Drill 21 ·
AP Business with Personal Finance Cash Flow Statement Drill 21 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A drill on reading a cash flow statement and explaining why net profit differs from net cash; uses an invented business and original figures.
Harbor Press is a small print shop. Although the shop reported a profit this year, the owner noticed the bank balance grew by much less than the profit. The cash flow statement below explains the difference. Parentheses show cash outflows. The net change reconciles beginning cash to ending cash. The figures are hypothetical.
Cash Flow Statement for Harbor Press (for the year)
| Item | Amount |
|---|---|
| Operating activities | |
| Net income | $22,000 |
| Add: depreciation | $3,000 |
| Increase in accounts receivable | ($9,000) |
| Increase in accounts payable | $2,000 |
| Net cash from operating activities | $18,000 |
| Investing activities | |
| Purchase of printing equipment | ($15,000) |
| Net cash from investing activities | ($15,000) |
| Financing activities | |
| Loan proceeds | $10,000 |
| Owner draw | ($4,000) |
| Net cash from financing activities | $6,000 |
| Net change in cash | $9,000 |
| Beginning cash | $12,000 |
| Ending cash | $21,000 |
Question 1. Q1: According to the statement, what was the net change in cash for the year?
Explanation: Q1: The net-change-in-cash line shows $9,000. $22,000 is net income, not the cash change. $18,000 is net cash from operating activities only. $21,000 is ending cash, not the change.
Question 2. Q2: The three sections of the statement (operating, investing, financing) are the standard categories of which financial statement?
Explanation: Q2: Operating, investing, and financing sections define the cash flow statement. The income statement reports revenues and expenses to arrive at profit, not cash by activity. The balance sheet lists assets, liabilities, and equity at a point in time. A marketing budget is not a core financial statement and has no such sections.
Question 3. Q3: By how much did net income exceed the net change in cash this year?
Explanation: Q3: Net income of $22,000 minus the $9,000 net change in cash equals $13,000. $9,000 is the cash change itself, not the gap. $22,000 is net income alone. $4,000 is the owner draw, unrelated to this difference.
Question 4. Q4: Why is the net change in cash ($9,000) so much lower than net income ($22,000) this year?
Explanation: Q4: The large equipment purchase ($15,000) and the $9,000 increase in receivables (sales billed but not yet collected) used or withheld cash that profit did not reflect, pulling the cash change well below net income. Depreciation was added back, not subtracted twice, because it is a non-cash expense. Rising receivables mean the shop collected less cash than it billed, not more. Profit and cash routinely differ because of timing and non-cash items, so the gap is expected, not an error.
Question 5. Q5: The owner asks what this statement shows that the profit figure alone does not. Which response is best supported?
Explanation: Q5: The statement shows that the shop was profitable, but cash rose far less because receivables grew and equipment was purchased. The shop did not lose money; net income was a positive $22,000. Net income still matters for measuring profitability, so it should not be ignored. The financing section shows loan proceeds, so the statement does not support the claim that the shop has no debt.