Deck 17: Statement of Cash Flows

Question 1

Cash flows arising from the purchase or sale of productive assets are cash flows from operating activities.

Answer 1

False

Question 2

Under International Financial Reporting Standards,interest paid can be classified either as an operating or financing cash flow.

Answer 2

True

Question 3

Firms using the indirect method must also provide a reconciliation between accrual earnings and cash flows from operating activities.

Answer 3

False

Question 4

The direct method is easier for firms to implement because it relies exclu­sively on data already available in the accrual accounts.

Question 5

Accrual accounting is often based upon subjective judgments that can introduce measurement errors and uncertainty into reported earnings.

Question 6

The most popular method used by the majority of firms for reporting operating activities is the indirect method.

Question 7

When using the direct method to report cash flow from operating activities,a specific category for cash paid to employees and other suppliers of goods and services must be reported.

Question 8

Depreciation expense is the most common adjustment under the indirect method because it does not cause cash to increase or decrease.

Question 9

Both the direct method and indirect method will arrive at the same amount for cash flow from operating activities.

Question 10

Current GAAP for preparing the statement of cash flows using the direct method requires cash flows from "interest paid" and "interest received" to be shown as operating activities.

Question 11

The statement of cash flows provides relevant information to lenders,bankers,and investors to help them analyze a company's cash flows from its operating,investing,and financing activities.

Question 12

According to U.S.GAAP,cash flows for interest resulting from a long-term investment in bonds should be reported in the investing activities section of the statement of cash flows.

Question 13

The direct method and the indirect method are two alternative presentations for cash flows from investing activities.

Question 14

A significant difference between income from operations and net cash flows from operating activities is a signal that reported income might have been distorted.

Question 15

A cash collection from a customer pertaining to a sale from the prior year will result in cash flow being reported in this year's statement of cash flows.

Question 16

Current GAAP requires firms to use the direct method when preparing the operating activities section of the statement of cash flows because it is more informative and transparent.

Question 17

Cash flows arising from the purchase or sale of a company's own stock are cash flows from financing activities.

Question 18

Firms using the indirect method must separately disclose the amount of income taxes paid and interest paid.

Question 19

For a firm using the indirect method to prepare cash flows from operating activities,a decrease in a company's pension liability account should be deducted from net income to arrive at cash flow from operating activities.

Question 20

The indirect method for cash flow from operating activities begins with accrual-basis operating income.

Question 21

The changes in the working capital accounts are the major sources and uses of cash flows from operating activities.

Question 22

Issuing common stock in exchange for a building will create a cash inflow in the financing activities section of the cash flow statement.

Question 23

From a lessee's perspective,total cash flows will be the same whether a lease is classified as a capital lease or an operating lease.

Question 24

An increase in accounts payable of $6,000 for the year increases cash flow from operating activities by $6,000.

Question 25

For a firm using the indirect method,the gain on sale of equipment should be added back to net income to arrive at cash flow from operating activities.

Question 26

For a firm using the direct method,amortization of bond premium should be added back to net income when determining cash payments for interest.

Question 27

The FASB addressed simultaneous financing and investing activities by requiring they be ignored.

Question 28

An increase in cash flows from financing activities will occur when a company distributes a stock dividend.

Question 29

Delaying the payment of accrued expenses until a later period is a technique that management can use to manipulate the current year's cash flow from operating activities.

Question 30

If Firm A and Firm B are identical in every sense except that Firm A has a capital lease and Firm B an operating lease,the operating cash flows for Firm A will be greater than those for Firm B.

Question 31

Cash flow from operating activities is very comparable across firms within the same industry in the United States given that all firms must follow GAAP.

Question 32

An increase in prepaid expenses of $8,000 for the year increases cash flow from operating activities by $8,000.

Question 33

Issuing common stock in exchange for land will create a cash outflow in the investing activities section of the cash flow statement.

Question 34

Issuing common stock in exchange for equipment will create a cash outflow in the investing activities section of the cash flow statement and a cash inflow in the financing activities section of the cash flow statement.

Question 35

For a firm using the indirect method,an increase in a deferred tax liability should be added back to net income to arrive at cash flow from operating activities.

Question 36

For a firm using the indirect method,changes in inventories due to acquisitions are not included as part of the inventory adjustment to accrual-basis income.

Question 37

Issuing common stock in exchange for a patent will neither be reported within the cash flow statement nor disclosed.

Question 38

For a firm using the indirect method,amortization of bond discount should be added back to net income to arrive at cash flow from operating activities.

Question 39

A significant increase in capital expenditures reported in the investing section of the cash flow statement that coincides with a significant decrease in operating expenses as a percentage of sales may be an indication that the firm is improperly capitalizing costs that should be expensed.

Question 40

For a firm using the indirect method,a loss on the sale of equipment should be added back to net income to arrive at cash flow from operations.

Question 41

Under IFRS firms are encouraged to use the direct method and are required to provide a reconciliation of net income to cash flows from operating activities.

Question 42

Cash flows arising from the payment of dividends are cash flows from

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

Question 43

Cash flows arising from the purchase or sale of marketable securities are cash flows from

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

Question 44

GAAP mandates that firms provide a

A)working capital statement.
B)cash flow statement.
C)statement showing inflows and outflows of current assets and current liabilities.
D)statement reporting changes in current operations.

Question 45

Under IFRS rules,nonfinancial firms are permitted to report interest and dividends received either as operating or investing activities and interest paid as either an operating or financing activity.

Question 46

Cash flows arising from the acquisitions and divestitures of other companies are cash flows from

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

Question 47

Under IFRS firms that use bank overdrafts repayable on demand as part of their normal cash management activities must include those overdrafts as part of financing activities.

Question 48

The direct method and the indirect method are alternative presentations for presenting cash flows from

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

Question 49

Analysts prefer the indirect method for the preparation of the cash flow statement because the size and direction of the items reconciling net income to net cash flow from operating activities provide a yardstick for measuring the

A)current ratio.
B)return on assets.
C)quality of earnings.
D)rate of dividends.

Question 50

Cash flows arising from the purchase or sale of productive assets are cash flows from

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

Question 51

Which one of the following would be reported in the cash flow from operating activities section of the cash flow statement under the direct method?

A)Increase in taxes payable
B)Interest and dividends received
C)Issuance of common stock
D)Cash payments made on short-term notes

Question 52

Cash flows arising from the purchase or sale of a company's own stock are cash flows from

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

Question 53

The FASB's agenda lists as "inactive" a project that would require firms to use the direct method of reporting cash flows from operating activities.

Question 54

IFRS rules allow firms to classify dividends paid as a component of cash flows from operating activities in order to help users to determine the ability of an entity to pay dividends out of operating cash flows.

Question 55

The method of preparing the statement of cash flows used by the majority of firms is the

A)direct method.
B)indirect method.
C)revenue method.
D)dividend methoD.

Question 56

Cash flows that arise from transactions of a firm related to the production and delivery of goods and services to customers are cash flows from

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

Question 57

Which one of the following items is the most common adjustment to the cash flow from operating activities under the indirect method because cash does not increase or decrease?

A)Change in receivables
B)Depreciation expense
C)Change in fixed assets
D)Change in cash

Question 58

Under IFRS firms are encouraged to use the direct method.The result is that firms that follow IFRS rarely use the indirect method of presenting cash flows from operating activities.

Question 59

Accrual accounting net income can differ from operating cash flows for all of the following reasons except

A)dividend declaration and payment dates.
B)useful lives of assets.
C)future pension and healthcare benefits.
D)estimates of uncollectible accounts.

Question 60

Under IFRS rules,if a firm uses the direct method,a reconciliation of net income to cash flows from operating activities is not required.

Question 61

The cash flow statement of the United Company is in process for 2015. The United Company is reporting the following balances:
$\begin{array}{lrrrr}&12/31/14&12/31/15\\\text { Equipment } & \$ 100,000 & \$ 170,000 \\\text { Loss on sale of equipment } & 0 &10,000 \\\text { Accumulated depreciation-equipment } & 75,000 & 95,000\end{array}$
During 2015, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash.

-Depreciation expense for 2015 is

A)$8,000.
B)$20,000.
C)$18,000.
D)$28,000.

Question 62

$\begin{array}{l}\text { The following data is for the Kris Company for } 2015 \text {; }\\\begin{array}{lr}\text { Gain on sale of equipment } & \$8, 000 \\\text { Purchase of First Corp. bonds (face value } \$ 250,000 \text { ) } & 275,000 \\\text { Proceeds from sale of machinery } & 300,000 \\\text { Dividends paid } & 50,000 \\\text { Proceeds from sale of treasury stock } & 200,000\end{array}\end{array}$

-The amount reported as net cash provided by financing activities is

A)$25,000.
B)$30,000.
C)$150,000.
D)$200,000.

Question 63

The following information has been provided to you by Watts Corporation: $$\begin{array} { l r l } \text { Net income } & \$ 175,300 \\\text { Increase in accounts payable } & \$ 18,500 \\\text { Increase in inventory } & \$ 17,500 \\\text { Increase in accounts receivable } & \$ 7,700 \\\text { Increase in bonds payable } & \$ 75,000 \\\text { Amortization of bond premium } & \$ 5,400 \\\text { Depreciation expense } & \$ 21,300 \\\text { Decrease in income taxes payable } & \$ 7,300\end{array}$$
What is Watts Corporation's net cash flow from operating activities?

A)$186,000
B)$175,200
C)$138,200
D)$210,200

Question 64

Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities when using the indirect method?

A)A decrease in accounts receivable will be added to net income.
B)An increase in inventory will be added to net income.
C)An increase in accounts payable will be added to net income.
D)Amortization of bond premium will be deducted from net income.

Question 65

A decrease in accounts receivable of $16,000 for the year

A)decreases cash flow from operating activities by $8,000.
B)increases cash flow from operating activities by $8,000.
C)decreases cash flow from operating activities by $16,000.
D)increases cash flow from operating activities by $16,000.

Question 66

$\begin{array}{l}\text { The following data is for the Kris Company for } 2015 \text {; }\\\begin{array}{lr}\text { Gain on sale of equipment } & \$8, 000 \\\text { Purchase of First Corp. bonds (face value } \$ 250,000 \text { ) } & 275,000 \\\text { Proceeds from sale of machinery } & 300,000 \\\text { Dividends paid } & 50,000 \\\text { Proceeds from sale of treasury stock } & 200,000\end{array}\end{array}$

-The amount reported as net cash provided by investing activities is

A)$25,000.
B)$50,000.
C)$275,000.
D)$300,000.

Question 67

$\begin{array}{l}\text { The following data is for the Matt Company for } 2015 \text { : }\\\begin{array}{lr}\text { Loss on sale of equipment } & \$, 000 \\\text { Purchase of Ithaca Corp. bonds (face value } \$ 400,000 \text { ) } & 375,000 \\\text { Proceeds from sale of machinery } & 200,000 \\\text { Dividends paid } & 25,000 \\\text { Proceeds from sale of treasury stock } & 100,000\end{array}\end{array}$

-The amount reported as net cash from investing activities is

A)($175,000).
B)($150,000).
C)$87,500.
D)$575,000.

Question 68

An increase in inventory of $7,000 for the year

A)decreases cash flow from operating activities by $7,000.
B)increases cash from operating activities by $7,000.
C)decreases cash flow from operating activities by $14,000.
D)increases cash flow from operating activities by $14,000.

Question 69

Pipe Corporation reported cost of goods sold of $250,000 for 2015.It also reported an increase in inventory for the year of $30,000,and an increase in accounts payable of $24,000.Pipe would report cash paid to suppliers in 2015 under the direct method for cash flows of

A)$250,000.
B)$256,000.
C)$280,000.
D)$304,000.

Question 70

Under the indirect method,the gain on sale of equipment should be

A)added back to net income to arrive at cash flow from operating activities.
B)subtracted from net income to arrive at cash flow from operating activities.
C)a source of funds in the financing activities.
D)a source of funds in the investing activities.

Question 71

The following information has been provided to you by your controller: $$\begin{array} { l r } \text { Net income } & \$ 100,000 \\\text { Decrease in accounts payable } & \$ 38,000 \\\text { Decrease in inventory } & \$ 7,500 \\\text { Increase in accounts receivable } & \$ 8,000 \\\text { Decrease in bonds payable } & \$ 75,000 \\\text { Amortization of bond discount } & \$ 9,400 \\\text { Depreciation expense } & \$ 20,000 \\\text { Increase in income taxes payable } & \$ 6,000\end{array}$$
What is the net cash flow from operating activities?

A)$96,900
B)$97,900
C)$112,900
D)$94,100

Question 72

An increase in accounts receivable of $6,000 for the year

A)decreases cash flow from operations by $3,000.
B)increases cash flow from operations by $3,000.
C)decreases cash flow from operations by $6,000.
D)increases cash flow from operations by $6,000.

Question 73

$\begin{array}{l}\text { The following data is for the Matt Company for } 2015 \text { : }\\\begin{array}{lr}\text { Loss on sale of equipment } & \$, 000 \\\text { Purchase of Ithaca Corp. bonds (face value } \$ 400,000 \text { ) } & 375,000 \\\text { Proceeds from sale of machinery } & 200,000 \\\text { Dividends paid } & 25,000 \\\text { Proceeds from sale of treasury stock } & 100,000\end{array}\end{array}$

-The amount reported as net cash from financing activities is

A)($25,000).
B)$30,000.
C)$75,000.
D)$80,000.

Question 74

The cash flow statement of the United Company is in process for 2015. The United Company is reporting the following balances:
$\begin{array}{lrrrr}&12/31/14&12/31/15\\\text { Equipment } & \$ 100,000 & \$ 170,000 \\\text { Loss on sale of equipment } & 0 &10,000 \\\text { Accumulated depreciation-equipment } & 75,000 & 95,000\end{array}$
During 2015, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash.

-If these were the only investing activities,the cash flow from investing activities is a net cash

A)outflow of $12,000.
B)inflow of $12,000.
C)outflow of $88,000.
D)inflow of $88,000.

Question 75

A decrease in prepaid expenses of $8,000 for the year

A)decreases cash flow from operating activities by $8,000.
B)increases cash flow from operating activities by $8,000.
C)decreases cash flow from operating activities by $16,000.
D)increases cash flow from operating activities by $16,000.

Question 76

For a firm using the indirect method,which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities?

A)An increase in wages payable will be added to net income.
B)A decrease in accrued interest payable will be deducted from net income.
C)Amortization of bond discount will be added to net income.
D)Patent amortization expense will be deducted from net income.

Question 77

The cash flow statement of the United Company is in process for 2015. The United Company is reporting the following balances:
$\begin{array}{lrrrr}&12/31/14&12/31/15\\\text { Equipment } & \$ 100,000 & \$ 170,000 \\\text { Loss on sale of equipment } & 0 &10,000 \\\text { Accumulated depreciation-equipment } & 75,000 & 95,000\end{array}$
During 2015, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash.

-Equipment purchases in 2015 were

A)$30,000.
B)$70,000.
C)$100,000.
D)$120,000.

Question 78

Bruce Company reported net income for 2015 of $100,000.The company reported depreciation expense of $17,500 and amortization of $5,000.The company also reported a loss on the sale of equipment of $2,500.Based only on this information,the company would report cash flow from operating activities of

A)$117,500.
B)$120,000.
C)$127,500.
D)$125,000.

Question 79

Under the indirect method,a loss on the sale of equipment should be

A)added back to net income to arrive at cash flow from operating activities.
B)subtracted from net income to arrive at cash flow from operating activities.
C)a source of funds in the financing activities.
D)a source of funds in the investing activities.

Question 80

The FASB decided that the allocation of income taxes paid to operating,financing,and investing activities would be complex and arbitrary,and relied on which one of the following justifications for its decision?

A)Materiality constraint
B)Historical cost
C)Cost-benefit constraint
D)Revenue recognition principle