Question 1

In a healthy business, cash flow from operations will normally be:

Accepted Answer

A healthy business generally generates enough cash flow from its daily operations to cover its operating expenses, such as salaries, rent, and supplies. If a business is profitable, it means that its revenues are higher than its expenses, which can contribute to a positive cash flow. However, a business can still be profitable and have negative cash flow if it is investing heavily in new equipment or other long-term assets. Therefore, a positive cash flow is the best indicator of a healthy business.

Question 2

The rule for converting credit sales to cash received from debtors is:

Accepted Answer

To convert credit sales to cash received from debtors, we need to subtract the closing balance of debtors from the total of credit sales and opening balance of debtors. This is because the closing balance of debtors represents the amount due from debtors at the end of the period, which reduces the cash received from credit sales. Therefore, the correct formula is: income + debtors at the beginning - debtors at the end = cash received.

Question 3

GG Ltd's accounting records show:  Determine the amount of cash paid for inventory for the period.

Accepted Answer

The answer of GG Ltd's accounting records show:  Determine...

Question 4

Which item would not be included in the operating section of a cash flow statement?

Accepted Answer

Cash received from the sale of surplus machinery is considered an investing activity, not an operating activity. Operating activities typically include transactions related to the primary operations of the business, such as cash received from sales and cash payments for expenses.

Question 5

Which of these factors could cause operating profit to be more than cash flow from operations?

Accepted Answer

Increases in accounts receivable and inventory both imply that some of the revenues or costs recorded in the operating profit have not yet been converted into cash. An increase in accounts receivable indicates that sales have been made but not all have been collected in cash, and an increase in inventory suggests that goods have been produced or purchased but not yet sold, both of which would lead to operating profit being higher than the cash flow from operations.

Question 6

Calculate net cash flow from operating activities if:

Accepted Answer

The provided statements are not clear enough to calculate the net cash flow from operating activities. Without additional information, it is impossible to determine the correct answer.

Question 7

In the reconciliation attached to the cash flow statement, operating cash flow is reconciled to:

Accepted Answer

The answer of In the reconciliation attached to the cash...

Question 8

All purchases of inventory are for cash. If inventory at the beginning of the year is $63,000 and at the end is $88,000 and the cost of sales is $200,000, the cash paid for inventory purchased for the year is:

Accepted Answer

To find the cash paid for inventory, we use the formula: Cash Paid for Inventory = Cost of Sales + Ending Inventory - Beginning Inventory. Plugging in the given values: $200,000 + $88,000 - $63,000 = $225,000.

Question 9

For The Book Co, share capital increased by $200,000 in total over a year in which there was a bonus issue of 20,000 new shares at $2 per share. The cash flow from the issue of shares is:

Accepted Answer

A bonus issue does not generate cash flow as it involves issuing additional shares to existing shareholders without receiving cash. The increase in share capital due to the bonus issue is $40,000 (20,000 shares x $2), so the cash flow from the issue of shares is $200,000 - $40,000 = $160,000.

Question 10

An example of a non-cash investing or financing transaction is:

Accepted Answer

The purchase of a building paid for by an issue of shares direct to the vendor is a non-cash investing transaction because the payment is made through the issuance of shares rather than cash. Repayment of a loan (A) and sale of a parcel of shares (C) are cash transactions. Charging depreciation (B) is an accounting entry and does not involve any cash flow.

Question 11

Select the statement that is not true.

Accepted Answer

Operating profit does not necessarily mean that the firm has plenty of cash, as cash outflows for various purposes such as investing activities, repayment of loans, and dividends may occur.

Question 12

Cash received from the issue of shares will appear in which section of the cash flow statement?

Accepted Answer

Cash received from the issue of shares is considered a financing activity and will appear in the financing activities section of the cash flow statement.

Question 13

Indulgence Chocolates has provided the following information:   The cash payments made to suppliers during the year total:

Accepted Answer

The answer of Indulgence Chocolates has provided the following information:...

Question 14

The difference between operating profit or loss after tax and net cash provided by operating activities is due to:

Accepted Answer

The difference between operating profit or loss after tax and net cash provided by operating activities is primarily due to changes in working capital items such as accounts receivable, accounts payable, and inventory. These changes can impact cash flow as they may result in cash inflows or outflows, but do not necessarily impact operating profit or loss after tax. Changes in non-current assets, non-current liabilities, and equity items may also impact cash flow and operating profit or loss after tax, but these are not the primary drivers of the difference between the two measures.

Question 15

Which transaction would not appear in the body of a cash flow statement?

Accepted Answer

All of the transactions would not appear in the body of a cash flow statement because they do not involve the inflow or outflow of cash. The purchase of a building by incurring a mortgage to the seller involves obtaining a loan, which is a financing activity. Acquisition of assets by means of a share issue involves issuing shares to raise funds, which is a financing activity. Conversion of a liability to equity, such as converting debt to equity, does not involve any cash flows, but represents a change in the ownership structure of a company.

Question 16

Wages expense in the income report is $56,250, with the balance sheet at the end of the year showing accrued wages of $2,000. If there were no accrued wages at the beginning of the period, how much was paid out in cash for wages during the year?

Accepted Answer

The formula for calculating cash paid for wages is:

Cash paid for wages = Wages expense - change in accrued wages

Change in accrued wages = Ending accrued wages - Beginning accrued wages

Since there were no accrued wages at the beginning, the change in accrued wages is simply the ending balance of $2,000. Therefore:

Cash paid for wages = $56,250 - $2,000 = $54,250

So the correct answer is A.

Question 17

In 2015 Gee Co repaid $45,000 to the bank on a mortgage loan. $35,000 was interest on the mortgage and $10,000 was repayment of the principal. The repayment would appear in the cash flow statement as:

Accepted Answer

The $35,000 interest paid on the mortgage is classified as an operating expense and will be included in the operating activities section of the cash flow statement as an outflow. The $10,000 repayment of the principal on the mortgage is classified as a financing activity and will be included in the financing activities section of the cash flow statement as an outflow. Therefore, the correct choice is D, where both outflows are accounted for in their respective sections.

Question 18

If the opening balance of equity is $45,000, the closing balance is $60,000 and profit is $27,000, calculate the amount of drawings which will appear as a financing outflow in the cash flow statement.

Accepted Answer

The formula to calculate the amount of drawings is:

Drawings = Opening Balance of Equity + Profit - Closing Balance of Equity

Drawings = $45,000 + $27,000 - $60,000

Drawings = $12,000

Therefore, option C is correct, and the amount of drawings which will appear as a financing outflow in the cash flow statement is $12,000.

Question 19

If $80,000 is owed by customers at the beginning of the year, $75,000 is owed at the end and credit sales are $120,000, the cash received from customers is:

Accepted Answer

The formula to calculate cash received from customers is: Credit sales + beginning accounts receivable - ending accounts receivable.

Substituting the given values, we get:
Cash received from customers = $120,000 + $80,000 - $75,000
Cash received from customers = $125,000

Therefore, the correct answer is choice B, $125,000.

Question 20

The cash flow statement must include a note reconciling:

Accepted Answer

The cash flow statement helps to explain the difference between profit and cash flow from operations. This is often needed because profit and cash flows from operating activities are not necessarily the same, due to non-cash items such as depreciation and changes in working capital. The reconciliation note helps to explain these differences.

Quiz 5: Measuring and Reporting Cash Flows