Question 1

Free cash flow is equal to net cash flow from operating activities minus capital expenditures and dividends.

Accepted Answer

This is the correct formula for free cash flow.

Question 2

To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and have an original maturity to the investor of 3 months or more.

Accepted Answer

To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and have an original maturity to the investor of 3 months or less.

Question 3

In terms of the statement of cash flows, cash includes actual cash items minus certain cash equivalents such as commercial paper, money market funds, and treasury bills.

Accepted Answer

Cash and cash equivalents on the statement of cash flows include actual cash on hand as well as certain cash equivalents like commercial paper, money market funds, and treasury bills, not minus them. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.

Question 4

Significant noncash transactions are not reported on the statement of cash flows, but in a separate schedule shown either at the bottom of the statement of cash flows or in a note to the financial statements.

Accepted Answer

Significant noncash transactions, such as issuance of stock, conversion of bonds, or exchange of assets, are not directly reported on the statement of cash flows. However, they are disclosed either at the bottom of the statement or in the notes to the financial statements.

Question 5

The statement of cash flows helps users understand the reasons for the differences between net income and related cash receipts and payments.

Accepted Answer

The statement of cash flows provides information about cash inflows and outflows during a particular period, which helps users understand the reasons for the differences between net income and related cash receipts and payments.

Question 6

Cash flows from purchases, sales, and maturities of investments are classified as financing activities.

Accepted Answer

Cash flows from purchases, sales, and maturities of investments are classified as investing activities, not financing activities. Financing activities typically refer to activities related to the issuance or repayment of debt or equity securities.

Question 7

Under the indirect method, the first line in the operating activities section of the statement of cash flows is the net income or loss for the period.

Accepted Answer

This is because the indirect method starts with the net income or loss and adjusts it for non-cash items and changes in working capital to arrive at the cash flows from operating activities.

Question 8

The Statement of Cash Flows is considered to be a good indicator of current cash inflows and outflows.

Accepted Answer

The Statement of Cash Flows provides information about the sources and uses of cash during a specific period of time, and therefore serves as a good indicator of current cash inflows and outflows.

Question 9

Issuing stock increases the company's cash flows from investing activities.

Accepted Answer

Issuing stock increases a company's cash flows from financing activities, not investing activities.

Question 10

Depreciation is a noncash expense that is subtracted from net income in determining cash provided from operating activities under the indirect method.

Accepted Answer

The answer of Depreciation is a noncash expense that is...

Question 11

Both the indirect and direct method arrive at an identical amount of net cash provided (used)by operating activities.

Accepted Answer

This is true as both methods use the same information from the statement of cash flows, just presented in different formats.

Question 12

An investment in common stock is not considered to be a cash equivalent.

Accepted Answer

Cash equivalents are highly liquid investments that can be easily converted to cash and provide a low-risk investment option. Common stock investments are not highly liquid and are subject to market risk, making them not considered as cash equivalents.

Question 13

The statement of cash flows summarizes the operating, investing, and financing activities of a business for a period of time.

Accepted Answer

The statement of cash flows reports the cash inflows and outflows of a business, categorized into operating, investing, and financing activities. It provides a summary of the sources and uses of cash during a specific period of time.

Question 14

Cash flows from operating activities often relate to an increase or decrease in either a current asset or a current liability.

Accepted Answer

Cash flows from operating activities can be influenced by changes in current assets (such as accounts receivable or inventory) or current liabilities (such as accounts payable or accrued expenses). Therefore, the statement is true.

Question 15

For the statement of cash flows, companies are required to classify their cash activities into three categories: operating, investing, and financing.

Accepted Answer

This is a requirement under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Question 16

Cash flows from selling machinery would be classified as investing activities.

Accepted Answer

Selling machinery is a transaction related to the purchase and sale of long-term assets, which falls under the category of investing activities in the statement of cash flows.

Question 17

Companies can use two different methods to report the amount of cash flow from their investing and financing activities.

Accepted Answer

The answer of Companies can use two different methods to...

Question 18

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 as a non-cash investing activity in the cash flow statement, as it involves the exchange of one asset (building) for another (common stock). No cash is involved in this transaction, so it would not appear in the financing activities section.

Question 19

Operating activities involve the acquiring and selling of goods and services for cash or on account.

Accepted Answer

Operating activities involve the day-to-day activities of a business, including the acquiring and selling of goods and services for cash or on account.

Question 20

The indirect method of reporting cash flows from operating activities involves reconciling net income and cash flows from operations.

Accepted Answer

The indirect method of reporting cash flows from operating activities involves adjusting net income for non-cash items and changes in working capital accounts to reconcile it to cash flows from operations.

Quiz 11: The Statement of Cash Flows