Deck 12: Reporting and Interpreting the Statement of Cash Flows

Question 1

The approach to preparing the cash flow statement relies on the following rearrangement of the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders' Equity + Noncash Assets).

Answer 1

False

Question 2

When preparing the operating activities section of the statement of cash flows using the indirect method,a decrease in accounts receivable is subtracted from net income.

Answer 2

False

Question 3

Under the indirect method,changes in current assets are used in determining cash flows from operating activities and changes in current liabilities are used in determining cash flows from financing activities.

Answer 3

False

Question 4

When preparing the operating activities section of the statement of cash flows using the direct method,net income must be adjusted for gains or losses realized when property,plant,and equipment is sold.

Question 5

Depreciation Expense is not reported on the statement of cash flows when prepared using the direct method.

Question 6

Maya Company's purchase of 100 shares of Labrador Inc.common stock would be reported as a financing activity on its statement of cash flows.

Question 7

The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

Question 8

In general,the cash flow from operating activities is considered by many to be the most important component of the statement of cash flows.

Question 9

When the net cash flows from operating,investing,and financing activities are combined to arrive at the overall net change in cash,a net decrease in cash is subtracted from the beginning cash balance to calculate the ending cash balance.

Question 10

Treasury stock purchases made with cash are classified as cash outflows from financing activities on the statement of cash flows.

Question 11

The reporting of financing activities is identical under the indirect and direct methods for the statement of cash flows on the statement of cash flows.

Question 12

The payment of salaries and wages would be reported as an operating activity on the statement of cash flows.

Question 13

When preparing the operating activities section of the statement of cash flows using the indirect method,accumulated depreciation is added to net income in the operating section.

Question 14

A healthy company typically shows positive cash flows in the financing activities section of the statement of cash flows.

Question 15

When preparing the operating activities section of the statement of cash flows using the direct method,a gain or loss from selling equipment is reported in the operating activities section of the statement of cash flows.

Question 16

The payment of interest on bonds is classified as a cash outflow from operating activities on the statement of cash flows.

Question 17

When preparing the operating activities section of the statement of cash flows using the indirect method,an increase in Income Taxes Payable is added to net income.

Question 18

The receipts of dividends and interest are both reported as cash inflows from investing activities on the statement of cash flows.

Question 19

Major investing and financing activities that do not involve cash do not have to be reported as part of the statement of cash flows.

Question 20

In the decline phase,the company continues to enjoy positive operating cash flows but stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders.

Question 21

Using the T-account approach to preparing the statement of cash flows,an increase in Accounts Payable would appear on the debit side of the Cash account.

Question 22

Which of the following would not be included in the cash and cash equivalents amount reported on the balance sheet?

A) Money market funds
B) Checking accounts
C) Treasury bills
D) Notes receivable due in 90 days

Question 23

Cash flows from operating activities include all of the following except:

A) a purchase of land.
B) collections from customers on account.
C) payments to employees for hours worked.
D) receipt of cash dividends.

Question 24

Which of the following items is considered to be a cash equivalent?

A) An investment in a U. S. bond due in two years
B) A one-year certificate of deposit due in six weeks
C) A one-month Treasury bill due in two weeks
D) A promissory note due from a customer in 7 months

Question 25

What is the purpose of the statement of cash flows?

A) It is intended to provide a cash-based view of a company.
B) It illustrates the profitability of a company.
C) It reports the financial position of a company at a specific point in time.
D) It outlines the changes in stockholders' equity accounts from the beginning of the period to the end of the period.

Question 26

Which of the following statements about the statement of cash flows is not correct?

A) It does not replace the income statement.
B) It provides details as to how cash changed during a period.
C) It provides information about cash receipts and cash payments over a period of time.
D) It measures profitability.

Question 27

Which of the following statements is correct?

A) Accrual-based net income can be manipulated because it is based on estimates.
B) Cash flows are easily manipulated because they are based on estimates.
C) Accrual-based net income is not easily manipulated because valuation for such items as bad debts and inventory are precise and based on objectively verifiable information.
D) Cash flows are not easily manipulated because they are generated by internal transactions and do not involve external parties.

Question 28

Investing activities include receiving cash from the sale of land and also the resulting gain or loss on the sale.

Question 29

Which of the following statements about the statement of cash flows is not correct?

A) The statement of cash flows can be used to assess the likelihood of a company paying dividends.
B) Net cash flow is the best measure of profitability since it does not rely on estimates.
C) A company can have positive net income but at the same time have negative cash flow.
D) The statement of cash flows is the only financial statement that reports business activities.

Question 30

The statement of cash flows cannot be used to determine:

A) changes in working capital.
B) expenditures on long-term assets.
C) profitability as measured by specific revenues and expenses.
D) reliance on external financing.

Question 31

Which of the following is the best measure of a company's profitability?

A) Cash-based net income
B) Accrual-based net income
C) Accounts Receivable
D) Sales Revenue

Question 32

Suppose a company generally records revenues and expenses before receiving or making cash payments.Which of the following statements is not correct?

A) If revenues are falling, a net loss could result even though the company reports a net cash inflow from operating activities.
B) If revenues are rising, net income could result even though the company reports a net cash outflow from operating activities.
C) Net income and net cash flows provided by operating activities will always agree.
D) The income statement doesn't explain changes in cash because it focuses on just the operating results of the business.

Question 33

The Viviana Co.uses the indirect method to determine its cash flow from operations.Which of the following items will be subtracted from net income to find its cash flow from operations?

A) Decrease in Supplies
B) Increase in Accounts Payable
C) Depreciation Expense
D) Increase in Accounts Receivable.

Question 34

Which of the following would be included in cash flows from operating activities?

A) Cash received from customers
B) Cash received from an issuance of bonds
C) Cash dividends paid to stockholders
D) Cash used for purchases of equipment

Question 35

Which of the following would be classified as an operating activity on the statement of cash flows using the direct method?

A) Cash dividends paid
B) Cash received from selling equipment
C) Cash paid to retire bonds payable at maturity
D) Cash received from accounts receivable collections

Question 36

A company purchased money market funds with cash during the current year.Which of the following statement is correct?

A) This transaction will result in a decrease in cash from operating activities.
B) This transaction will result in a decrease in cash from investing activities.
C) This transaction will result in a decrease in cash from financing activities.
D) This transaction will not cause a change in cash from operating, investing, or financing activities.

Question 37

Cash and cash equivalents include assets that:

A) have stable long-term value.
B) are short-term, highly liquid, and purchased by the entity within three months of maturity.
C) consistently grow in value over the long run.
D) are expected to be used up within a year.

Question 38

Accrual-basis accounting is superior to cash-basis accounting in that:

A) it provides a better measure of profitability.
B) a statement of cash flows is not needed.
C) the cash balance reported will be greater.
D) there is only one method of preparing the operating activities of the statement of cash flows.

Question 39

Which of the following statements about the statement of cash flows is not correct?

A) GAAP requires every company to report a statement of cash flows.
B) The statement of cash flows is contained in the notes to the financial statements.
C) The statement of cash flows is needed because the income statement and balance sheet do not provide adequate information about the changes in cash.
D) The statement of cash flows provides information about how each major type of business activity causes a company's cash to change.

Question 40

Cash flows from operating activities include:

A) changes in accounts receivable
B) paying principal to lenders
C) purchases of equipment
D) proceeds from stock issuance

Question 41

The repayment of the principal of a loan which had been used to finance the purchase of equipment should be reported on the statement of cash flows as a:

A) cash outflow from investing activities.
B) cash outflow from operating activities.
C) cash outflow from financing activities.
D) noncash investing and financing activities in a supplemental disclosure.

Question 42

Cash flows from investing activities include:

A) changes in Accounts Receivable.
B) sale of land.
C) paying principal to lenders.
D) cash dividends paid.

Question 43

Which of the following statements about cash flows from financing activities is correct?

A) When a company borrows from lenders, a cash outflow from financing activities has occurred.
B) When a company receives cash dividends, a cash inflow from financing activities has occurred.
C) When a company repurchases its own stock, a cash outflow for financing activities has occurred.
D) When a company pays cash dividends, a cash inflow from financing activities has occurred.

Question 44

Cash flows from financing activities can include:

A) selling goods on credit.
B) acquiring long-lived assets.
C) issuing long-term debt.
D) purchasing inventory on credit.

Question 45

Which of the following statements about classification choices is correct?

A) GAAP classifies cash dividends paid as a financing activity, but IFRS allows them to be classified as either an operating or financing activity.
B) GAAP allows interest paid to be classified as either an operating or financing activity, but IFRS requires that it be classified as a financing activity.
C) GAAP classifies cash dividends received as an investing activity, but IFRS allows them to be classified as either an operating or investing activity.
D) GAAP classifies interest received as either an operating or investing activity, but IFRS requires it to be classified as an investing activity.

Question 46

Which of the following would be classified as a financing activity on the statement of cash flows?

A) Cash receipts from accounts receivable collections
B) Cash receipts from sale of equipment
C) Cash paid to purchase treasury stock
D) Cash paid for interest on notes payable

Question 47

Which of the following statements about financing activities is not correct?

A) Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B) When a company issues stock for cash, it reports a cash inflow from financing activities.
C) When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D) When a company repays a loan, it reports a cash inflow from financing activities.

Question 48

Which of the following would be reported as a cash outflow from investing activities?

A) Donating an old piece of equipment to charity
B) Repaying the principal of a bond
C) Buying another company's bonds with cash
D) Acquiring an investment security by issuing company stock

Question 49

Which of the following would be classified as an investing activity on the statement of cash flows?

A) Cash received from sale of land
B) Cash paid for interest
C) Cash received from stock issuance
D) Cash dividends paid

Question 50

Which of the following would be included in cash flows from investing activities?

A) Cash collected from customers
B) Cash received from an issuance of bonds
C) Cash dividends paid
D) Cash used to purchase equipment

Question 51

Which of the following journal entries has an effect on cash provided by (used in)operating activities?

A) Bad debts expense
B) Depreciation expense
C) Sale of an investment
D) Payment of interest on long-term notes payable

Question 52

A company's cash flows from investing activities include cash transactions relating to the purchase and disposal of which types of assets?

A) All of a company's assets
B) All of a company's assets except inventory
C) All of a company's non-current assets
D) Property, plant and equipment

Question 53

Which of the following is included in the financing activities on a statement of cash flows?

A) Changes in accounts payable
B) Purchases of equipment
C) Paying interest to lenders
D) Cash dividends paid

Question 54

Cash flows from investing activities include cash:

A) inflows and outflows reflecting revenues and expenses reported on the income statement.
B) inflows from the issuance of bonds.
C) inflows from the sale of long-term investments.
D) inflows from the sale of a company's own stock to its stockholders.

Question 55

A company loaned $1,000,000 with interest at 7% to another company.The interest revenue from this loan would be reported on the statement of cash flows as a:

A) cash inflow from operating activities.
B) cash inflow from investing activities.
C) cash inflow from financing activities.
D) noncash investing and/or financing activity.

Question 56

Cash flows from investing activities include all of the following except a(n):

A) purchase of an automobile.
B) sale of a trademark.
C) purchase of stock of another company.
D) issuance of bonds.

Question 57

Which of the following statements about cash flows from investing activities is correct?

A) The proceeds from sales of investments are reported as cash inflows from investing activities.
B) Cash flows from investing activities are calculated by making adjustments to net income.
C) Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities.
D) Cash received from issuing a long-term payable is reported as a cash inflow from investing activities.

Question 58

Which of the following items below will be subtracted in the financing cash flow portion of the statement of cash flows?

A) Net income earned
B) Bank loans obtained
C) Payment of dividends
D) Disposal of equipment

Question 59

Which of the following would be included in cash flows from financing activities?

A) Cash proceeds from sales
B) Cash received from a sale of land
C) Cash dividends paid
D) Cash used to purchases of equipment

Question 60

Cash flows from financing activities include all of the following except:

A) payment of long-term debt.
B) payment of interest.
C) proceeds from stock issuance.
D) cash dividends paid.

Question 61

Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it:

A) reduces net income but not cash.
B) is a cash inflow.
C) is a revenue.
D) is a valuation concept.

Question 62

Which of the following items would not be classified as a cash flow from financing activities?

A) Payments of amounts owed to owners
B) Borrowing from financial institutions
C) Issuing additional common stock
D) Making a payment on account

Question 63

Which of the statements below is correct when comparing the direct and indirect methods of reporting operating cash flows?

A) The direct method starts with net income and makes adjustments to arrive at the net cash provided by or used in operations.
B) The indirect method starts with cash collected from customers and details cash inflows and outflows from operations.
C) The indirect method starts with net income and makes adjustments to arrive at the net cash provided by or used in operations.
D) The net cash provided by or used in operations will be different depending on whether the direct or indirect method is used.

Question 64

When the indirect method is used,if a prepaid expense account decreases during the accounting period,the change in the prepaid expense account is:

A) added to the change in the cash account.
B) subtracted from net income.
C) added to net income.
D) subtracted from the change in the cash account.

Question 65

The statement of cash flows may be viewed in terms of the balance sheet equation.Which of the following expressions below is correct?

A) Change in Cash = Change in (Liabilities + Stockholders' Equity - Noncash Assets)
B) Change in Cash = Change in (Stockholders' Equity - Liabilities + Noncash Assets)
C) Change in Cash = Change in (Liabilities - Noncash Assets)
D) Change in Cash = Change in (Stockholders' Equity - Liabilities)

Question 66

Which of the following variations of the accounting equation describes the preparation of the statement of cash flows?

A) Change in cash = Change in (Liabilities + Stockholders' equity - Noncash assets)
B) Change in cash = Change in (Liabilities - Stockholders' equity + Noncash assets)
C) Change in cash = Change in (Liabilities + Stockholders' equity + Noncash assets)
D) Change in cash = Change in (Liabilities - Stockholders' equity - Noncash assets)

Question 67

Cash provided by issuing stock to owners should be reported as cash:

A) inflows from financing activities.
B) outflows from financing activities.
C) inflows from investing activities.
D) outflows from investing activities.

Question 68

What is the starting point for calculating cash flows from operations when the indirect method is used?

A) Find net income on the income statement.
B) Calculate the net change in the cash account.
C) Add the change in accounts receivable to sales revenue.
D) Identify the balance sheet accounts that relate to operating activities.

Question 69

In calculating the net cash provided by or used in operations using the indirect method,which of the following items would be subtracted from net income?

A) A decrease in Prepaid Rent
B) An increase in Accounts Receivable
C) An increase in long-lived assets
D) An increase in Salaries and Wages Payable

Question 70

Which of the following classifications is not used on the statement of cash flows?

A) Operating
B) Investing
C) Financing
D) Spending

Question 71

Depreciation Expense is $20,000 and the beginning and ending Accumulated Depreciation balances are $150,000 and $155,000,respectively.What is the cash paid for depreciation?

A) $20,000
B) $5,000
C) $0
D) $25,000

Question 72

Darnell,Inc.'s balance sheet indicated that the cash account increased by $5,400 during the past year.Net cash provided by operating activities was $14,000 and net cash used in investing activities was $6,100.What was the net cash flow effect of the company's financing activities?

A) Net cash provided of $2,500
B) Net cash used of $2,500
C) Net cash used of $14,700
D) Net cash provided of $14,700

Question 73

If operating cash flows are calculated using the indirect method,which of the choices below correctly states the direction of adjustments to convert net income into net cash provided by or used in operations?

Question 74

When the indirect method is used,if accounts receivable increases during the accounting period,the change in accounts receivable is:

A) added to the change in the cash account.
B) subtracted from net income.
C) added to net income.
D) subtracted from the change in the cash account.

Question 75

Which of the following statements is correct?

A) The Accumulated Depreciation account includes cash flows that may be categorized as both operating and investing.
B) Inventory includes cash flows that may be categorized as both operating and investing.
C) Retained Earnings includes cash flows that may be categorized as both operating and investing.
D) Bonds Payable includes cash flows that may be categorized as both operating and financing.

Question 76

Which of the following is not needed to prepare a statement of cash flows?

A) Statement of Retained Earnings
B) Comparative balance sheets
C) Additional data concerning selected accounts that increase and decrease as a result of investing and/or financing activities
D) A complete income statement

Question 77

Which of the following statements about calculation of cash flows from operating activities under the indirect method is correct?

A) When the indirect method is used, changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flow from operating activities.
B) When the indirect method is used, depreciation expense is added to net income as a step in the process of calculating net cash flow provided by operating activities.
C) When the indirect method is used, changes in long-term assets are added to convert net income to net cash flow provided by operating activities.
D) When the indirect method is used, changes in long-term liabilities are subtracted to convert net income to net cash flow provided by operating activities.

Question 78

If the calculation of cash flows from operating activities starts with net income,the company:

A) is using the net income method.
B) will remove the effects of all noncash items included in the calculation of net income.
C) is using the direct method.
D) will add all noncash items not included in the calculation of net income.

Question 79

Which of the following equations is correct?

A) Change in cash = Change in noncash assets
B) Change in cash = Change in liabilities + Change in stockholders' equity
C) Change in cash = Change in liabilities + Change in stockholders' equity - Change in noncash assets
D) Change cash = Change in liabilities + Change in stockholders' equity + Change in noncash assets

Question 80

How is the change in cash classified on the statement of cash flows?

A) It is found in the investing activities section of the statement.
B) It is found in the operating activities section of the statement.
C) It is found in the financing activities section of the statement.
D) It is the sum of the investing, operating, and financing activities sections.