Question 1

The direct method is considered to be more informative and easier to compare with the other financial statements.

Accepted Answer

The direct method provides more detailed information about cash flows and makes it easier to compare with the income statement. It presents the actual cash inflows and outflows from operating activities, while the indirect method adjusts net income for non-cash items and changes in working capital.

Question 2

Investing activities affect non-current asset accounts.

Accepted Answer

Investing activities involve the purchase or sale of non-current assets such as property, plant, and equipment, and investments in other companies, which have an impact on non-current asset accounts.

Question 3

In the investing activities section of the statement of cash flows, all the cash payments for purchase of non-current assets should be totalled and reported as one number.

Accepted Answer

The answer of In the investing activities section of the...

Question 4

The statement of cash flows is a required statement for both public and private corporations.

Accepted Answer

The statement of cash flows is a required financial statement for both public and private corporations according to generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).

Question 5

Under IFRS, the receipt of dividends from equity investments may be classified as a cash receipt provided (used) by investing activities.

Accepted Answer

Dividends received from equity investments are typically classified as cash inflows from investing activities under the indirect method of the statement of cash flows, which is required under IFRS.

Question 6

Under the indirect method, an increase in accounts receivable during a period is deducted from profit in calculating cash provided by operating activities.

Accepted Answer

This is correct. The indirect method adjusts net income for non-cash items and changes in current assets and liabilities, including an increase in accounts receivable, which would reduce cash provided by operating activities.

Question 7

A disadvantage of the indirect method of reporting cash flows provided (used) by operating activities is that the difference between the net amount of cash flows from operating activities and profit is not emphasized.

Accepted Answer

The answer of A disadvantage of the indirect method of...

Question 8

Under the direct method, an increase in inventory would be added to cost of goods sold to determine net purchases for the period.

Accepted Answer

The answer of Under the direct method, an increase in...

Question 9

Under the direct method, as an adjustment to operating expenses per the income statement, a decrease in prepaid expenses would be added to operating expenses to determine cash payments for operating expenses.

Accepted Answer

A decrease in prepaid expenses indicates that cash payments were made in a prior period, so it would be subtracted from operating expenses to determine cash payments for operating expenses.

Question 10

Cash flow provided (used) by investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected profit.

Accepted Answer

Cash flow provided (used) by investing activities is not considered the best measure of expected profit. It reflects the cash inflows and outflows related to the purchase and sale of long-term assets and investments, which may or may not contribute to future profitability. The best measure of expected profit is net income, which is reported on the income statement.

Question 11

Under the indirect method, an increase in accounts payable during a period is deducted from profit in calculating cash provided by operating activities.

Accepted Answer

An increase in accounts payable is added to profit in the indirect method because it represents expenses that have not yet been paid in cash, thus increasing cash flow.

Question 12

Cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers during a period.

Accepted Answer

The equation should be Cost of goods sold minus an increase in inventory minus an increase in accounts payable equals cash paid to suppliers during a period. This is because an increase in inventory and accounts payable suggests that payment has not yet been made to suppliers, so they should not be included in the total cash paid.

Question 13

In calculating cash flow provided (used) by operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

Accepted Answer

This is correct. The direct method of calculating cash flow from operating activities involves adjusting items in the income statement from the accrual basis to the cash basis in order to calculate the cash received and paid out during the period.

Question 14

Under the direct method, as an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

Accepted Answer

Under the direct method, cash payments for operating expenses are calculated by adjusting operating expenses for changes in related balance sheet accounts. An increase in accrued liabilities indicates that expenses have been incurred but not yet paid, so it would not be added to operating expenses to determine cash payments. Instead, it would be subtracted to reflect that cash payments are less than the expenses recognized.

Question 15

A loss on sale of equipment is included in the investing activities on the statement of cash flows.

Accepted Answer

A loss on sale of equipment is included in the operating activities section of the statement of cash flows, as it is added back to net income when calculating cash flow from operating activities. The actual cash received from the sale is reported in the investing activities section.

Question 16

Under the indirect method, a loss on the sale of equipment is added to profit in calculating cash provided by operating activities.

Accepted Answer

A loss on the sale of equipment is a non-cash expense that reduces net income, so it is added back to net income in the operating activities section of the cash flow statement when using the indirect method.

Question 17

Like the other financial statements, the statement of cash flows is prepared from an adjusted trial balance.

Accepted Answer

The statement of cash flows is prepared using information from the balance sheet and the income statement, not directly from an adjusted trial balance. It focuses on the changes in cash and cash equivalents by categorizing cash flows into operating, investing, and financing activities.

Question 18

Under ASPE, the payment of interest on a mortgage payable may be classified as a cash payment from financing activities.

Accepted Answer

The answer of Under ASPE, the payment of interest on...

Question 19

During the year, Income Tax Expense was $22,000 and Income Tax Payable increased by $3,000; therefore, the cash paid for income tax was $19,000.

Accepted Answer

The answer of During the year, Income Tax Expense was...

Question 20

Cash provided by operating activities is generally the same as the profit reported on the income statement.

Accepted Answer

Cash provided by operating activities and profit reported on the income statement are two different concepts. While profit takes into account non-cash items such as depreciation and amortization, cash provided by operating activities reflects actual cash transactions during the period, including changes in working capital. Therefore, the two figures can be different.

Quiz 13: Financial Analysis: the Big Picture