Question 1

Whether one uses the direct or the indirect method of presentation of the statement of cash flows, the totals from each of the three sections (activities) will be the same regardless of the method used.

Accepted Answer

The two methods may present the information differently, but ultimately they will result in the same total cash flows from operating, investing, and financing activities.

Question 2

Interest paid is classified as either operating or financing activities.

Accepted Answer

Interest paid can be classified as operating or financing activities depending on the nature and purpose of the interest payment. Interest paid on operating activities such as accounts payable, accruals, and other liabilities are classified as operating activities while interest paid on financing activities such as long-term debt or bonds are classified as financing activities.

Question 3

In the long run, it is more important for a business to generate positive cash flows from investing activities than from operating activities.

Accepted Answer

While positive cash flows from both operating and investing activities are important for a business, generating positive cash flows from operating activities is generally considered to be more crucial for the sustainability and growth of the business in the long run. Operating cash flows represent the cash generated from the primary business activities of the company, such as sales and services, which are the main drivers of the company's profits and growth potential. On the other hand, investing cash flows represent the cash used for acquiring or disposing of long-term assets, such as property, plant, and equipment, or for making investments in other businesses or securities. While investing cash flows can contribute to the growth and expansion of the business, they are typically more volatile and subject to greater risk than operating cash flows. Additionally, a business that relies heavily on investing cash flows may be seen as a speculative, rather than a stable, investment, which could negatively affect its valuation and investor sentiment.

Question 4

Depreciation is a non-cash expense.

Accepted Answer

Depreciation is considered a non-cash expense because it does not involve the outflow of cash. It is a way of allocating the cost of an asset over its useful life for accounting and tax purposes.

Question 5

Both the direct method and the indirect method of computing net cash from operating activities convert accrual-based income statement amounts into cash flows.

Accepted Answer

Both the direct method and the indirect method involve adjusting accrual-based income statement amounts to arrive at net cash from operating activities.

Question 6

If accounts receivable decrease during the period, Cash receipts from customers probably exceeds net sales.

Accepted Answer

When accounts receivable decrease during the period, it means that more cash was collected from customers than sales made during the period. This is because accounts receivable represent sales made on credit that have not yet been collected in cash, so a decrease in accounts receivable suggests that cash was received from customers to pay off these outstanding balances. Therefore, Option A is correct.

Question 7

The purchase of equipment for the manufacturing of inventory belongs in the operations section of the statement of cash flows.

Accepted Answer

The answer of The purchase of equipment for the manufacturing...

Question 8

Depreciation expense reduces profit for the year but does not reduce the net cash from operating activities.

Accepted Answer

Depreciation is a non-cash expense, which means it does not require an outflow of cash. Therefore, it is added back to net income when calculating net cash from operating activities in the statement of cash flows. However, it does reduce profit for the year on the income statement.

Question 9

If cash increased during the year and there was also a loss for the year, there must be positive cash flows from financing and investing activities.

Accepted Answer

The statement is incorrect. It is possible to have a cash increase during the year even with a loss if the company had positive cash flows from operating activities. Positive cash flows from financing and investing activities are not necessary for a cash increase to occur.

Question 10

Net cash from operating activities will have the same total no matter which method is used, direct or indirect.

Accepted Answer

This is true. Both the direct and indirect method are different approaches to present the same information about net cash from operating activities. The difference lies in the presentation format, but the final dollar amount of net cash from operating activities should be the same.

Question 11

Any "non-cash" investing and financing transactions should be disclosed in a supplementary schedule accompanying a statement of cash flows.

Accepted Answer

Non-cash investing and financing transactions, such as the issuance of common stocks or the acquisition of assets through a loan, do not affect the cash balance directly and thus should be disclosed separately in a supplementary schedule accompanying the statement of cash flows. This disclosure helps users of financial statements understand the complexity of the company's financial activities beyond just its cash flow.

Question 12

The IASB permits a company to use the direct method for the statement of cash flows or the indirect method.

Accepted Answer

The IASB allows a company to use either the direct method or the indirect method for the statement of cash flows. However, most companies tend to use the indirect method due to its simplicity.

Question 13

Companies that show profit for the year on the income statement will always show positive cash flows from operating activities.

Accepted Answer

A company can show a profit on the income statement but still have negative cash flows from operating activities due to factors like changes in working capital, non-cash expenses, or timing differences between revenue recognition and cash collection.

Question 14

Under the indirect method, when machinery is sold at a gain, the gain is added in the operating section of the statement of cash flows and the cost is added in the investing section.

Accepted Answer

Under the indirect method, a gain on the sale of machinery is deducted from net income in the operating activities section to reconcile to cash generated from operations, while the entire cash proceeds from the sale are reported in the investing activities section.

Question 15

Dividends paid belong in the operating section of the statement of cash flows.

Accepted Answer

Dividends paid are a financing activity and therefore should be classified as a cash outflow in the financing section of the statement of cash flows.

Question 16

All cash receipts and cash payments not classified as investing or financing activities are classified as indirect activities.

Accepted Answer

The answer of All cash receipts and cash payments not...

Question 17

In a statement of cash flows, the term cash includes both cash and cash equivalents.

Accepted Answer

Cash includes both physical currency and highly liquid investments that are easily converted to cash, such as Treasury bills, money market funds, and short-term commercial paper. These highly liquid investments are considered cash equivalents. Therefore, the term cash in statement of cash flows includes both physical cash and cash equivalents.

Question 18

A net decrease in accounts payable to suppliers indicates that cash payments to suppliers were less than purchases made during the period.

Accepted Answer

A net decrease in accounts payable indicates that cash payments to suppliers were more than purchases made during the period, reducing the outstanding balance owed to suppliers.

Question 19

The principal purpose of a statement of cash flows is to measure the profitability of a business that maintains its accounting records on the cash basis.

Accepted Answer

The principal purpose of a statement of cash flows is to provide information about a company's cash inflows and outflows during a specific period of time, regardless of whether the company uses cash or accrual accounting. It helps users to assess a company's liquidity, operating activities, investing activities, and financing activities. Profitability is measured through the income statement.

Question 20

Receipts of interest revenue are classified as operating or investing activities.

Accepted Answer

Receipts of interest revenue can be classified as operating activities if the interest is earned on funds held for operational purposes, or as investing activities if the interest is earned on investments held for the purpose of generating a return.

Quiz 13: Statement of Cash Flows