Question 1

Metz Vets

The company’s accountant prepared this reminder for his intern:

Cash = CL + LTL + CS + RE ? NCCA ? LTA

where:	CL = Current liabilities
 	LTL = Long-term liabilities
 	CS = Common stock
 	RE = Retained earnings
 	NCCA = Noncash current assets
 	LTA = Long-term assets

-Refer to Metz Vets. Which of the following activities results in a cash outflow?

Accepted Answer

Decreases in retained earnings typically result from dividends paid out to shareholders, which is a cash outflow.

Question 2

When using the direct method to determine operating cash flows, how is the sale of long-term investments for cash reported on the Statement of Cash Flows?

Accepted Answer

The sale of long-term investments for cash is reported as an investing activity on the Statement of Cash Flows.

Question 3

The following items were reported by Morris Plumbing Company:  What amount would be reported in the operating activities section of the statement of cash flows for Collections from Customers under the direct method, assuming that all sales are on credit?

Accepted Answer

The answer of The following items were reported by Morris...

Question 4

A company reported the following information: 
An analysis of records indicated that there were no cash flow effects resulting from the changes in the two accounts presented above. How should the changes in these accounts be reported on a statement of cash flows?

Accepted Answer

The answer of A company reported the following information: 
An...

Question 5

During the current year, the accounts payable balance decreased.

Accepted Answer

A decrease in accounts payable suggests that the company paid off more of its accounts payable than it incurred in new payables, indicating that payments on account exceeded credit purchases.

Question 6

A company acquired land by issuing its common stock. How should this transaction be disclosed when a statement of cash flows is prepared?

Accepted Answer

Transactions that do not involve cash, such as acquiring land through the issuance of stock, are not reported in the main body of the statement of cash flows. Instead, they are disclosed in a supplemental schedule of noncash investing and financing activities or in a note to the financial statements.

Question 7

Metz Vets

The company’s accountant prepared this reminder for his intern:

Cash = CL + LTL + CS + RE ? NCCA ? LTA

where:	CL = Current liabilities
 	LTL = Long-term liabilities
 	CS = Common stock
 	RE = Retained earnings
 	NCCA = Noncash current assets
 	LTA = Long-term assets

-Refer to Metz Vets. Which of the following activities results in a cash inflow?

Accepted Answer

Increases in common stock (CS) indicate that the company is issuing more shares, which results in a cash inflow as investors buy these shares.

Question 8

Which of the following transactions is not a significant noncash investing and financing activity?

Accepted Answer

Cash equivalents are purchased with cash, which is a cash transaction and not a noncash investing or financing activity. The other options involve noncash transactions, such as issuing mortgages, bonds, and stocks to acquire assets.

Question 9

Occasionally, companies engage in important investing and financing activities which do not affect cash. If the amount of the transaction is significant, how should it be disclosed when financial statements are prepared?

Accepted Answer

Investing and financing activities that do not affect cash should be disclosed in a note to the financial statements or in a supplemental schedule. This allows for transparency and clarity in the financial reporting process. They should not be included in the cash flow statement, as this statement is specifically meant to show the inflows and outflows of cash during a period. Including non-cash transactions in this statement could be misleading.

Question 10

Presented below is the operating activities section of a statement of cash flows for the current year:  Which method of preparing the operating activities section was used?

Accepted Answer

The answer of Presented below is the operating activities section...

Question 11

Which of the following statements is most likely to be right?

Accepted Answer

The indirect method is the most commonly used method for preparing the operating activities section of the statement of cash flows. While the FASB does not officially endorse either method, they have expressed a preference for the direct method in the past. Choice A is incorrect because it describes the direct method, not the indirect method. Choice B describes the direct method, not the indirect method. Choice C is not entirely accurate as the FASB does not officially endorse either method.

Question 12

During the current year, the accounts receivable balance increased.

Accepted Answer

An increase in accounts receivable indicates that more sales were made on credit and not all the payments have been collected yet. Thus, credit sales exceeded collections on account during the period. Option B is incorrect because an increase in accounts receivable is added to net income in the operating activities section of the statement of cash flows prepared under the indirect method to adjust for non-cash transactions, but it is not directly added to net income as revenue. Option C is incorrect because the increase in accounts receivable cannot be added to credit sales to determine collections on account; the accounts receivable balance is already a result of credit sales during the period. Option D is incorrect because an increase in accounts receivable does not indicate that there were no cash sales during the period.

Question 13

When using the indirect method to determine operating cash flows, where is the gain from selling a long-term investment recognized? (The proceeds from selling the investment are considered separately.)

Accepted Answer

Gains from selling long-term investments are recognized in the operating section of the cash flow statement when using the indirect method. This is because the gain is subtracted from net income to adjust for the fact that it did not provide cash from operating activities.

Question 14

Presented below is the operating activities section of a statement of cash flows for the current year:  Which method of preparing the operating activities section was used?

Accepted Answer

The operating activities section is shown using adjustments to net income, which indicates that the indirect method was used.

Question 15

The following information was reported by a catering company:  What amount would be reported in the operating activities section of the statement of cash flows for Payments for Operating Expenses under the direct method?

Accepted Answer

The answer of The following information was reported by a...

Question 16

The following information was taken from the financial records of Mr. Transmission:  How would the change in accounts payable be reported in the operating activities section of the statement of cash flows under the indirect method?

Accepted Answer

The answer of The following information was taken from the...

Question 17

The following items were obtained from the financial records:  How would the change in accounts receivable be reported in the operating activities section of the statement of cash flows under the indirect method?

Accepted Answer

The answer of The following items were obtained from the...

Question 18

Which method of preparing the operating activities section of a statement of cash flows reports major classes of gross cash receipts and cash payments for revenues and expenses?

Accepted Answer

The direct method is the method of preparing the operating activities section of a statement of cash flows that reports major classes of gross cash receipts and cash payments for revenues and expenses. It shows actual cash inflows and outflows, rather than adjustments made to net income. The indirect method shows adjustments made to net income to convert it to cash flows from operating activities.

Question 19

Which of the following statements is false?

Accepted Answer

Most companies actually prefer to use the indirect method of preparing the operating activities section of the statement of cash flows because it is simpler and less costly to implement. Therefore, statement D is false. The other statements are true. The indirect method adjusts net income to remove the effects of deferrals and accruals, while the direct method reports gross cash receipts and cash payments for major classes of revenues and expenses. While the FASB prefers the direct method, it is not commonly used in practice.

Question 20

Each of the following transactions would be classified as an investing activity except:

Accepted Answer

Receiving dividends on an investment in the stock of another company is considered an operating activity because it relates to the income received from investments, not the purchase or sale of long-term assets or investments.

Quiz 11: The Statement Of Cash Flows

When using the direct method to determine operating cash flows, how is the sale of long-term investments for cash reported on the Statement of Cash Flows?

The following items were reported by Morris Plumbing Company: What amount would be reported in the operating activities section of the statement of cash flows for Collections from Customers under the direct method, assuming that all sales are on credit?

A company reported the following information: An analysis of records indicated that there were no cash flow effects resulting from the changes in the two accounts presented above. How should the changes in these accounts be reported on a statement of cash flows?