabilities implies a tax expense not yet paid, boosting operating cash flow. This adjustment increases FCF since cash outflow is delayed. Deferred taxes are a working capital component. Investopedia
Which adjustment is required when computing free cash flow from the indirect method statement of cash flows?
Exclude changes in working capital
Add back non?cash expenses like amortization
Include dividends paid
Subtract interest expense
Under the indirect method you start with net income and add back non?cash charges (depreciation, amortization). You then adjust for working capital changes. Interest and dividends are financing cash flows and not part of FCF. Investopedia
A company with negative free cash flow may still be healthy if:
It is investing heavily to grow future operations
Its net income is negative
It has large deferred revenues
It is reducing receivables aggressively
Negative FCF due to high CAPEX can signal growth investments, especially for tech or utility firms. Context matters: if spending is on productive assets, long?term health may improve. Investors examine the nature of investments. Investopedia
How is maintenance capital expenditure different from growth capital expenditure in FCF analysis?
They are the same
Growth CAPEX is non?cash
Maintenance CAPEX sustains current operations; growth CAPEX expands capacity
Maintenance CAPEX is financing
Maintenance CAPEX refers to spending required to sustain existing operations, whereas growth CAPEX is for expansion. Analysts separate them to assess real discretionary free cash flow. Growth CAPEX is optional and affects future revenue. CFI
In analyzing free cash flow, why must nonrecurring items be considered separately?
They distort sustainable cash generation levels
They always increase FCF
They are excluded from operating cash flow
They are financing activities
Nonrecurring items like asset sales can inflate a single period's FCF but don't reflect ongoing operations. Analysts isolate them to evaluate sustainable cash flows. This yields a truer picture of operational health. Investopedia
How would recognizing a large increase in prepaid expenses affect free cash flow?
No effect on free cash flow
Reduces free cash flow
Is treated as CAPEX
Increases free cash flow
An increase in prepaid expenses uses cash, reducing operating cash flow and free cash flow. Prepaids are part of working capital adjustments. They do not appear in investing or financing sections. Investopedia
Which of the following best describes the terminal value in a DCF using free cash flow?
Value of current assets
Value of all future FCF beyond explicit forecast period
Net present value of CAPEX
Sum of depreciation over forecast
Terminal value estimates the value of future free cash flows beyond the explicit forecast period, often using a perpetuity growth model. It heavily influences total firm value in a DCF. It's distinct from explicit period calculations. CFI
Under IFRS vs. US GAAP, which treatment can affect the free cash flow calculation?
Depreciation method used
Inventory valuation method
Revenue recognition policy
Classification of interest paid in operating vs financing section
IFRS allows interest paid to be classified as operating or financing; US GAAP requires operating classification. This changes operating cash flow and thus free cash flow. Depreciation method differences affect net income, not directly operating cash. IFRS Foundation
How does capitalizing vs expensing R&D affect free cash flow?
Expensing R&D increases CAPEX
Capitalizing R&D reduces operating cash flow when paid, but depreciates over time
Capitalizing R&D increases net income immediately
Expensing R&D has no impact on cash flow
Capitalized R&D is treated as an investing cash outflow (CAPEX) and amortized, while expensed R&D appears in operating expenses, reducing net income but added back in operating cash flow. The classification affects timing of cash flow and FCF profile. Investopedia
Which of the following would you add to unlevered free cash flow to arrive at levered free cash flow?
Add dividend payments
Subtract mandatory debt repayments
Subtract taxes
Add capital expenditures
Levered free cash flow reflects cash available to equity holders after mandatory debt repayments, so you subtract debt principal payments from unlevered FCF. Dividends are discretionary and not part of the levered FCF calculation. Investopedia
How does the treatment of operating leases under ASC 842 impact reported free cash flow?
Increases operating cash flow only
Increases investing cash flow only
No impact on cash flows
Reduces operating cash flow and increases financing cash flow
Under ASC 842, operating lease payments split into interest and principal, moving part of the cash outflow from operating to financing activities. This reduces operating cash flow used in FCF and increases financing cash flow. It affects the FCF calculation. FASB
In a multi-segment company, how should free cash flow be allocated when performing divisional DCF valuations?
Divide total FCF by number of segments equally
Ignore inter?segment transfers
Use each segment's net income only
Allocate corporate CAPEX and working capital based on segment usage
Analysts allocate CAPEX and working capital based on each segment's usage to estimate segment-level FCF. Proportional allocation provides more accurate divisional valuations. Equal division or ignoring transfers misstates segment performance. CFI
How would you adjust free cash flow for a company that uses heavy deferred financing costs?
Ignore deferred financing costs
Add back amortization of deferred financing costs to operating cash flow
Treat deferred financing costs as working capital
Subtract deferred financing costs from CAPEX
Amortization of deferred financing costs is non?cash and should be added back to operating cash flow. The upfront payment is financing cash outflow. Properly adjusting ensures FCF reflects pure operational performance. Investopedia
When estimating a company's sustainable growth rate, why might free cash flow be preferred over earnings?
FCF excludes taxes
Earnings always include non?cash gains
FCF reflects actual cash for reinvestment
Earnings ignore capital expenditures
Sustainable growth depends on cash available to reinvest, which FCF captures. Earnings may include non?cash items and not reflect true reinvestment ability. FCF offers a clearer picture of funding growth. Investopedia
A high-dividend company reports strong free cash flow but declines net income. What could explain this discrepancy?
Large non?cash charges reduced net income
Working capital increased
Dividend payouts were misclassified
CAPEX increased drastically
Non?cash charges like impairments reduce net income but are added back in operating cash flow, leaving FCF strong. High CAPEX or working capital changes would reduce FCF. Dividend classification does not affect FCF. Investopedia
In merger modeling, free cash flow synergy calculations should exclude:
Working capital improvements
Reductions in combined CAPEX
One?time integration costs
Tax shield from additional debt
One?time integration costs are nonrecurring and distort ongoing synergies, so exclude them from permanent FCF synergy calculations. You include sustainable cost savings and tax shields. This gives a clearer view of continuous benefits. CFI
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Study Outcomes

  1. Understand Cash Flow Components -

    Grasp the key sections of the cash flow statement and the role of operating, investing, and financing activities.

  2. Analyze Operating Cash Flows -

    Differentiate between the direct and indirect methods to calculate operating cash inflows and outflows.

  3. Prepare Cash Flow Statements -

    Apply accounting standards to construct accurate cash flow statements for various business transactions.

  4. Interpret Financial Health -

    Evaluate cash flow results to assess a company's liquidity, solvency, and overall financial stability.

  5. Identify Cash Flow Transactions -

    Classify business activities into operating, investing, or financing categories for proper reporting.

  6. Evaluate Free Cash Flow -

    Calculate and assess free cash flow to determine available resources for growth and debt repayment.

Cheat Sheet

  1. Three Sections of the Cash Flow Statement -

    The statement is divided into operating, investing, and financing activities, each revealing different aspects of liquidity (FASB ASC 230). For acct 202 exam 1 prep, remember: operating shows core business cash, investing covers PPE and asset sales, and financing reflects debt or equity movements.

  2. Indirect Method Reconciliation -

    Start with net income and adjust for noncash items (depreciation & amortization) and working capital changes: CFO = NI + D&A - ΔWC (Investopedia). A handy mnemonic is "ADJUST": Add Depreciation, Subtract Increase in WC, Add Decrease in WC, Just tally noncash items.

  3. Calculating Free Cash Flow (FCF) -

    Free cash flow equals cash from operations minus capital expenditures (FCF = CFO - CapEx), per Corporate Finance Institute standards. For instance, if CFO is $120,000 and CapEx is $30,000, FCF is $90,000 - vital for valuation and dividend capacity analysis.

  4. Investing vs. Financing Activity Classification -

    Investing activities include PPE purchases or sales, while financing covers debt issuance/repayment and equity transactions (see Harvard Business School online). Correct classification boosts accuracy in your acct 202 practice test by showing where cash truly comes and goes.

  5. Key Cash Flow Ratios -

    Calculate the operating cash flow ratio (CFO ÷ average current liabilities) and cash flow margin (CFO ÷ net sales) to gauge liquidity and cash generation quality. Remember "LQ" (liquidity & quality): higher ratios signal stronger ability to cover liabilities and fund growth without external financing.

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