Deck 23: Statement of Cash Flows

Question 1

The statement of cash flows is divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Answer 1

True

Question 2

Dividends received on investments made in the stock of other corporations is an example of a financing activity.

Answer 2

False

Question 3

Under the indirect method, debits to the investing and financing sections represent inflows of cash.

Answer 3

True

Question 4

Although the accrual basis of accounting is an excellent method for measuring profitability, it does not explain why a company's liquidity has improved or worsened.

Question 5

Interest received on loans made to borrowers is an example of a financing activity.

Question 6

Financing activities are those transactions involving the purchase and sale of long-term assets, investing in equity securities, lending money, and collecting the principal on the related loans.

Question 7

Financing activities are those transactions dealing with the exchange of cash between the firm and its owners (stockholders) and creditors.

Question 8

Proceeds from the sale of productive assets (property, plant, equipment, and intangible assets, etc.) are one example of investing activities.

Question 9

The statement of cash flows categorizes all cash flow into four major types of activities: planning, investing, financing, and operating.

Question 10

Achieving profitability will automatically assure sufficient amounts of cash.

Question 11

An increase or decrease in cash results from a combination of the operating, investing, and capitalizing activities of a business.

Question 12

The accuracy of the statement of cash flows can be verified by computing the change in the balance of the cash and cash equivalents.

Question 13

The investing activities section of the statement of cash flows includes the purchasing and selling of long-term assets, investing in the debt and equity securities of other businesses, making loans, and collecting the principal on loans.

Question 14

The accrual basis of accounting offers a direct explanation of why a firm's liquidity, as reported on the balance sheet, has improved or worsened.

Question 15

If dividends begin to exceed the cash generated from operating activities, it could imply that the business is about to liquidate.

Question 16

Cash generated from operating activities has traditionally been computed by combining the direct and the indirect methods.

Question 17

Proceeds from borrowing money through a mortgage is an example of an investing activity.

Question 18

The income statement adequately reflects all operating, investing, and financing activities.

Question 19

Under the cash basis of accounting, revenues are recognized when cash is received, regardless of when it is earned.

Question 20

The sum of the cash generated or used by each section of the statement of cash flows should equal the difference between the beginning and ending balance of the cash and cash equivalent accounts.

Question 21

Adjusting entries to record depreciation expense increase operating expenses and reduce net income but do not require an outflow of cash.

Question 22

Increases or decreases in net income always increase or decrease cash by the same amount.

Question 23

The managers of a business have the dual objective of generating net income (profitability) and keeping the enterprise solvent (liquidity).

Question 24

Financing activities include transactions with owners and creditors.

Question 25

The rate which credit customers pay their bills has no effect on the cash received from sales during an accounting period.

Question 26

Revenues recorded during an accounting period must be converted to the amount of cash received from customers during the year in order to prepare a statement of cash flows under the direct method.

Question 27

Under the indirect method of reporting cash flows, revenues and expenses reported on the income statement are adjusted to reflect the amount of cash received or expended for each item.

Question 28

(Appendix) Although the formats are different, the amount of cash flows from operating activities reported under the direct and indirect methods is always equal.

Question 29

(Appendix) To determine the cash generated from operating activities under the direct method, cost of goods sold must be adjusted to reflect the cash paid to suppliers for merchandise.

Question 30

Gains on the sale of plant and equipment should be subtracted from net income when computing cash from operating activities.

Question 31

Since interest revenue, interest expense, and dividend revenue are reported on the income statement, they are also considered cash flow from operating activities.

Question 32

Under the direct method of reporting cash flows, net income is adjusted for transactions impacting both net income and cash flows, but in different ways.

Question 33

A noncash expense is an expense that does not require an outflow of cash.

Question 34

Probably the most important indicator of an organization's financial health is the net cash flow from operating activities.

Question 35

Under the indirect method, a decrease in Accounts Payable must be subtracted from net income when computing cash from operating activities.

Question 36

Operating activities include transactions and events associated with selling a product or providing a service and are related to the revenues and expenses reported on the income statement.

Question 37

If all sales were made for cash, it would not be necessary to adjust the sales reported on the income statement.

Question 38

Under the indirect method, net income is considered the primary source of cash from operating activities.

Question 39

Under the indirect method, Depreciation Expense must be added to net income when computing cash from operating activities.

Question 40

Under the indirect method, an increase in Accounts Receivable must be added to net income when computing cash from operating activities.

Question 41

An example of a cash inflow from operating activities is

A) net income.
B) issuance of preferred stock.
C) buying and selling debt and equity securities.
D) lending money and collecting the principal on the related loans.

Question 42

An example of a cash outflow from investing activities is

A) issuance of a notes payable.
B) making a loan to another company.
C) cash dividends paid.
D) the purchase of treasury stock.

Question 43

(Appendix) A decrease in Accounts Receivable represents an increase in the cash generated from sales.

Question 44

Transactions involving the purchase and sale of long-term assets, investing in equity securities, lending money, and collecting the principal on related loans are called

A) investing activities.
B) operating activities.
C) financing activities.
D) buying and selling activities.

Question 45

An example of a cash inflow from investing activities is

A) interest received on loans.
B) the purchase of plant and equipment.
C) the sale of investments in equity securities.
D) the issuance of stock.

Question 46

(Appendix) Cash flows from investing activities are computed and reported in the same manner under the direct and indirect method.

Question 47

The purpose of a cash flow statement is to

A) show the profits generated.
B) show how cash was generated and used during a period.
C) show the expenses incurred in doing business.
D) show the revenue earned.

Question 48

(Appendix) An increase in Merchandise Inventory is deducted from cost of goods sold to compute the cash paid to suppliers.

Question 49

(Appendix) A decrease in Accounts Receivable is deducted from net sales to compute cash collected from customers.

Question 50

(Appendix) Under the direct method, each line of the income statement is converted to cash paid or received.

Question 51

Probably the most important indicator of financial health is the net cash flow from

A) operating activities.
B) investing activities.
C) financing activities.
D) buying and selling activities.

Question 52

Which of the following is NOT a cash outflow from an investing activity?

A) a loan made to another party
B) a payment made to acquire property
C) a purchase of treasury stock
D) a purchase of equity securities

Question 53

Under the direct and indirect methods of reporting the statement of cash flows, only

A) the operating activities section is different.
B) the financing activities section is different.
C) the investing activities section is different.
D) the operating and financing activities sections are different.

Question 54

(Appendix) A decrease in Accounts Payable is deducted from cost of goods sold to compute the cash paid to suppliers.

Question 55

(Appendix) An increase in Accounts Receivable represents an increase in the cash generated from sales.

Question 56

An example of a cash inflow from financing activities is

A) the sale of common stock.
B) interest paid on notes payable.
C) payment for additional inventory.
D) buying debt and equity securities.

Question 57

Which activities represent the company's primary source of cash over the life of the business?

A) financing activities
B) investing activities
C) operating activities
D) buying and selling activities

Question 58

(Appendix) The first step in computing the cash paid for merchandise is to determine the amount of inventory purchased during the year.

Question 59

(Appendix) Cash flows from financing activities are computed and reported in the same manner under the direct and indirect method.

Question 60

(Appendix) Payments to employees and to the government are examples of cash outflows resulting from operating activities.

Question 61

Operating activities are transactions and events associated with selling a product or providing a service related to

A) the revenues and expenses reported on the income statements.
B) the assets and liabilities reported on the balance sheet.
C) the net income reported on the statement of retained earnings.
D) the retained earnings reported on the balance sheet.

Question 62

Which of the following adjustments would NOT be made to net income when computing cash from operating activities?

A) add an increase in Accounts Payable
B) add depreciation expense
C) add an increase in Accounts Receivable
D) subtract the gain on sale of land

Question 63

An example of a cash inflow from operating activities is

A) cash received from the sale of merchandise.
B) proceeds from the sale of productive assets.
C) proceeds from discounting notes receivable.
D) proceeds from additional investments by the owners.

Question 64

Which of the following adjustments would NOT be made to net income when computing cash from operating activities?

A) add an increase in Accrued Interest Payable
B) deduct the purchase of store equipment
C) add the decrease in Merchandise Inventory
D) add the reduction in Accounts Receivable

Question 65

(Appendix) When preparing a schedule for the calculation of cash generated from operating activities under the direct method, the decrease in Merchandise Inventory is

A) added to cost of goods sold.
B) added to operating expenses.
C) subtracted from cost of goods sold.
D) subtracted from operating expenses.

Question 66

Those transactions dealing with the exchange of cash between the firm and its owners (stockholders) and creditors are called

A) investing activities.
B) operating activities.
C) financing activities.
D) planning activities.

Question 67

Which of the following is NOT a cash inflow from a financing activity?

A) proceeds from the issuance of stock
B) interest received on loans made to outsider investors
C) additional investments by the owners
D) proceeds from a mortgage

Question 68

(Appendix) When preparing a schedule for the calculation of cash generated from operating activities under the direct method, an increase in Prepaid Insurance is

A) subtracted from cost of goods sold.
B) added to cost of goods sold.
C) added to operating expenses.
D) subtracted from operating expenses.

Question 69

To qualify as "cash equivalents," the investment must be

A) readily convertible to a known amount of cash.
B) convertible to cash within a one-year period of time.
C) convertible to cash without a significant loss of value.
D) convertible to cash within a five-year period of time.

Question 70

A statement of cash flows is prepared from the

A) balance sheet from the beginning and the end of the period.
B) general journal.
C) accounts receivable ledger.
D) accounts payable ledger.

Question 71

If $10,000 was generated from operations, $4,000 used for investing activities, and $6,000 provided by financing activities, the cash balance must have increased by

A) $6,000.
B) $8,000.
C) $12,000.
D) $20,000.

Question 72

Some investing and financing activities involve no cash flows so they

A) represent no significant financial change.
B) should be included in the three main sections of the statement of cash flows.
C) should be reported in a separate section of the statement of cash flows.
D) must be converted to cash at the end of the accounting period.

Question 73

(Appendix) When preparing a schedule for the calculation of cash generated from operating activities under the direct method, an increase in Depreciation Expense is

A) subtracted from operating expenses.
B) added to operating expenses.
C) subtracted from net income.
D) added to net income.

Question 74

An example of a cash outflow from operating activities is

A) loans made by the company to other parties.
B) a payment for employee salaries.
C) payments to acquire treasury stock.
D) payments to acquire investments in debt and equity securities.

Question 75

Cash generated from operating activities may be computed and reported using

A) the direct method only.
B) the indirect method only.
C) either the direct and indirect methods.
D) the combination method.

Question 76

The accuracy of the statement of cash flows can be verified by computing the change in the balance of the

A) cash and cash equivalent accounts.
B) equity account.
C) revenue account.
D) asset and liability accounts.

Question 77

The method of reporting cash flows from operating activities under which income is adjusted for transactions impacting both net income and cash flows, but in different ways, is called the

A) direct method.
B) indirect method.
C) combination method.
D) adjusted method.

Question 78

Which of the following is NOT a cash outflow from an operating activity?

A) a withdrawal by the owners
B) a payment for the acquisition of inventory
C) a payment to the government
D) a payment for interest on a loan

Question 79

Those transactions dealing primarily with selling a product or providing a service related to the revenues and expenses reported on the income statement are called

A) investing activities.
B) operating activities.
C) financing activities.
D) planning activities.

Question 80

The method of reporting cash flows from operating activities under which revenues and expenses reported on the income statement are adjusted to reflect the amount of cash received or expended for each item is called the

A) direct method.
B) indirect method.
C) combination method.
D) adjusted method.