Question 1

In preparing a statement of cash flows, an increase in the Common Shares account during a period would be classified as an investing activity.

Accepted Answer

An increase in the Common Shares account is considered a financing activity rather than an investing activity. Investing activities relate to the acquisition or disposal of long-term assets or investments, while financing activities relate to transactions with owners or lenders, such as issuing or repurchasing shares.

Question 2

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

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Question 3

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

Accepted Answer

The formula is incorrect. It should be "Cost of goods sold - an increase in inventory + an increase in accounts payable = cash paid to suppliers during a period."

Question 4

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

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Question 5

In the investing activities section of the statement of cash flows, all the cash outflows 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 6

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 7

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 because the increase in accounts receivable indicates that sales were made on credit, but the cash from these sales has not been received yet. Therefore, the increase in accounts receivable is subtracted from net income in order to adjust for this non-cash transaction and calculate cash provided by operating activities.

Question 8

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

The direct method of calculating cash flow from operating activities involves adjusting each item in the income statement from the accrual basis to the cash basis. This is in contrast to the indirect method, which starts with net income and adjusts for non-cash items and changes in working capital to arrive at cash flow from operating activities.

Question 9

In preparing a statement of cash flows, the issue of debt should be reported separately from the retirement of debt.

Accepted Answer

Debt and retirement of debt are two separate activities that should be reported separately in the statement of cash flows. The issuance of debt would be reported under financing activities, while the retirement of debt would be reported under either financing activities (if the debt was repaid early) or operating activities (if the debt was repaid at maturity).

Question 10

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

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Question 11

Preparing the financing activities section of the statement of cash flows requires the analysis of non-current liability and equity accounts, as well as any short-term loans incurred for lending purposes rather than trade.

Accepted Answer

The financing activities section of the statement of cash flows includes the analysis of non-current liability and equity accounts, as well as any short-term loans incurred for financing purposes, such as borrowing funds to invest in the business, rather than for trade purposes like purchasing inventory or paying for operating expenses.

Question 12

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

Accepted Answer

The direct method presents the actual cash inflows and outflows during the period, which provides more detailed information about the company's operating activities. Additionally, it is easier to compare the direct method with the other financial statements, such as the income statement, as it uses the same categories of revenue and expenses.

Question 13

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

Accepted Answer

Cash provided by operating activities includes adjustments for non-cash items such as depreciation and changes in working capital, which can cause it to be different from the profit reported on the income statement.

Question 14

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

Accepted Answer

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Question 15

Investing activities affect non-current asset accounts.

Accepted Answer

Investing activities involve the acquisition or disposal of long-term or non-current assets, which affects the non-current asset accounts in a company's balance sheet. Examples of investing activities include purchasing property, plant, and equipment, buying or selling securities, and making loans or investments to other companies.

Question 16

On the statement of cash flows of a growing company, the reader should expect to see cash provided by its financing activities, not cash used.

Accepted Answer

A growing company often finances its expansion through borrowing or issuing equity, which results in cash inflows in the financing activities section of the statement of cash flows.

Question 17

If accumulated other comprehensive income increases or decreases during the year, the change must be reported in the financing activities section.

Accepted Answer

Accumulated other comprehensive income is reported in the equity section of the balance sheet and is not included in the statement of cash flows. Therefore, any changes in accumulated other comprehensive income during the year are not reported in the financing activities section of the cash flow statement.

Question 18

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

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Question 19

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