Question 1

The sales revenue reported on the income statement for 20A totaled $96,000,of which one third was on credit.The 20A beginning balance of trade receivables was zero and the 20A ending balance reported on the statement of financial position was $10,000; therefore,the 20A cash inflow from customer sales was $86,000.
Calculation: $96,000-10,000 = $86,000

Accepted Answer

The calculation provided in the statement is correct, and based on that, it can be concluded that the 20A cash inflow from customer sales was $86,000. Therefore, option A is correct.

Question 2

Only investments with original maturities of less than three months at the date of purchase qualify as cash equivalents.

Accepted Answer

This is a generally accepted accounting principle that defines cash equivalents as short-term, highly liquid investments that are readily convertible to cash and have original maturities of three months or less from the date of purchase. Investments with longer original maturities are considered as short-term investments or marketable securities.

Question 3

The indirect method for reporting cash flows from operating activities presents a conversion of profit to net cash flow from operating activities.

Accepted Answer

The indirect method for reporting cash flows from operating activities starts with net income (profit) and makes adjustments to convert it to net cash flow from operating activities.

Question 4

Collection of principal on a note receivable is a cash flow from investing activities.

Accepted Answer

Collection of principal on a note receivable is an inflow of cash related to the acquisition and disposition of long-term assets, and therefore a cash flow from investing activities.

Question 5

Cash collected from customers is a cash flow from a financing activity.

Accepted Answer

Cash collected from customers is a cash flow from an operating activity, not a financing activity. Financing activities relate to external sources of financing, such as borrowing or issuing stocks.

Question 6

Expenses reported on the income statement for 20A (the first year of operations),totaled $60,000,which included depreciation expense of $8,000,and wages payable increased to $3,000 by the end of 20A.Therefore,the 20A cash outflow for expenses was $71,000.
Calculation: $60,000-8,000-3,000 = $49,000

Accepted Answer

The calculation is incorrect. The wages payable increase of $3,000 should not be added back to the expenses reported on the income statement. The correct calculation would be $60,000 - $8,000 = $52,000 in cash outflow for expenses in 20A.

Question 7

The statement of cash flows is the only financial statement prepared on the cash basis of accounting rather than on the accrual basis of accounting.

Accepted Answer

The statement of cash flows is prepared on the cash basis of accounting, while the income statement, balance sheet, and statement of changes in equity are prepared on the accrual basis of accounting.

Question 8

The quality of earnings ratio (Cash Flow from Operating Activities ¸ Profit)measures the portion of profit that was generated in cash.

Accepted Answer

The quality of earnings ratio (Cash Flow from Operating Activities ¸ Profit) measures the proportion of profit that was generated in cash. Therefore, the statement is true.

Question 9

The payment to shareholders for repurchase of treasury shares is a cash flow from a financing activity.

Accepted Answer

Repurchase of treasury shares is a financing activity, as it involves using cash from the company's financing sources (such as loans or equity) to buy back shares from shareholders. The payment to shareholders for these repurchased shares is also a cash outflow from financing activities.

Question 10

The payment of interest on a note payable is a cash flow from an operating activity.

Accepted Answer

The answer of The payment of interest on a note...

Question 11

In order to prepare the statement of cash flows,the accountant must analyze current asset and current liability balances.

Accepted Answer

The statement of cash flows requires information on changes in current assets and liabilities in order to determine the cash inflows and outflows of a business during a given period. Without analyzing these balances, it is not possible to accurately prepare the statement of cash flows.

Question 12

The amortization of a patent is treated in a similar manner to depreciation of a building when preparing the operating activities section of the statement of cash flows using the indirect method.

Accepted Answer

The statement is correct as both patents and buildings are long-term assets that lose value over time, so their associated costs are spread out over several reporting periods. Therefore, the amortization of a patent is treated similar to the depreciation of a building when preparing the operating activities section of the statement of cash flows using the indirect method.

Question 13

Depreciation expense has the immediate effect of increasing the cash account.

Accepted Answer

Depreciation expense decreases the value of the asset on the balance sheet, which in turn reduces the company's net income for the period. This reduction in net income results in a decrease in retained earnings, which decreases the overall equity of the company. As a result, depreciation expense does not increase the cash account.

Question 14

Depreciation expense does not cause a cash outflow for the current period; therefore,it should never be shown on the statement of cash flows.

Accepted Answer

While it is true that depreciation expense does not represent a cash outflow for the current period, it still has an impact on the statement of cash flows. Depreciation expense is added back to net income in the operating activities section of the statement of cash flows because it is a non-cash expense. This adjustment is necessary to reconcile net income to the actual cash inflows and outflows for the period. Therefore, depreciation expense is actually shown on the statement of cash flows, but in a different section than cash outflows.

Question 15

Increases in current liabilities are added to profit while decreases in current liabilities are subtracted from profit to derive the net cash flows.

Accepted Answer

Increases in current liabilities indicate that a company is deferring cash payments, thus increasing cash flow, while decreases indicate cash payments, reducing cash flow.

Question 16

The date in the heading of a statement of cash flows should say,"At December 31,20A," rather than "For the Year Ended December 31,20A."

Accepted Answer

The heading of a statement of cash flows should say "For the Year Ended December 31, 20A" as it summarizes the cash flows for the entire year. "At December 31, 20A" would only indicate the cash flow at one specific point in time.

Question 17

Dividends collected from a long-term investment are cash flows from investing activities.

Accepted Answer

The answer of Dividends collected from a long-term investment are...

Question 18

The net increase (or decrease)in cash that is reported on the statement of cash flows should be the same as the change in the balance of the cash account for the two most recent years on the comparative statements of financial position.

Accepted Answer

The net increase (or decrease) in cash reported on the statement of cash flows should be consistent with the change in the cash account balance for the two most recent years on the comparative statements of financial position, as the statement of cash flows is specifically designed to reconcile changes in the cash account between two financial periods.

Question 19

Very few companies use the direct method for disclosing their cash flows from operating activities.

Accepted Answer

The indirect method is more commonly used for disclosing cash flows from operating activities.

Question 20

Loans to other companies (notes receivable)are cash flows from investing activities.

Accepted Answer

Loans to other companies are considered investments and therefore their cash flows fall under the category of cash flows from investing activities.

Quiz 5: Communicating and Interpreting Accounting Information