Question 1

When a cash dividend is paid, the cash outflow is classified as an operating activity.

Accepted Answer

Cash dividends paid are classified as financing activities in the statement of cash flows, not operating activities.

Question 2

The statement of cash flows and the statement of financial position both report on the causes of the changes in the cash of the business.

Accepted Answer

The statement of cash flows reports on the causes of changes in cash, while the statement of financial position (also known as balance sheet) reports the financial position of the business at a given point in time.

Question 3

Cash flow from investing activities is considered the most important category on the cash flow statement because it is considered the best measure of expected earnings.

Accepted Answer

Cash flow from investing activities reflects the cash inflows and outflows related to a company's investments in assets such as property, plant, and equipment, and acquisitions of other businesses. While important, it is not necessarily a measure of expected earnings. Cash flow from operating activities, which reflects the cash inflows and outflows related to a company's core business operations, is often considered the most important category on the cash flow statement as it provides insight into a company's ability to generate cash from its day-to-day activities.

Question 4

The acquisition of a building by issuing a mortgage note payable would be considered an investing and financing activity that did not affect cash and would be reported in the notes to the financial statements.

Accepted Answer

The acquisition of a building through a mortgage note payable involves both investing (acquiring an asset) and financing (incurring a liability) activities, but it does not involve cash transactions, hence it is reported in the notes to the financial statements.

Question 5

Collection of principal on a note receivable is a cash flow from investing activities.

Accepted Answer

When a company collects the principal on a note receivable, it is considered a cash inflow from investing activities on the statement of cash flows.

Question 6

When the statement of cash flows is prepared in conformity with IFRS there is only one acceptable way to measure and report cash flows from operating activities.

Accepted Answer

Unlike US GAAP, IFRS provides two methods for reporting cash flows from operating activities: the direct method and the indirect method. While the direct method is preferred, the indirect method is also acceptable.

Question 7

A primary objective of the statement of cash flows is to show the earnings or loss on investing and financing transactions.

Accepted Answer

The primary objective of the statement of cash flows is to show the inflows and outflows of cash from operating, investing, and financing activities, rather than showing the earnings or loss from those activities. However, the statement of cash flows can indirectly provide information about the earnings and losses on those transactions.

Question 8

A transaction that does not cause an inflow or outflow of cash should be reported on the statement of cash flows only if it is an adjustment to convert accrual profit to the cash basis.

Accepted Answer

Non-cash transactions are not reported on the statement of cash flows but are disclosed in the notes to the financial statements or in a separate schedule.

Question 9

The statement of cash flows is dated exactly like the income statement but unlike the statement of financial position.

Accepted Answer

The statement of cash flows is dated exactly like the income statement, typically covering a period of one year or a fiscal quarter. However, the statement of financial position (also known as the balance sheet) does not have a date range listed as it reflects a snapshot of the company's financial position at a specific point in time.

Question 10

The net increase (or decrease) in cash that is reported on the statement of cash flows should be the same as the change in the balance of the cash account for the two most recent years on the comparative statements of financial position.

Accepted Answer

The statement of cash flows summarizes the cash inflows and outflows for a specific period of time and calculates the net change in cash during that period. This net change should match the difference in the cash account balances on the two comparative statements of financial position for the same period. Therefore, the net increase (or decrease) in cash reported on the statement of cash flows should be the same as the change in the cash account balance on the comparative statements of financial position.

Question 11

Any item that appears on the statement of earnings would be considered either a cash inflow or cash outflow from operating activities.

Accepted Answer

The statement of earnings, or income statement, includes non-cash items like depreciation and amortization, which do not directly affect cash flow from operating activities.

Question 12

The purchase of a piece of equipment in exchange for common shares must be reported on the statement of cash flows.

Accepted Answer

The purchase of equipment in exchange for common shares is a non-cash transaction and is not reported on the statement of cash flows.

Question 13

Only investments with original maturities of less than three months at the date of purchase qualify as cash equivalents.

Accepted Answer

This statement is true. Cash equivalents are highly liquid investments that can be easily converted into cash and have original maturities of less than three months from the date of purchase. Examples include Treasury bills, commercial paper, and money market funds.

Question 14

Cash equivalents are defined as short-term, highly liquid investments that are readily convertible into known amounts of cash and are so near their maturity that there is insignificant risk of changes in their value due to interest rate changes.

Accepted Answer

Cash equivalents are indeed defined as short-term, highly liquid investments that are readily convertible into known amounts of cash and are so near their maturity that there is insignificant risk of changes in their value due to interest rate changes.

Question 15

For external reporting, a company must prepare either a statement of earnings or a cash flow statement, but not both.

Accepted Answer

For external reporting, a company must prepare both a statement of earnings and a cash flow statement.

Question 16

Under the indirect method, noncash expenses are added to net earnings.

Accepted Answer

Noncash expenses, such as depreciation and amortization, are added back to net earnings under the indirect method because they do not involve an outflow of cash.

Question 17

Dividends collected from a long-term investment are cash flows from investing activities.

Accepted Answer

Dividends collected from a long-term investment are considered cash flows from operating activities, not investing activities.

Question 18

Cash collected from customers is a cash flow from a financing activity.

Accepted Answer

Cash collected from customers is a cash flow from an operating activity, not a financing activity.

Question 19

The amortization of a patent is treated in a similar manner to depreciation of a building when preparing the operating activities section of the statement of cash flows using the indirect method.

Accepted Answer

This statement is true. The amortization of a patent is a non-cash expense that is included in the operating activities section of the statement of cash flows. It is treated in a similar manner to depreciation of a building or other fixed asset.

Question 20

The primary objective of statement of cash flows is to provide information about a company's cash receipts and cash payments during an accounting period.

Accepted Answer

The statement of cash flows is a financial statement that reports a company's cash inflows and outflows during a specific period of time. Its primary objective is to provide information about a company's cash receipts and cash payments so that investors, creditors, and other users of financial information can evaluate its ability to generate cash and meet its obligations.

Quiz 5: Communicating and Interpreting Accounting Information