Question 1

A company purchases a $300,000 building, paying $200,000 in cash and signing a $100,000 promissory note. What will be reported on the statement of cash flows as a result of this transaction?
A) A $300,000 cash outflow from investing activities.
B) A $200,000 cash outflow from investing activities and a $100,000 cash inflow from financing activities.
C) A $200,000 cash outflow from investing activities and a $100,000 noncash transaction.
D) A $300,000 cash outflow from investing activities and a $100,000 cash inflow from financing activities.

Accepted Answer

The answer of A company purchases a $300,000 building, paying...

Question 2

A company bought $250,000 of equipment with an expected life of ten years and no residual value. After six years the company sold the equipment for $94,000. If it uses straight-line depreciation and the indirect method is used to determine net cash flows from operating activities, which of the following reflects how the sale of the equipment would be reported in the statement of cash flows?
A) $94,000 is recorded as a cash inflow from investing activities and no other sections of the statement are affected.
B) $94,000 is recorded as a cash inflow from investing activities and $6,000 is added to convert net income to net cash flow from operating activities.
C) $94,000 is recorded as a cash inflow from investing activities and $6,000 is subtracted to convert net income to net cash flow from operating activities.
D) $94,000 is recorded as a cash inflow from operating activities.

Accepted Answer

The equipment is sold for $94,000, which is recorded as a cash inflow from investing activities. The book value after six years is $100,000 ($250,000 - ($250,000/10)*6). The loss of $6,000 ($100,000 - $94,000) is added back to net income in the operating activities section.

Question 3

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) Dividends paid.

Accepted Answer

Cash received from sale of land would be classified as an investing activity because it represents a sale of a long-term asset.

Option B: Cash paid for interest is a financing activity since it represents expenses incurred for obtaining and servicing debt.

Option C: Cash received from stock issuance is a financing activity as it represents funds raised through the sale of ownership in the company.

Option D: Dividends paid is also a financing activity because it represents the distribution of profits to the company's shareholders.

Question 4

Corporation X has no short-term investments, carries only a minimal amount of cash, and has a capital acquisitions ratio of 0.7. Which of the following is suggested by these facts?
A) The corporation probably needed external financing to fund property, plant, and equipment replacement this period.
B) The corporation is efficient at managing debt; each $.70 of debt generates $1 of asset value.
C) The corporation is efficient at generating cash; each $1 of assets acquired generates $.70 of cash.
D) The corporation is likely to need to replace equipment at a rate of 70% of its net income.

Accepted Answer

The answer of Corporation X has no short-term investments, carries...

Question 5

A company has a net cash inflow from operating activities of $789,000, a net cash outflow of $50,000 from investing activities and a net cash inflow of $100,000 from financing activities. The company paid $124,000 in interest, $186,500 in income taxes, and $200,000 in dividends. Which of the following statements about the Statement of Cash Flows is NOT true:
A) Dividends of $200,000 will be reported as a cash outflow in the cash flow from investing activities section.
B) Supplemental disclosures required for a company using the indirect method include the amount of interest and the amount of income taxes paid.
C) The Statement of Cash Flows will show a net increase to cash and cash equivalents of $839,000.
D) If the direct method is used, the $124,000 of interest paid and the $186,500 of income taxes paid will be reported in the cash flows from operating activities.

Accepted Answer

Dividends paid are reported as a cash outflow in the financing activities section, not the investing activities section.

Question 6

A company has net income of $43,560 with a net cash flow from operations of $91,476 and a net change in cash of $84,942. The company spent $72,600 on property, plant, and equipment during the year. The company's capital acquisitions ratio is approximately:
A) 0.60.
B) 1.17.
C) 1.26.
D) 1.67.

Accepted Answer

The answer of A company has net income of $43,560...

Question 7

If accounts receivable are increasing faster than net income, other things being equal, net cash flows from operating activities will:
A) increase, so the Quality of Income Ratio will fall.
B) decrease, so the Quality of Income Ratio will fall.
C) increase, so the Quality of Income Ratio will rise.
D) decrease, so the Quality of Income Ratio will rise.

Accepted Answer

Accounts receivable represent sales that have not yet been collected in cash, so if they are increasing faster than net income it means that the company is not collecting its sales revenue as quickly as it is recording it. This suggests a potential quality of income issue, as it may be possible that some of the sales are not collectible. As a result, net cash flows from operating activities will decrease, leading to a lower Quality of Income Ratio.

Question 8

If an analyst wishes to analyze the ability of a company's operating activities to fund its level of investment in property, plant, and equipment, a good measure would be the:
A) quality of income ratio.
B) working capital.
C) times interest earned ratio.
D) capital acquisitions ratio.

Accepted Answer

The capital acquisitions ratio (also known as the fixed assets to operating cash flow ratio) measures the ability of a company's operating activities to fund its investment in property, plant, and equipment. It calculates the annual cash flow from operating activities divided by capital expenditures on property, plant, and equipment. This ratio indicates how many times a company's cash flow from operations can cover its investment in fixed assets. A higher ratio suggests that a company is generating enough cash flow from its operations to fund its capital expenditures, while a lower ratio may indicate a higher reliance on external financing. Therefore, the capital acquisitions ratio is the best measure in this scenario.

Question 9

Which of the following would not be considered cash and cash equivalents for purposes of preparing a statement of cash flows?
A) Money market funds.
B) Checking accounts.
C) Treasury bills.
D) Notes receivable.

Accepted Answer

Notes receivable are not considered cash and cash equivalents because they are typically not immediately convertible to cash and involve a time lag before the company receives the cash. Money market funds, checking accounts, and treasury bills are all considered cash and cash equivalents because they are highly liquid and readily convertible to cash.

Question 10

A piece of equipment with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount that should be reported as a cash inflow from investing activities is:
A) $50,000.
B) $5,000.
C) $45,000
D) $0. This is a financing activity.

Accepted Answer

The answer of A piece of equipment with a cost...

Question 11

A company reported that its bonds with a face value of $50,000 and a carrying value of $53,000 are retired for $56,000 cash. The amount to be reported under cash flows from financing activities is:
A) ($53,000).
B) ($3,000).
C) ($56,000)
D) $0. This is an operating activity.

Accepted Answer

The cash received from the retirement of bonds is reported as a cash inflow under cash flows from financing activities. The amount of cash received is $56,000, which is the difference between the face value ($50,000) and the carrying value ($53,000) of the bonds, plus any premium or minus any discount.

Question 12

If a company uses the indirect method to determine net cash flows from operating activities:
A) gains must be added to net income and losses subtracted from net income.
B) gains and losses must be added to net income.
C) gains must be subtracted from net income and losses added to net income.
D) gains and losses must be subtracted from net income.

Accepted Answer

Under the indirect method, gains are subtracted from net income and losses are added to net income when calculating net cash flows from operating activities. This is because gains and losses are non-cash items that are included in net income but do not affect the actual cash flows of the business. Therefore, they must be adjusted for in order to accurately determine the cash generated or used by operating activities.

Question 13

The capital acquisitions ratio is often calculated as a multi-year average because of the volatility of:
A) cash flow from year to year.
B) property, plant, and equipment expenditures from year to year.
C) net income from year to year.
D) inventory investment.

Accepted Answer

The capital acquisitions ratio measures a company's ability to invest in property, plant and equipment, which can be a significant expense. This expenditure can vary greatly from year to year depending on the company's needs, making it volatile. Therefore, it is often calculated as a multi-year average to give a more accurate representation of the company's ability to make these types of investments.

Question 14

When using the spreadsheet approach for the indirect method to calculate net cash flows from operating activities, net income would be found as:
A) a debit to the Retained Earnings account.
B) the difference between revenues and expenses.
C) a credit to the Retained Earnings.
D) the difference between gains and losses.

Accepted Answer

The answer of When using the spreadsheet approach for the...

Question 15

Which of the following statements is NOT true?
A) The statement of cash flows does not replace the income statement.
B) The statement of cash flows provides details as to how cash changed during a period.
C) The statement of cash flows provides information about cash receipts and cash payments over a period of time.
D) The statement of cash flows measures profitability.

Accepted Answer

The statement of cash flows provides information about cash receipts and cash payments over a period of time, but it does not measure profitability. Profitability is measured on the income statement.

Question 16

If net cash flow from operating activities is unchanged, but net income is increasing, the quality of income ratio will:
A) rise, which may signal that revenue is being recorded later and/or expenses earlier than in the past.
B) fall, which may signal that revenue is being recorded later and/or expenses earlier than in the past.
C) fall, which may signal that revenue is being recorded earlier and/or expenses later than in the past.
D) rise, which may signal that revenue is being recorded earlier and/or expenses later than in the past.

Accepted Answer

The quality of income ratio is calculated as cash flow from operating activities divided by net income. If net income increases while cash flow remains unchanged, the ratio will fall, suggesting that revenue might be recorded earlier or expenses later, potentially inflating net income.

Question 17

The quality of income ratio measures:
A) how much of net income came from operating activities.
B) the proportion of net income that is likely to be collected over time.
C) how much of gross income the company was able to shield from taxes.
D) the portion of net income that is generated by cash from operating activities.

Accepted Answer

The quality of income ratio measures the portion of net income that is generated by cash from operating activities, indicating the sustainability and quality of earnings.

Question 18

At certain times of the year, many retail companies experience a rapid increase in inventory as they prepare for a period of high sales. All other things equal, this would cause:
A) both the quality of income ratio and the capital acquisitions ratio to fall.
B) the quality of income ratio to fall while the capital acquisitions ratio would remain the same.
C) the quality of income ratio to rise while the capital acquisitions ratio would remain the same.
D) both the quality of income ratio and the capital acquisitions ratio to rise.

Accepted Answer

A rapid increase in inventory would decrease the quality of income ratio (because of the increase in ending inventory) and increase the capital acquisitions ratio (because of the increase in inventory).

Question 19

A company has net income of $43,560 with a net cash flow from operating activities of $91,476 and a net increase in cash of $84,942. The company paid $33,524 for income taxes and $25,000 for interest during the year. The company's quality of income ratio is:
A) 2.1.
B) 1.1.
C) 1.95.
D) 0.48.

Accepted Answer

The quality of income ratio is calculated as net cash flow from operating activities divided by net income. Here, it is $91,476 / $43,560 = 2.1.

Question 20

A company purchased money market funds with cash during the current year. Choose the TRUE statement.
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.

Accepted Answer

The answer of A company purchased money market funds with...

Quiz 12: Reporting and Interpreting the Statement of Cash Flows

A company purchases a $300,000 building, paying $200,000 in cash and signing a $100,000 promissory note. What will be reported on the statement of cash flows as a result of this transaction?

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

Corporation X has no short-term investments, carries only a minimal amount of cash, and has a capital acquisitions ratio of 0.7. Which of the following is suggested by these facts?

A company has net income of $43,560 with a net cash flow from operations of $91,476 and a net change in cash of $84,942. The company spent $72,600 on property, plant, and equipment during the year. The company's capital acquisitions ratio is approximately:

If accounts receivable are increasing faster than net income, other things being equal, net cash flows from operating activities will:

If an analyst wishes to analyze the ability of a company's operating activities to fund its level of investment in property, plant, and equipment, a good measure would be the:

Which of the following would not be considered cash and cash equivalents for purposes of preparing a statement of cash flows?

A piece of equipment with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount that should be reported as a cash inflow from investing activities is:

A company reported that its bonds with a face value of $50,000 and a carrying value of $53,000 are retired for $56,000 cash. The amount to be reported under cash flows from financing activities is:

If a company uses the indirect method to determine net cash flows from operating activities:

The capital acquisitions ratio is often calculated as a multi-year average because of the volatility of:

When using the spreadsheet approach for the indirect method to calculate net cash flows from operating activities, net income would be found as:

Which of the following statements is NOT true?

If net cash flow from operating activities is unchanged, but net income is increasing, the quality of income ratio will:

The quality of income ratio measures:

At certain times of the year, many retail companies experience a rapid increase in inventory as they prepare for a period of high sales. All other things equal, this would cause:

A company has net income of $43,560 with a net cash flow from operating activities of $91,476 and a net increase in cash of $84,942. The company paid $33,524 for income taxes and $25,000 for interest during the year. The company's quality of income ratio is:

A company purchased money market funds with cash during the current year. Choose the TRUE statement.