Deck 16: Statement of Cash Flows

Question 1

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

Answer 1

True

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.

Answer 2

True

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.

Answer 3

True

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.

Question 5

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

Question 6

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

Question 7

The statement of cash flows explains 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.

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

Cash paid for merchandise is an operating activity.

Question 14

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

Question 15

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

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.

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.

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.

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.

Question 20

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

Question 21

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

Question 22

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

Question 23

The usual first step in preparing the statement of cash flows is computing the net increase or net decrease in cash.

Question 24

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

Question 25

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

Question 26

The cash flow on total assets ratio reflects actual cash flows and is therefore affected by the accounting constraints of recognition and measurement for net income.

Question 27

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 28

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 income.

Question 29

The direct method for preparing and reporting the statement of cash flows reports net income and then adjusts it for items necessary to calculate net cash provided or used by operating activities.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

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 can be used as an indicator of earnings quality.

Question 38

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

Question 39

Managers only use the statement of cash flows 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 40

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

Question 41

The statement of cash flows reports:

A) Cash flows from operating activities.
B) Cash flows from financing activities.
C) Cash flows from investing activities.
D) Significant noncash financing and investing activities.
E) All of these.

Question 42

The appropriate section in the statement of cash flows for reporting the purchase of equipment for cash is:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash investing or financing activity.
E) None of these. This is not reported on the statement of cash flows.

Question 43

An investment that is readily convertible to a known amount of cash and that is sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes is a(n):

A) Short-term marketable equity security.
B) Operating activity.
C) Ordinary share.
D) Cash equivalent.
E) Financing activity.

Question 44

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

Question 45

Investing activities include the:

A) Purchase of property, plant and equipment.
B) Lending on notes receivable.
C) Collecting on notes receivable.
D) Sale of property, plant and equipment.
E) All of these.

Question 46

Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business, are classified as:

A) Financing activities.
B) Investing activities.
C) Operating activities.
D) Direct activities.
E) Indirect activities.

Question 47

The appropriate section in the statement of cash flows for reporting the cash payment of wages is:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash investing or financing activity.
E) None of these. This is not reported on the statement of cash flows.

Question 48

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 contracts held for dealing or trading purposes.

Question 49

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

Question 50

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.
Cost of asset $100,000
Accumulated depreciation 40,000
Carrying amount 60,000
Loss on sale (10,000)
Cash received $ 50,000

Question 51

A cash equivalent is an investment that:

A) Is readily convertible to a known amount of cash.
B) Is sufficiently close to its maturity date so its market value is unaffected by interest rate changes.
C) Generally is within 3 months of its maturity date.
D) Is highly liquid.
E) All of these.

Question 52

The statement of cash flows reports:

A) Assets, liabilities, and equity.
B) Revenues, gains, expenses, and losses.
C) Cash inflows and cash outflows for an accounting period.
D) Equity, net income, and dividends.
E) Changes in equity.

Question 53

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

Question 54

The appropriate section in the statement of cash flows for reporting the issuance of ordinary shares for cash is:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash investing or financing activity.
E) None of these. This is not reported on the statement of cash flows.

Question 55

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

Question 56

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

Question 57

Which of the following items can be reported on the statement of cash flows under financing activities?

A) Declaration of a cash dividend.
B) Payment of a cash dividend.
C) Declaration of a share dividend.
D) Payment of a share dividend.
E) Share split.

Question 58

The statement of cash flows is:

A) Another name for the statement of financial position.
B) A financial statement that presents information about changes in equity during a period.
C) A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.
D) A financial statement that lists the types and amounts of assets, liabilities, and equity of a business on a specific date.
E) A financial statement that lists the types and amounts of the revenues and expenses of a business for an accounting period.

Question 59

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

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 income.

Question 61

The purchase of long-term assets by issuing a note payable for the entire amount is reported on the statement of cash flows in the:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash financing and investing activities.
E) Reconciliation of cash balance.

Question 62

The statement of cash flows helps analysts evaluate the:

A) Source of cash used for debt repayments.
B) Source of cash used for plant expansion.
C) Differences between income and net operating cash flow.
D) Source of cash used to finance investing activities.
E) All of these.

Question 63

The appropriate section in the statement of cash flows for reporting the purchase of land in exchange for ordinary shares is:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash investing or financing activity.
E) Either investing or financing activities.

Question 64

An example of a transaction that must be disclosed as a noncash investing and financing activity includes:

A) The retirement of debt by issuance of equity.
B) The purchase of long-term assets financed by a cash down payment and a note payable to the seller for the balance.
C) The leasing of assets by means of a finance lease.
D) The purchase of noncash assets in exchange for equity or debt securities.
E) All of these.

Question 65

The cash flow on total assets ratio:

A) Is the same as return on assets.
B) Is the same as profit margin.
C) Can be an indicator of earnings quality.
D) Is highly affected by accounting principles of income recognition and measurement.
E) Is average net assets divided by cash flows from operations.

Question 66

The statement of cash flows helps address questions such as

A) How is the increase in investments financed?
B) What is the source of cash for new property, plant and equipment?
C) How much cash is generated from or used in operations?
D) Why is cash flow from operations different from income?
E) All of these.

Question 67

A company had net cash flows from operations of $120,000, cash flows from financing of $330,000, total cash flows of $500,000, and average total assets of $2,500,000. The cash flow on total assets ratio equals:

A) 4.8%.
B) 5.0%.
C) 20.0%.
D) 20.8%.
E) 24.0%.

Question 68

Typical cash flows from investing activities include:

A) Payments to purchase property, plant and equipment or other productive assets (excluding inventory).
B) Proceeds from collecting the principal amount of notes receivable arising from customer sales.
C) Proceeds from collecting the principal amount of notes receivable arising from intercompany transactions.
D) Payments to acquire held-to maturity securities of other entities, except cash equivalents.
E) Proceeds from the sale of equipment.

Question 69

Cash flows from interest received on loans are reported in the statement of cash flows as part of:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Noncash activities.
E) Operating or investing activities.

Question 70

A company's transactions with its creditors to borrow money and/or to repay the principal amounts of both short- and long-term debt are reported as cash flows from:

A) Operating activities.
B) Investing activities.
C) Financing activities.
D) Direct activities.
E) Indirect activities.

Question 71

The cash flow on total assets ratio is calculated by:

A) Dividing cash flows from operations by average total assets.
B) Dividing total cash flows by average total assets.
C) Dividing average total assets by cash flows from investing activities.
D) Dividing average total assets by total cash flows.
E) Total cash flows divided by average total assets times 365.

Question 72

Noncash investing and financing activities may be disclosed in:

A) A note in the financial statements or a schedule attached to the statement of cash flows.
B) The operating activities section of the statement of cash flows.
C) The investing activities section of the statement of cash flows.
D) The financing activities section of the statement of cash flows.
E) The reconciliation of cash balance section.

Question 73

Preparation of the statement of cash flows involves:

A) Computing the net increase or decrease in cash.
B) Computing and reporting net cash provided or used by operations.
C) Computing and reporting net cash provided or used by investing activities.
D) Computing and reporting net cash provided or used by financing activities.
E) All of these.

Question 74

Which one of the following is representative of typical cash flows from operating activities?

A) Proceeds from collecting the principal amounts of loans.
B) Repayment of principals on loans.
C) Proceeds from the issuance of bonds and notes payable.
D) Payments by a merchandiser to acquire equity securities of other companies.
E) Receipts of cash sales.

Question 75

If a company borrows money from a bank, the interest paid on this loan should be reported on the statement of cash flows as a(n):

A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash investing and financing activity.
E) Operating or financing activity.

Question 76

Which of the following is included in the cash flows from financing activities section of the statement of cash flows?

A) Collection of notes receivable.
B) Sale of equipment.
C) Dividends received from investments.
D) Purchase of treasury shares.
E) Purchase of shares in another company.

Question 77

Accounting standards:

A) Allow companies to omit the statement of cash flows from a complete set of financial statements if cash is an insignificant asset.
B) Require that companies omit the statement of cash flows from a complete set of financial statements if the company has no investing activities.
C) Require that companies include a statement of cash flows in a complete set of financial statements.
D) Allow companies to include the statement of cash flows in a complete set of financial statements if the cash balance makes up more than 50% of the current assets.
E) Allow companies to omit the statement of cash flows from a complete set of financial statements if the company has no financing activities.

Question 78

A company had average total assets of $1,760,000, total cash flows of $1,320,000, cash flows from operations of $205,000, and cash flows from financing of $850,000. The cash flow on total assets ratio equals:

A) 1.33%.
B) 8.58%.
C) 11.65%.
D) 15.5%.
E) 75%.

Question 79

The accounting principle that requires important noncash financing and investing activities be reported on the statement of cash flows or in a footnote is the:

A) Historical cost principle.
B) Materiality principle.
C) Full disclosure principle.
D) Going concern principle.
E) Business entity principle.

Question 80

The appropriate section in the statement of cash flows for reporting the receipt of cash dividends from investments in securities is:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Schedule of noncash investing or financing activity.
E) Either operating or investing activities.