Deck 4: Statement of Cash Flows

Question 1

An increase in accounts payable should be------to convert net income to cash flow from operating activities.

Answer 1

added

Question 2

The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness.

Answer 2

True

Question 3

An increase in inventory should be------to convert net income to cash flow from operating activities.

Answer 3

subtracted

Question 4

Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.

Question 5

A decrease in accounts receivable should be------to convert net income to cash flow from operating activities.

Question 6

Repurchase of a firm's own shares is an investing cash outflow.

Question 7

The________ ________ is one way to common size the cash flow statement.
For questions 5 through 10, insert the word "added" or "subtracted" in the blank.

Question 8

Per FASB rules, firms may use the------method or the------method to calculate and present cash flow from operating activities.

Question 9

The amounts on a cash flow statement cannot be manipulated.

Question 10

Depreciation and amortization should be------to convert net income to cash flow from operating activities.

Question 11

The statement of cash flows shows the changes in the balance sheet accounts between periods.

Question 12

Cash flows are segregated on a statement of cash flows by------activities,------activities, and------activities.

Question 13

A change in the retained earnings account is the result of the________for the period and the payment of________ .

Question 14

Cash flow from operations represents the "cash" income from the company's business operations.

Question 15

Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement.

Question 16

A gain on sale of asset should be------to convert net income to cash flow from operating activities.

Question 17

A decrease in accrued liabilities should be------to convert net income to cash flow from operating activities.

Question 18

Cash outflows result from increases in asset accounts and decreases in liability and equity accounts.

Question 19

An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities.

Question 20

Proceeds from borrowing are a financing cash outflow.

Question 21

Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows?

A)Adding depreciation back to net income to determine cash flow from operating activities.
B)Including interest expense and tax expense in the calculation of cash flow from operating activities.
C)Recording an item that should be recorded as an operating activity as an investing activity.
D)The cash flow statement cannot be manipulated.

Question 22

Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities?

A)Selling assets is a noncash item.
B)Gains and losses from asset sales are a financing activity.
C)Gains and losses are not removed from net income when calculating the cash flows from operating activities
D)The entire proceeds from sales of long-lived assets are included in investing activities.

Question 23

Which item may be of concern when analyzing cash flow from financing activities?

A)Increasing inventories.
B)Borrowing each year to repay debt from prior years.
C)Repayment of debt.
D)Payments of dividends.

Question 24

What is implied if the inventory account has increased?

A)Cash flow from financing activities has decreased relative to net income.
B)Cash flow from operating activities has increased relative to net income.
C)Cash flow from operating activities has decreased relative to net income.
D)Cash flow from financing activities has increased relative to net income.

Question 25

What is cash from investing activities for Armstrong Company?

A)($160)
B)$160
C)$170
D)($170)

Question 26

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities?

A)Accounts receivable.
B)Depreciation.
C)Accounts payable.
D)Inventory.
Use the indirect method to answer questions 7-10.The following information is available for Armstrong Company:
$$\begin{array} { l r l r } \text { Net income } & \$ 450 & \text { Increase in plant and equip. } & \$ 170 \\\text { Depreciation expense } & 80 & \text { Payment of dividends } & 10 \\\text { Decrease in accts. receiv. } & 20 & \text { Increase in long-term debt } & 100 \\\text { Increase in inventories } & 15 & \text { Decrease in accounts payable } & 30\end{array}$$

Question 27

All of the following are reasons that the statement of cash flows is useful to the analyst except:

A)The statement of cash flows shows how cash is generated during an accounting period and how it has been used.
B)A positive net income figure on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statements for learning about cash generation is the statement of cash flows.
C)The statement of cash flows shows the adjustments made to net income in order to calculate cash flow from operations; those should be examined to determine why cash flow from operations is negative or positive.
D)The statement of cash flows is the only financial statement that cannot be manipulated.

Question 28

How is the statement of cash flows connected to the balance sheet?

A)The statement of cash flows shows changes in the asset and liability accounts to explain cash from operating activities.
B)The changes in all revenue and expense accounts are calculated and then listed as cash inflows or outflows.
C)The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.
D)Changes in asset accounts are recorded as operating activities, changes in liability accounts are recorded as financing activities and changes in equity accounts are recorded as investing activities.

Question 29

The following item would be classified as a financing activity on the statement of cash flows:

A)Payments for inventory.
B)Payment of dividends.
C)Acquisition of land.
D)Sales of goods.

Question 30

What is cash from financing activities for Armstrong Company?

A)$70
B)$60
C)$90
D)($110)

Question 31

What is cash flow from operating activities for Armstrong Company?

A)$505
B)$495
C)$335
D)$55

Question 32

The following item would be classified as an operating activity on the statement of cash flows:

A)Payments for inventory.
B)Acquisitions of equipment.
C)Proceeds from borrowing.
D)Payments on loans.

Question 33

Use the indirect method to answer questions The following information is available for Felix Company:
$$\begin{array} { l r l r } \text { Net income } & \$ 300 & \text { Decrease in plant and equip. } & \$ 40 \\\text { Depreciation expense } & 20 & \text { Increase in deferred tax asset } & 5 \\\text { Gain on sale of assets } & 35 & \text { Decrease in long-term debt } & 50 \\\text { Increase in inventories } & 25 & \text { Decrease in accounts payable } & 15\end{array}$$

-What is cash from investing activities for Felix Company?

A)$5
B)$40
C)$75
D)$10

Question 34

The following item would be classified as an investing activity on the statement of cash flows:

A)Proceeds from borrowing.
B)Sale of goods.
C)Sale of property.
D)Payment to lenders.

Question 35

What is the preferred method to generate cash in a firm?

A)Operating activities.
B)Investing activities.
C)Financing activities.
D)Investing and financing activities.

Question 36

What is the change in cash for Armstrong Company?

A)$315
B)$565
C)$425
D)$215

Question 37

Use the indirect method to answer questions The following information is available for Felix Company:
$$\begin{array} { l r l r } \text { Net income } & \$ 300 & \text { Decrease in plant and equip. } & \$ 40 \\\text { Depreciation expense } & 20 & \text { Increase in deferred tax asset } & 5 \\\text { Gain on sale of assets } & 35 & \text { Decrease in long-term debt } & 50 \\\text { Increase in inventories } & 25 & \text { Decrease in accounts payable } & 15\end{array}$$

-What is cash flow from operating activities for Felix Company?

A)$240
B)$70
C)$320
D)$250

Question 38

Use the indirect method to answer questions The following information is available for Felix Company:
$$\begin{array} { l r l r } \text { Net income } & \$ 300 & \text { Decrease in plant and equip. } & \$ 40 \\\text { Depreciation expense } & 20 & \text { Increase in deferred tax asset } & 5 \\\text { Gain on sale of assets } & 35 & \text { Decrease in long-term debt } & 50 \\\text { Increase in inventories } & 25 & \text { Decrease in accounts payable } & 15\end{array}$$

-What is the change in cash for Felix Company?

A)$310
B)$205
C)$330
D)$230

Question 39

Use the indirect method to answer questions The following information is available for Felix Company:
$$\begin{array} { l r l r } \text { Net income } & \$ 300 & \text { Decrease in plant and equip. } & \$ 40 \\\text { Depreciation expense } & 20 & \text { Increase in deferred tax asset } & 5 \\\text { Gain on sale of assets } & 35 & \text { Decrease in long-term debt } & 50 \\\text { Increase in inventories } & 25 & \text { Decrease in accounts payable } & 15\end{array}$$

-What is cash from financing activities for Felix Company?

A)$50
B)$65
C)($50)
D)$60

Question 40

Which of the following would increase cash from operating activities?

A)Increasing accounts receivable.
B)Increasing inventories.
C)Decreasing accounts payable.
D)Decreasing accounts receivable.

Question 41

What are the three areas of a cash flow statement that an analyst should cover at a minimum? Discuss each area by explaining items an analyst should be concerned with when reviewing the cash flow statement.

Question 42

Discuss the format of a statement of cash flows prepared using the indirect method.

Question 43

What can be learned from a statement of cash flows?