Question 1

Transactions that involve the acquisition or sale of long-term assets are generally classified as investing activities on the statement of cash flows.

Accepted Answer

Investing activities on the statement of cash flows typically include transactions related to the acquisition or sale of long-term assets such as property, plant, and equipment or investments in other companies.

Question 2

Investments in stock are reported as an investing activity on the statement of cash flows.

Accepted Answer

Investments in stock are considered as a part of the investing activities of a company as they involve the acquisition or sale of long-term assets which can generate income or appreciation. Therefore, it is reported in the investing section of the statement of cash flows.

Question 3

On the statement of cash flows, the indirect method adjusts net income to determine the net cash flows from operating activities.

Accepted Answer

The indirect method of the statement of cash flows begins with net income and then adds or subtracts non-cash items and changes in working capital to arrive at the net cash flows from operating activities.

Question 4

Cash inflows that enter into the determination of net income are classified as financing activities on a statement of cash flows.

Accepted Answer

Cash inflows that enter into the determination of net income are classified as operating activities on a statement of cash flows, not financing activities. Financing activities include cash inflows from borrowing money or selling bonds, as well as cash outflows for repaying debt or paying dividends to shareholders.

Question 5

A statement of cash flows indicates the sources and uses of a firm's cash during a period.

Accepted Answer

A statement of cash flows summarizes a company's inflows and outflows of cash during a particular period, such as a quarter or a year. It includes information about the sources of cash, such as operations, investments, and financing, as well as the uses of cash, such as purchases of equipment, repayment of debt, and dividend payments.

Question 6

Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are disclosed in a supplementary schedule that is attached to the statement of cash flows.

Accepted Answer

Noncash investing and financing transactions are indeed significant activities that do not involve cash flows directly. They are disclosed in a supplementary schedule to the statement of cash flows to provide a complete picture of a company's investing and financing activities.

Question 7

Cash flow activities that include the cash effect of transactions that create revenues and expenses and thus enter into the determination of net income are classified as operating activities on the statement of cash flows.

Accepted Answer

Operating activities on the statement of cash flows include the cash effect of transactions that create revenues and expenses and thus enter into the determination of net income. Examples of operating activities include cash received from customers, cash paid to suppliers, and cash paid for salaries and wages.

Question 8

A decrease in accounts payable is added to net income in the operating activities section of the statement of cash flows prepared under the indirect method.

Accepted Answer

A decrease in accounts payable is deducted from net income in the operating activities section of the statement of cash flows prepared under the indirect method.

Question 9

Under the indirect method of determining the net cash from operating activities on the statement of cash flows, depreciation is subtracted from the net income for the period.

Accepted Answer

Under the indirect method, depreciation is added back to the net income because it is a non-cash expense that had reduced the net income.

Question 10

The issuance of common stock in exchange for a building would appear both as a cash inflow in the financing activities section of the cash flow statement and also as a cash outflow in the investing activities section.

Accepted Answer

The issuance of common stock in exchange for a building would only appear in the investing activities section as a cash outflow, not in the financing activities section as there is no cash inflow or outflow involved in this transaction.

Question 11

The amount for "net cash from operating activities" will be different depending on if the direct method or the indirect method is used to construct the statement of cash flows.

Accepted Answer

The amount for "net cash from operating activities" remains the same whether the direct method or the indirect method is used; the difference between the two methods lies in the presentation of cash flows, not in the total amount reported.

Question 12

All SEC-registered firms must issue a statement of cash flows, in addition to the income statement and balance sheet.

Accepted Answer

This is mandated by the Securities and Exchange Commission (SEC) as part of their financial reporting requirements.

Question 13

The sale of land for cash would be classified as a cash inflow from a financing activity.

Accepted Answer

The sale of land for cash would be classified as a cash inflow from an investing activity, not financing activity. Financing activities typically involve transactions related to debt or equity, such as issuing or repurchasing stock, paying dividends, or borrowing or repaying loans.

Question 14

For a statement of cash flows, firms are required to classify their cash activities into three categories: operating, investing, and borrowing.

Accepted Answer

The three categories are operating, investing, and financing activities, not borrowing.

Question 15

Companies can use two different methods to report the amount of cash flow from their operating activities on the statement of cash flows.

Accepted Answer

The two methods are the direct method and the indirect method.

Question 16

Cash received on the sale of equipment would be considered a financing activity on a statement of cash flows.

Accepted Answer

Cash received from the sale of equipment is considered an investing activity on a statement of cash flows, as it relates to the sale of long-term assets.

Question 17

Determining the cash flows from operating activities generally requires analyzing each item on the income statement as well as the current asset and current liability accounts.

Accepted Answer

Cash flows from operating activities are determined by analyzing each item on the income statement as well as the changes in current asset and current liability accounts.

Question 18

The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders' equity only.

Accepted Answer

The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of both stockholders' equity and liabilities.

Question 19

Under the indirect method of determining the net cash from operating activities on the statement of cash flows, increases in current assets such as accounts receivable are added to net income.

Accepted Answer

Increases in current assets such as accounts receivable are subtracted from net income because they represent earnings that have not yet been received in cash, thus reducing the cash available from operating activities.

Question 20

The indirect method of reporting the cash flows from operating activities on the statement of cash flows is the method most widely used in practice.

Accepted Answer

The indirect method is the most common method used to report cash flows from operating activities on the statement of cash flows. This method adjusts net income for non-cash transactions and changes in working capital accounts to arrive at the cash flow from operations.

Quiz 15: Statement of Cash Flows