Question 1

The investing activities section of the statement of cash flows distinguishes between acquisitions of long-term assets that expand operating capacity and those that replace old,worn-out assets.

Accepted Answer

There is no differentiation on the statement between types of long-term asset purchases.

Question 2

The amount of increase in accounts receivable is added to credit sales to calculate the amount of cash inflow from customers when using the direct method to prepare the operating activities section of the statement of cash flows.

Accepted Answer

Increases in accounts receivable are deducted from credit sales to determine cash collections from customers.

Question 3

Cash flow from operating activities is often less stable from year to year than the amount of net income reported on the income statement.

Accepted Answer

Accrual accounting smooths out earnings by matching expenses to revenues providing a more stable performance measure.

Question 4

The direct method of preparing the operating activities section of the statement of cash flows shows increases and decreases in noncash current assets and current liabilities to arrive at cash flows from operating activities.

Accepted Answer

The indirect method of preparing the operating activities section of the statement of cash flows shows increases and decreases in noncash current assets and current liabilities to arrive at cash flows from operating activities.The direct method shows actual cash inflows and outflows from operating activities.

Question 5

Rapid growth of a company can cause it to be short of cash.

Accepted Answer

A company,especially one experiencing rapid growth,can be short of cash in spite of earning substantial net income.

Question 6

The FASB requires that companies report cash flow per share in their audited financial statements.

Accepted Answer

The FASB prohibits companies from disclosing cash flow per share in audited financial statements.The requirement for a per share amount is to report earnings per share on an income statement.

Question 7

A company experiencing rapid growth can be short of cash in spite of earning substantial net income.

Accepted Answer