Deck 12: Reporting and Analyzing Cash Flows

Question 1

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

Answer 1

True

Question 2

The payment of cash dividends to shareholders is classified as a financing activity.

Answer 2

True

Question 3

Investing 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.

Answer 3

True

Question 4

Conversion of preferred stock to common stock is disclosed in the financing section of the statement of cash flows.

Question 5

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

Question 6

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.

Question 7

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

Question 8

The purchase of stock in another company is classified as an investing activity.

Question 9

A purchase of land in exchange for a long-term note payable must be disclosed as a noncash investing and financing activity.

Question 10

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.

Question 11

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

Question 12

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

Question 13

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

Question 14

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.

Question 15

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

Question 16

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 in the financing section of the statement of cash flows.

Question 17

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.

Question 18

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

Question 19

Cash paid for merchandise is an operating activity.

Question 20

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

Question 21

Both the direct and indirect methods yield the identical net cash flow amount provided or used by operating activities.

Question 22

A cash-based measure to help business decision makers estimate the amount and timing of cash flows is the cash flow on total assets ratio.

Question 23

The direct method for computing and reporting net cash flows from operating activities involves adjusting the net income figure to obtain net cash provided or used by operating activities.

Question 24

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

Question 25

The cash flow on total assets ratio compared to the total assets ratio can be used as an indicator of earnings quality.

Question 26

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

Question 27

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.

Question 28

Cash flow amounts and their timing should be considered when planning and analyzing operating activities.

Question 29

The cash flow on total assets ratio is computed by dividing cash flows from operations by average total assets.

Question 30

The FASB recommends that the operating section of the statement of cash flows be reported using the direct method.

Question 31

A cash coverage of growth ratio of less than 1 indicates cash inadequacy to meet asset growth.

Question 32

Managers only use the cash flow statement to evaluate the net cash increase or decrease,and do not pay much attention to the details of cash flows from operating activities,cash flows from investing activities,and cash flows from financing activities.

Question 33

Most managers stress the importance of understanding and predicting cash flows for business decisions.

Question 34

The reporting of investing activities in the statement of cash flows is identical under either the direct or indirect methods.

Question 35

The reporting of financing activities in the statement of cash flows is identical under either the direct or indirect methods.

Question 36

Information to prepare the statement of cash flows usually comes from (a)comparative balance sheets,(b)current income statement,and (c)additional information.

Question 37

The cash flow on total assets ratio reflects actual cash flows and is therefore affected by income recognition and measurement.

Question 38

Since it is recommended by the FASB,the direct method of preparing the statement of cash flows is most frequently used.

Question 39

The cash flows from operating activities section of an indirect method of cash flows begins with net income or loss.

Question 40

The cash flow on total assets ratio is computed by dividing average total assets by operating income.

Question 41

Cash flows are essentially the same as net income because they are both measured using accrual accounting principles.

Question 42

When preparing the operating activities section of the statement of cash flows using the indirect method,non-operating gains are added to net income.

Question 43

Companies have the option of using either the direct or indirect method to prepare the operating section of the statement of cash flows.

Question 44

When preparing the operating activities section of the statement of cash flows using the indirect method,an increase in accounts receivable is subtracted from net income.

Question 45

When preparing the operating activities section of the statement of cash flows using the indirect method,decreases in current operating liabilities are subtracted from net income.

Question 46

When preparing the operating activities section of the statement of cash flows using the direct method,non-operating gains are added to net income.

Question 47

When preparing the operating activities section of the statement of cash flows using the indirect method,decreases in current operating assets are added to net income.

Question 48

When preparing the operating activities section of the statement of cash flows using the indirect method,non-operating losses are subtracted from net income.

Question 49

When preparing the operating activities section of the statement of cash flows using the direct method,non-operating losses are added to net income.

Question 50

The indirect method separately lists each major item of operating cash receipts and cash payments.

Question 51

The indirect method for computing and reporting net cash flows from operating activities involves adjusting the net income figure to obtain net cash provided or used by operating activities.

Question 52

When preparing the operating activities section of the statement of cash flows using the indirect method,expenses with no cash outflows are added back to net income.

Question 53

When preparing the operating activities section of the statement of cash flows using the indirect method,decreases in current operating assets are subtracted from net income.

Question 54

When preparing the operating activities section of the statement of cash flows using the indirect method,decreases in current operating liabilities are added to net income.

Question 55

When preparing the operating activities section of the statement of cash flows using the indirect method,non-operating gains are subtracted from net income.

Question 56

When preparing the operating activities section of the statement of cash flows using the indirect method,an increase in income taxes payable is added to net income.

Question 57

When preparing the operating activities section of the statement of cash flows using the indirect method,non-operating losses are added to net income.

Question 58

When preparing the operating activities section of the statement of cash flows using the indirect method,an increase in wages payable is subtracted from net income.

Question 59

The direct method separately lists each major item of operating cash receipts and cash payments.

Question 60

When preparing the operating activities section of the statement of cash flows using the indirect method,a decrease in accounts receivable is subtracted from net income.

Question 61

On a spreadsheet used to prepare the operating activities section of the statement of cash flows,depreciation expense does not require an entry in the Analysis of Changes columns because it is a noncash item.

Question 62

Financing activities include receiving cash from issuing debt and receiving cash dividends from investments in other companies' stocks.

Question 63

Financing activities include receiving cash from issuing debt and paying cash dividends to shareholders.

Question 64

Investing activities include: (a)the purchase and sale of long-term assets,(b)lending and collecting on notes receivable,and (c)the purchase and sale of short-term investments in the securities of other entities,other than cash equivalents and trading securities.

Question 65

Financing activities include the payment of cash dividends to stockholders.

Question 66

When using a spreadsheet to prepare the statement of cash flows,an increase in accounts payable is entered in the Analysis of Changes columns with a debit in the statement of cash flows section and a credit in the balance sheet section.

Question 67

Financing activities include receiving cash dividends from investments in other companies' stocks.

Question 68

The FASB requires a reconciliation of net income to net cash provided or used by operating activities when the direct method is used (which can be reported in the notes).

Question 69

Equipment costing $400,000 with accumulated depreciation of $260,000 is sold at a gain of $10,000.This implies that $150,000 cash was received from the sale.

Question 70

When preparing the operating activities section of the statement of cash flows using the indirect method,depreciation is added to net income.

Question 71

Equipment costing $200,000 with accumulated depreciation of $160,000 is sold at a loss of $10,000.This implies that $30,000 cash was received from the sale.

Question 72

Equipment costing $400,000 with accumulated depreciation of $260,000 is sold at a gain of $10,000.This implies that $130,000 cash was received from the sale.

Question 73

Investing activities include receiving cash dividends from investments in other companies' stocks.

Question 74

When using a spreadsheet to prepare the statement of cash flows,a decrease in accounts payable is entered in the Analysis of Changes columns with a debit in the statement of cash flows section and a credit in the balance sheet section.

Question 75

A spreadsheet can help organize the information needed to prepare a statement of cash flows.

Question 76

The payment of cash dividends never changes the balance of retained earnings.

Question 77

When preparing the operating activities section of the statement of cash flows using the indirect method,depreciation is subtracted from net income.

Question 78

Depreciation expense is not reported on a statement of cash flows prepared under the direct method.

Question 79

The gain or loss from retirement of debt is reported under cash flows from operating activities on the statement of cash flows using the indirect method.

Question 80

Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000.This implies that $40,000 cash was received from the sale.