Question 1

The statement of cash flows is divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Accepted Answer

The statement of cash flows is indeed divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Question 2

Dividends received on investments made in the stock of other corporations is an example of a financing activity.

Accepted Answer

Dividends received on investments made in the stock of other corporations is an example of an investing activity.

Question 3

Under the indirect method, debits to the investing and financing sections represent inflows of cash.

Accepted Answer

Under the indirect method, debits to the investing and financing sections represent cash outflows, not inflows.

Question 4

Although the accrual basis of accounting is an excellent method for measuring profitability, it does not explain why a company's liquidity has improved or worsened.

Accepted Answer

The accrual basis of accounting only records transactions when they occur, regardless of whether cash has been exchanged. Therefore, it does not provide information on changes in a company's cash balances or overall liquidity.

Question 5

Interest received on loans made to borrowers is an example of a financing activity.

Accepted Answer

Interest received on loans is considered an operating activity, as it relates to the core business operations of lending and earning interest income.

Question 6

Financing activities are those transactions involving the purchase and sale of long-term assets, investing in equity securities, lending money, and collecting the principal on the related loans.

Accepted Answer

Financing activities involve transactions related to raising and paying back funds for the business, such as issuing and repurchasing stock, borrowing and repaying loans, and paying dividends. The activities described in the question are actually investing activities.

Question 7

Financing activities are those transactions dealing with the exchange of cash between the firm and its owners (stockholders) and creditors.

Accepted Answer

Financing activities include the issuance or repurchase of stocks, payment of dividends, issuance or repayment of debt, and other activities that affect the company's capital structure.

Question 8

Proceeds from the sale of productive assets (property, plant, equipment, and intangible assets, etc.) are one example of investing activities.

Accepted Answer

Proceeds from the sale of productive assets are part of investing activities because they involve cash inflows related to buying or selling long-term productive assets, which affect a company's capital expenditures and financing decisions.

Question 9

The statement of cash flows categorizes all cash flow into four major types of activities: planning, investing, financing, and operating.

Accepted Answer

The statement of cash flows categorizes cash flows into three major types of activities: operating, investing, and financing.

Question 10

Achieving profitability will automatically assure sufficient amounts of cash.

Accepted Answer

Although profitability is a key component to generating cash, it does not guarantee that a company will have sufficient amounts of cash. Factors such as accounts receivable, accounts payable, and capital expenditures can all impact a company's cash position.

Question 11

An increase or decrease in cash results from a combination of the operating, investing, and capitalizing activities of a business.

Accepted Answer

An increase or decrease in cash results from a combination of the operating, investing, and financing activities of a business, not capitalizing activities.

Question 12

The accuracy of the statement of cash flows can be verified by computing the change in the balance of the cash and cash equivalents.

Accepted Answer

The change in the balance of the cash and cash equivalents as reported on the statement of cash flows should match the actual change in the cash and cash equivalents balance on the balance sheet for the same period. Therefore, verifying the accuracy of the statement of cash flows can be done by comparing these two balances.

Question 13

The investing activities section of the statement of cash flows includes the purchasing and selling of long-term assets, investing in the debt and equity securities of other businesses, making loans, and collecting the principal on loans.

Accepted Answer

The investing activities section of the statement of cash flows includes all of these activities related to the acquisition and disposition of long-term assets and investments.

Question 14

The accrual basis of accounting offers a direct explanation of why a firm's liquidity, as reported on the balance sheet, has improved or worsened.

Accepted Answer

The accrual basis of accounting records revenues and expenses when they are incurred, not when cash is exchanged, so it doesn't directly explain changes in liquidity, which is more related to cash flow.

Question 15

If dividends begin to exceed the cash generated from operating activities, it could imply that the business is about to liquidate.

Accepted Answer

If dividends exceed cash generated from operating activities, it means that the company is using cash from other sources such as selling assets or borrowing money to pay dividends. This is not sustainable in the long run and could lead to financial distress, including the possibility of liquidation.

Question 16

Cash generated from operating activities has traditionally been computed by combining the direct and the indirect methods.

Accepted Answer

The cash generated from operating activities is typically computed using either the direct method or the indirect method, not by combining both.

Question 17

Proceeds from borrowing money through a mortgage is an example of an investing activity.

Accepted Answer

Borrowing money through a mortgage is a financing activity, not an investing activity.

Question 18

The income statement adequately reflects all operating, investing, and financing activities.

Accepted Answer

The income statement primarily reflects operating activities, while investing and financing activities are detailed in the cash flow statement.

Question 19

Under the cash basis of accounting, revenues are recognized when cash is received, regardless of when it is earned.

Accepted Answer

Under the cash basis of accounting, revenues are recognized when cash is received, regardless of when it is earned. This means that revenue is recorded when payment is received from customers, rather than when the sale is made or the service is provided. This method is simpler than the accrual basis of accounting but can result in misleading financial statements as it does not accurately reflect the timing of when revenues are earned and expenses are incurred.

Question 20

The sum of the cash generated or used by each section of the statement of cash flows should equal the difference between the beginning and ending balance of the cash and cash equivalent accounts.

Accepted Answer

This concept is known as the "cash reconciliation" and is important for ensuring the accuracy and completeness of the statement of cash flows. If the sum of the cash generated or used by each section does not equal the difference between the beginning and ending balance of the cash and cash equivalent accounts, there may be errors in the statement that require further investigation.

Quiz 23: Statement of Cash Flows