Question 1

A growing, start-up company may have a cash flow pattern of borrowing cash to offset a cash shortage from the cash flows from operating activities and to purchase additional productive assets.

Accepted Answer

This is a common cash flow pattern for growing start-up companies that require additional cash to fund their operations and expansion.

Question 2

Which of the following statements regarding financing activities is NOT true?
A) Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B) When a company issues stock for cash, it reports a cash inflow from financing activities.
C) When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D) When a company repays a loan, it reports a cash outflow from investing activities.

Accepted Answer

Repaying a loan is a cash outflow from financing activities, not investing activities.

Question 3

If the calculation of net cash flows from operating activities starts with net income, the company:
A) is using the net income method.
B) will remove the effects of all noncash items included in the calculation of net income.
C) is using the direct method.
D) will add all noncash items not included in the calculation of net income.

Accepted Answer

The company is using the indirect method, which starts with net income and adjusts for noncash items and changes in working capital to calculate net cash flows from operating activities.

Question 4

B. Darin Company loaned $3,000,000 at 7% interest to S. Dee Company.
B. Darin Company would report this as an investing activity on the statement of cash flows.
TRUE

Accepted Answer

Loaning money is considered an investing activity on the statement of cash flows.

Question 5

Which of the following statements regarding quality of income ratio is NOT true?
A) A quality of income ratio will increase if a company's working capital management allows current assets such as inventory to increase out of control.
B) Variations in the ratio can be seasonal and are the result of sales fluctuations rather than reasons for alarm.
C) The quality of income ratio measures the portion of income that was generated in cash.
D) The quality of income ratio is useful when compared to industry competitors or to prior periods.

Accepted Answer

A quality of income ratio will actually decrease if a company's working capital management allows current assets such as inventory to increase out of control. This is because it indicates that the company is not efficiently using its assets to generate cash flow.

Question 6

Which of the following would be included in cash flows from operating activities?
A) Cash proceeds from sales.
B) Cash received from an issuance of bonds.
C) Dividends paid to stockholders.
D) Cash used for purchases of equipment.

Accepted Answer

Cash proceeds from sales would be included in cash flows from operating activities because it represents the cash received from the primary business operations of the company. Choices B, C, and D would be included in cash flows from financing activities (issuance of bonds and dividends paid) or investing activities (purchases of equipment).

Question 7

If a company reports negative net cash flows from operating activities, positive net cash flows from investing activities, and zero net cash flows from financing activities, this suggests that the company is selling its productive assets to cover its operating activities outflows.

Accepted Answer

Negative net cash flows from operating activities indicate that the company is spending more cash on its operations than it is generating from its core business. Positive net cash flows from investing activities suggest that the company is selling or disposing of productive assets, such as property, plant, and equipment, to generate cash inflows. Zero net cash flows from financing activities imply that the company is not raising additional capital or repaying debt during the period. Therefore, selling productive assets could be a possible source of cash inflow for the company to cover its operating activities outflows.

Question 8

Which of the following statements regarding the reporting of operating cash flows using the direct method is true?
A) The Financial Accounting Standards Board (FASB) prefers the direct method of accounting for cash flows from operating activities.
B) The FASB prefers the indirect method of calculating cash flows fro m operations because it gives a more accurate calculation of cash provided by operating activities.
C) The direct method results in a larger amount of cash flow from operating activities than does the indirect method.
D) The direct and indirect methods use different presentations for cash flows from investing and financing activities.

Accepted Answer

The first statement is true. The FASB prefers the direct method of accounting for cash flows from operating activities because it provides more detailed information and greater transparency in the presentation of cash flows from operations. However, both the direct and indirect methods are acceptable under Generally Accepted Accounting Principles (GAAP).

Question 9

If a company is to succeed over the long-term, a positive cash flow from operating activities is necessary.

Accepted Answer

Positive cash flow from operating activities means that a company is generating enough cash to cover its day-to-day operations and invest in its future growth. This is essential for a company's sustainability and long-term success.

Question 10

Which of the following statements regarding cash flows from investing activities is true?
A) The proceeds from sales of investments are reported as cash inflows from investing activities.
B) Cash flows from investing activities are calculated by making adjustments to net income.
C) Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities.
D) Cash received from issuing a long-term payable is reported as a cash inflow from investing activities.

Accepted Answer

The proceeds from sales of investments are reported as cash inflows from investing activities. Cash flows from investing activities relate to the acquisition and disposal of long-term assets and investments. It does not involve adjustments to net income or long-term payables. Cash paid to acquire long-lived assets is reported as a cash outflow from investing activities, not a cash inflow.

Question 11

Cash flows from investing activities include cash:
A) inflows and outflows reflecting revenues and expenses.
B) outflows from the sale of long-term investments.
C) inflows from the sale of long-term investments.
D) inflows from the sale of a company's own stock to its stockholders.

Accepted Answer

Cash flows from investing activities include cash inflows from the sale of long-term investments, such as the sale of property, plant, and equipment or investment securities, and cash outflows from the purchase of long-term investments. Options A and D describe cash flows from operating activities, while option B describes a cash outflow from investing activities.

Question 12

Cash and cash equivalents include:
A) assets that have stable long-term value.
B) assets that are short-term, highly liquid, and are purchased within three months of maturity.
C) assets that consistently grow in value over the long run.
D) assets that are expected to be used up within a year.

Accepted Answer

Cash and cash equivalents are short-term, highly liquid assets that can be easily converted into cash within three months or less. These assets are used for day-to-day operations and to cover short-term financial obligations. Examples include bank deposits, money market funds, and treasury bills.

Question 13

Suppose a company generally records revenues and expenses before receiving or making cash payments. Which of the following statements is NOT true?
A) If sales are falling, net losses could occur even though the company reports net cash inflows from operating activities.
B) If sales are rising, net profits could occur even though the company reports net cash outflows from operating activities.
C) Net income and cash flows will always agree because even though revenues and expenses can be recorded in different time periods than their related cash flows the differences will cancel out and the results will be the same.
D) When the indirect method is used, net cash flows from operating activities includes adjustments for non-cash expenses such as depreciation which would cause net cash from operating activities to be different from net

Accepted Answer

Net income and cash flows will not always agree because of differences in the timing of recording revenues and expenses versus their related cash flows. While the differences may eventually cancel out, this may not occur in the same period and may lead to temporary discrepancies between net income and net cash flows from operating activities.

Question 14

Which of the following would be included in cash flows from investing activities?
A) Cash proceeds from sales.
B) Cash received from an issuance of bonds.
C) Dividends paid to stockholders.
D) Cash used to purchases of equipment.

Accepted Answer

Cash used to purchase equipment is a cash outflow related to investing activities. Choice A (cash proceeds from sales) could refer to sales of investments, in which case it would be an investing cash flow, but without more information it is impossible to determine. Choice B (cash received from an issuance of bonds) is a financing activity. Choice C (dividends paid to stockholders) is also a financing activity.

Question 15

Which of the following statements regarding calculation of cash flows from operating activities under the indirect method is true?
A) When the indirect method is used, changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flows from operating activities.
B) When the indirect method is used, depreciation expense is added to net income as a step in the process of calculating net cash flows from operating activities.
C) When the indirect method is used, gains on the sale of property, plant and equipment are added to convert net income to net cash flows from operating activities.
D) When the indirect method is used, changes in long-term liabilities are subtracted to convert net income to net cash flows from operating activities.

Accepted Answer

Under the indirect method, depreciation expense is added to net income while changes in current assets are subtracted and changes in current liabilities are added to convert net income to net cash flows from operating activities. Gains on the sale of property, plant and equipment are also added but changes in long-term liabilities are not directly involved in the calculation of cash flows from operating activities.

Question 16

Which of the following statements regarding the quality of income and fraudulent financial reporting is NOT true?
A) Net income assumes that all revenues are eventually realized as cash inflows and all expenses are realized as cash outflows. The quality of income ratio is a measure of the extent to which this assumption should be considered valid.
B) Fraudulent financial reporting may involve delayed expense recognition.
C) Fraudulent financial reporting is more likely to result in overstatement of net cash flows from operating activities rather than as overstatement of net income.
D) Fraudulent financial reporting may involve aggressive revenue recognition, that is, recognizing revenue before it is earned.

Accepted Answer

Fraudulent financial reporting is more likely to result in overstatement of net income rather than net cash flows from operating activities because inflating net income can be used to meet earnings targets or increase the company's stock price, while inflating net cash flows from operating activities is more difficult to achieve.

Question 17

Which of the following statements regarding the calculation of cash flows from operating activities under the direct method is true?
A) When the direct method is used, each revenue and expense account on the income statement is individually adjusted to calculate net cash flows from operating activities.
B) Noncash revenues and expenses must be included in net cash flows from operating activities when preparing a Statement of Cash Flows using the direct method.
C) Depreciation is reported as a cash inflow in the cash flows from operating activities when the direct method is used.
D) A loss on the sale of a long-term asset is subtracted in the cash flows from operating activities when the

Accepted Answer

When using the direct method to calculate cash flows from operating activities, each revenue and expense account on the income statement is individually adjusted to calculate net cash flows from operating activities. This means that the actual cash inflows and outflows related to each revenue and expense item are identified and used to calculate the net cash flows from operating activities. Noncash revenues and expenses are not included in net cash flows from operating activities under the direct method. Depreciation is not reported as a cash inflow in the cash flows from operating activities under the direct method. A loss on the sale of a long-term asset is not subtracted or added to cash flows from operating activities.

Question 18

B. Darin Company loaned $3,000,000 at 7% interest to S. Dee Company. S. Dee Company would report this as an investing activity on the statement of cash flows.
FALSE

Accepted Answer

S. Dee Company would report this as a financing activity on the statement of cash flows, not an investing activity.

Question 19

Which of the following would be included in cash flows from financing activities?
A) Cash proceeds from sales.
B) Cash received from a sale of land.
C) Dividends paid to stockholders.
D) Cash used to purchases of equipment.

Accepted Answer

Cash flows from financing activities include transactions related to obtaining or repaying funds to finance the company's operations and growth. Payment of dividends to stockholders is an example of a financing activity as it is a distribution of profits to the owners of the company. Choices A, B, and D are incorrect as they do not involve financing activities.

Question 20

Which of the following statements regarding the capital acquisitions ratio is true?
A) The capital acquisitions ratio is often calculated as an average over a number of years for better comparison between companies in the same industry.
B) The calculation of the capital acquisit ions ratio uses the cash expenditures for property, plant and equipment that, all else equal, are reported in the financing activities section of the Statement of Cash Flows.
C) A ratio greater than 1.0 indicates that outside financing was needed to replace equipment in the current period.
D) The higher the ratio, the more likely external financing will be needed to fund future expansion.

Accepted Answer

The capital acquisitions ratio is often calculated as an average over a number of years for better comparison between companies in the same industry. This helps in understanding long-term trends and differences in capital investment strategies.

Quiz 12: Reporting and Interpreting the Statement of Cash Flows

A growing, start-up company may have a cash flow pattern of borrowing cash to offset a cash shortage from the cash flows from operating activities and to purchase additional productive assets.

Which of the following statements regarding financing activities is NOT true?

If the calculation of net cash flows from operating activities starts with net income, the company:

B. Darin Company loaned $3,000,000 at 7% interest to S. Dee Company. B. Darin Company would report this as an investing activity on the statement of cash flows. TRUE

Which of the following statements regarding quality of income ratio is NOT true?

Which of the following would be included in cash flows from operating activities?

If a company reports negative net cash flows from operating activities, positive net cash flows from investing activities, and zero net cash flows from financing activities, this suggests that the company is selling its productive assets to cover its operating activities outflows.

Which of the following statements regarding the reporting of operating cash flows using the direct method is true?

If a company is to succeed over the long-term, a positive cash flow from operating activities is necessary.

Which of the following statements regarding cash flows from investing activities is true?

Cash flows from investing activities include cash:

Cash and cash equivalents include:

Suppose a company generally records revenues and expenses before receiving or making cash payments. Which of the following statements is NOT true?

Which of the following would be included in cash flows from investing activities?

Which of the following statements regarding calculation of cash flows from operating activities under the indirect method is true?

Which of the following statements regarding the quality of income and fraudulent financial reporting is NOT true?

Which of the following statements regarding the calculation of cash flows from operating activities under the direct method is true?

B. Darin Company loaned $3,000,000 at 7% interest to S. Dee Company. S. Dee Company would report this as an investing activity on the statement of cash flows. FALSE

Which of the following would be included in cash flows from financing activities?

Which of the following statements regarding the capital acquisitions ratio is true?