Question 1

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.

Accepted Answer

When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is added to net income because it indicates that cash collections are higher than revenue recognized, increasing cash flow.

Question 2

The payment of interest on bonds is classified as a cash outflow from operating activities on the statement of cash flows.

Accepted Answer

True

Question 3

In the decline phase,the company continues to enjoy positive operating cash flows but stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders.

Accepted Answer

False

Question 4

The receipt of dividends and interest are both reported as cash inflows from investing activities on the statement of cash flows.

Accepted Answer

The receipt of dividends and interest is typically reported as cash inflows from operating activities, not investing activities, on the statement of cash flows.

Question 5

Under the indirect method,changes in current assets are used in determining cash flows from operating activities and changes in current liabilities are used in determining cash flows from financing activities.

Accepted Answer

Under the indirect method, changes in current assets and current liabilities are used in determining cash flows from operating activities, not financing activities. Changes in financing activities are primarily related to debt, equity, and dividends.

Question 6

A healthy company typically shows positive cash flows in the financing activities section of the statement of cash flows.

Accepted Answer

Positive cash flows in the financing activities section of the statement of cash flows may indicate that the company has issued additional debt or equity, which may not always be a sign of a healthy company. A healthy company may show positive cash flows in the operating activities section, indicating strong operational performance and cash generation.

Question 7

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

Accepted Answer

The answer of When preparing the operating activities section of...

Question 8

The payment of salaries and wages would be reported as an operating activity on the statement of cash flows.

Accepted Answer

Payment of salaries and wages is considered a part of operating activities on the statement of cash flows as it involves the cash spent on the day-to-day business operations of the company.

Question 9

Depreciation Expense is not reported on the statement of cash flows when prepared using the direct method.

Accepted Answer

Depreciation Expense is a non-cash expense and is therefore not reported on the statement of cash flows when prepared using the direct method. However, it is reported on the statement of cash flows when prepared using the indirect method as an adjustment to net income.

Question 10

When preparing the operating activities section of the statement of cash flows using the direct method,net income must be adjusted for gains or losses realized when property,plant,and equipment is sold.

Accepted Answer

When using the direct method for the operating activities section of the statement of cash flows, adjustments for gains or losses on the sale of property, plant, and equipment are not made because these gains or losses are investing activities, not operating activities. The direct method focuses on the specific cash flows from operating activities, such as cash received from customers and cash paid to suppliers and employees.

Question 11

Treasury stock purchases made with cash are classified as cash outflows from financing activities on the statement of cash flows.

Accepted Answer

Treasury stock purchases are a financing activity because they affect the company's equity. When the company buys back its own shares, it reduces the number of outstanding shares on the market, which increases the ownership percentage of existing shareholders. Therefore, treasury stock purchases made with cash are classified as cash outflows from financing activities on the statement of cash flows.

Question 12

When preparing the operating activities section of the statement of cash flows using the direct method,a gain or loss from selling equipment is reported in the operating activities section of the statement of cash flows.

Accepted Answer

Gains or losses from selling equipment are typically reported in the investing activities section of the statement of cash flows, not the operating activities section.

Question 13

Maya Company's purchase of 100 shares of Labrador Inc.common stock would be reported as a financing activity on its statement of cash flows.

Accepted Answer

The purchase of common stock is classified as an investing activity on the statement of cash flows, not a financing activity. Financing activities include borrowing money, repaying loans, and issuing or repurchasing equity securities.

Question 14

When the net cash flows from operating,investing,and financing activities are combined to arrive at the overall net change in cash,a net decrease in cash is subtracted from the beginning cash balance to calculate the ending cash balance.

Accepted Answer

This is a correct statement. When the net cash flows from operating, investing, and financing activities are combined, the resulting net change in cash is either added to or subtracted from the beginning cash balance in order to calculate the ending cash balance. If there is a net decrease in cash, it is subtracted from the beginning balance.

Question 15

The approach to preparing the cash flow statement relies on the following rearrangement of the balance sheet equation:
Change in cash = Change in (Liabilities + Stockholders' Equity + Noncash Assets).

Accepted Answer

The correct rearrangement of the balance sheet equation for preparing the cash flow statement is: Change in cash = Change in Liabilities + Change in Stockholders' Equity - Change in Noncash Assets.

Question 16

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

Accepted Answer

The statement of cash flows provides information on the sources and uses of cash and cash equivalents during a period, resulting in the difference between the beginning and ending balances.

Question 17

The reporting of financing activities is identical under the indirect and direct methods for the statement of cash flows on the statement of cash flows.

Accepted Answer

The reporting of financing activities is the same under both the indirect and direct methods on the statement of cash flows. However, the difference between the two methods is in how cash flows from operating activities are reported.

Question 18

Major investing and financing activities that do not involve cash do not have to be reported as part of the statement of cash flows.

Accepted Answer

Major investing and financing activities that do not involve cash are reported in the notes to the financial statements, not in the statement of cash flows itself.

Question 19

In general,the cash flow from operating activities is considered by many to be the most important component of the statement of cash flows.

Accepted Answer

Cash flow from operating activities represents the cash generated or used by a company's regular business operations, and is often seen as a key indicator of a company's ability to generate stable cash flows over time.

Question 20

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.

Accepted Answer

An increase in Income Taxes Payable represents a decrease in cash, and since net income is calculated on an accrual basis, it does not reflect changes in cash. Therefore, Income Taxes Payable is added to net income in order to adjust for the decrease in cash.

Quiz 12: Statement of Cash Flows