Question 1

The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.

Accepted Answer

The full disclosure principle requires that all significant investing and financing activities, including noncash transactions, be disclosed in the financial statements to provide users with a complete and accurate understanding of the company's financial position and performance.

Question 2

Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term investment and financing decisions.

Accepted Answer

Internal users such as managers, executives, and company owners use the statement of cash flows to make informed decisions about their business operations, investments, and financing activities. They use the cash flow information to plan and allocate resources efficiently and effectively.

Question 3

A purchase of land in exchange for shares is disclosed on the statement of cash flows or in a note to the statement.

Accepted Answer

Non-cash transactions, such as a purchase of land in exchange for shares, are typically disclosed in a note to the statement of cash flows, as they do not involve actual cash movement.

Question 4

A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000 note payable. The entire transaction is disclosed to users on the statement of cash flows and/or in the notes to the financial statements.

Accepted Answer

The transaction involves both cash payment and signing a note payable, which would be disclosed in the statement of cash flows and/or in the notes to the financial statements.

Question 5

Receipts of cash dividends and interest earned on loans are classified as financing activities.

Accepted Answer

Receipts of cash dividends and interest earned on loans are classified as operating activities, not financing activities, according to the cash flow statement categorization.

Question 6

The payment of cash dividends to shareholders can be classified as an operating or a financing activity.

Accepted Answer

The payment of cash dividends to shareholders is typically classified as a financing activity in the cash flow statement, reflecting how it is a distribution of profits to owners. However, in some financial reporting frameworks outside of the U.S. GAAP, such as the International Financial Reporting Standards (IFRS), there can be flexibility allowing for classification under either operating or financing activities based on the entity's policy.

Question 7

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

Accepted Answer

The statement of cash flows is specifically designed to explain the difference between the beginning and ending balances of cash and cash equivalents.

Question 8

A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

Accepted Answer

A purchase of land in exchange for a long-term note payable is considered a non-cash transaction and therefore not reported in the investing section of the statement of cash flows. It is only reported in the notes to the financial statements.

Question 9

To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

Accepted Answer

To be classified as a cash equivalent, an item must not only be readily convertible to a known amount of cash but also be subject to an insignificant risk of changes in value and typically have a short maturity of three months or less from the date of acquisition.

Question 10

The purchase of shares in another company is classified as a financing activity.

Accepted Answer

The purchase of shares in another company is classified as an investing activity, not a financing activity, on the cash flow statement.

Question 11

Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.

Accepted Answer

This is a requirement under International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP). The statement of cash flows shows the inflows and outflows of cash and cash equivalents during a specific period of time and helps investors and creditors understand a company's ability to generate cash and how it is being used.

Question 12

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

Accepted Answer

This is true. Operating activities include cash flow from sales and expenses, investing activities include cash flow from buying or selling assets, and financing activities include cash flow from issuing or repaying debt or equity. These classifications are used to provide a better understanding of how a company generates and uses cash.

Question 13

Cash paid for merchandise is an operating activity.

Accepted Answer

Cash paid for merchandise is considered an operating activity according to the indirect method of statement of cash flows.

Question 14

A noncash investing transaction should be disclosed in either a footnote or at the bottom of the statement of cash flows.

Accepted Answer

Noncash investing transactions can include the acquisition of assets through issuance of stock, the conversion of debt to equity, and the exchange of nonmonetary assets. These transactions do not involve the exchange of cash and therefore do not affect the statement of cash flows directly. However, they should still be disclosed in either a footnote or at the bottom of the statement to provide a complete picture of the company's investing activities.

Question 15

Conversion of preference shares to ordinary shares is reported in the financing section of the statement of cash flows.

Accepted Answer

Conversion of preference shares to ordinary shares does not involve cash flow and is therefore not reported in the statement of cash flows. It is an equity transaction reported in the equity section of the financial statements.

Question 16

The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.

Accepted Answer

The statement of cash flows provides information about the sources and uses of cash during a specific period of time, including cash receipts and cash payments from operating, investing, and financing activities. It is important for investors, creditors, and other stakeholders to understand an organization's cash flow position in order to make informed decisions about its financial health and future prospects.

Question 17

The statement of cash flows explains how transactions and events impact the end-of-period cash balance to produce the end-of-period net income.

Accepted Answer

The statement of cash flows explains how cash flows in and out of a company during a specific period, and it does not directly relate to the end-of-period net income.

Question 18

Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

Accepted Answer

Financing activities include (a) obtaining funds from creditors and investors, (b) paying dividends to shareholders, and (c) buying back stock. The activities listed in the statement refer to investing activities.

Question 19

A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Accepted Answer

A cash equivalent must meet both of these criteria to be considered as such.

Question 20

The statement of cash flows reports and proves the net change in cash for a reporting period.

Accepted Answer

The statement of cash flows is a financial statement that reports the net change in cash from operating, investing, and financing activities for a specific period of time. This statement shows the cash inflows and outflows in a company and reconciles it with the change in the company's cash balance. Therefore, the statement of cash flows proves the net change in cash for a reporting period.

Quiz 16: Statement of Cash Flows