Question 1

Under the direct method,depreciation expense is treated as an outflow in the Investing Activities section of the statement of cash flows.

Accepted Answer

Under the direct method, depreciation expense is not reported in the Investing Activities section of the statement of cash flows. Instead, it is shown in the Operating Activities section as a non-cash expense that is added back to net income to calculate cash flows from operating activities.

Question 2

The Financial Accounting Standards Board (FASB)has expressed a strong preference for the indirect method,but allows companies to use the direct method in calculating the cash flow from operating activities.

Accepted Answer

The FASB actually prefers the direct method for calculating cash flows from operating activities, but allows the indirect method as well.

Question 3

A decrease in retained earnings indicates that a cash dividend has been paid.

Accepted Answer

A decrease in retained earnings can result from a cash dividend payment, but it can also be due to a company reporting a net loss.

Question 4

Because the cash received from the sale of long-term assets is reported in the Investing Activities section of the statement of cash flows,any gain or loss is built into the cash received under the direct method.

Accepted Answer

This statement is true. When using the direct method in preparing the statement of cash flows, gains or losses from the sale of long-term assets are incorporated into the cash received from the sale, which is reported under the Investing Activities section.

Question 5

The cash flow adequacy ratio can only be calculated if a company uses the direct method to report cash flows from operating activities.

Accepted Answer

The cash flow adequacy ratio can be calculated regardless of whether a company uses the direct or indirect method to report cash flows from operating activities. The ratio compares a company's operating cash flows to its capital expenditures, and is a measure of a company's ability to fund its operations and investments from its own resources.

Question 6

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 true. The indirect method starts with net income or loss for the period as the first line item in the Operating Activities section of the statement of cash flows.

Question 7

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

Accepted Answer

Cash flows from operating activities can be derived from analyzing each item on the income statement as well as changes in current asset (except cash) and current liability accounts. This is because changes in these accounts can impact cash flows from operating activities.

Question 8

Under the indirect method,instead of reporting cash receipts and payments,net income is reconciled with net cash from operating activities.

Accepted Answer

This statement is true. The indirect method of preparing the cash flow statement starts with net income and then makes adjustments to reconcile it with net cash from operating activities. This is done by adding back non-cash expenses and deducting non-cash revenues and adjusting for changes in current assets and current liabilities.

Question 9

All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.

Accepted Answer

The cash flow adequacy ratio requires information from both the income statement and the cash flow statement, in addition to the balance sheet. Therefore, all the information needed to compute the ratio is not found on the balance sheet alone.

Question 10

Some companies use a work sheet approach,which functions like the T account approach,as a tool to aid in preparing the statement of cash flows.

Accepted Answer

Some companies do use a worksheet approach, similar to the T account approach, to prepare the statement of cash flows. This includes organizing information from various sources, adjusting for non-cash items, and categorizing cash flows into operating, investing, and financing activities.

Question 11

The work sheet used to prepare a statement of cash flows (indirect method to determine cash flows from operating activities)should have a total in the Changes column equal to total assets.

Accepted Answer

The total in the Changes column on the worksheet used to prepare a statement of cash flows (indirect method) should equal the net increase/decrease in cash for the period, not total assets.

Question 12

The statement of cash flows emphasizes explanations for the change in net income.

Accepted Answer

The statement of cash flows emphasizes explanations for the change in cash and cash equivalents, not net income. Net income is just one factor that affects the change in cash.

Question 13

Many companies report cash flow per common share on the statement of cash flows.

Accepted Answer

Companies typically report cash flow information in the statement of cash flows as total amounts rather than on a per-share basis. Per-share data, such as earnings per share (EPS), is usually found in the income statement or notes to the financial statements.

Question 14

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

Accepted Answer

Significant noncash transactions are not reported in the statement of cash flows because it only includes cash transactions. Instead, they are disclosed in a separate schedule or in a note to the financial statements to provide a complete picture of a company's financial activities.

Question 15

If the December 31,2017,balance of accounts payable is higher than the January 1,2017,balance,then the amount of cash payments will exceed the purchases on account for the year.

Accepted Answer

An increase in accounts payable from the beginning to the end of the year indicates that the company has more unpaid bills at the end of the year than at the beginning. This does not necessarily mean cash payments exceeded purchases on account; it could indicate that purchases on account were greater than cash payments made towards those purchases.

Question 16

The basic accounting equation can be restated in terms of cash by the following equation: Cash = current liabilities + long-term liabilities + capital stock - retained earnings - noncash current assets + long-term assets.

Accepted Answer

The basic accounting equation is Assets = Liabilities + Equity, and it cannot be accurately restated in the form given because it mixes elements of the equation in a way that does not represent the fundamental relationship between assets, liabilities, and equity correctly.

Question 17

The cash flow adequacy ratio is defined as:
 $\frac{\text {Total Cash Flow - Capital Expenditures  }}{\text { Average Debt Maturing over Next Five Years}}$

Accepted Answer

The cash flow adequacy ratio is typically defined as operating cash flows divided by total debt maturities (including both principal and interest) over a certain period, often one year, not as described in the question.

Question 18

If the December 31,2017,balance of accounts receivable is higher than the January 1,2017,balance,then the amount of cash collections will be less than the sales on account for the year.

Accepted Answer

If accounts receivable increased over the year, it indicates that not all sales on account were collected in cash, meaning cash collections were less than sales on account.

Question 19

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 noncash transaction. There would be no cash inflow or outflow related to this transaction in the Financing Activities section.

Question 20

Cash flow per share is computed by dividing cash on the balance sheet by the number of shares outstanding.

Accepted Answer

Cash flow per share is computed by dividing the cash flow from operating activities by the number of shares outstanding, not by the cash on the balance sheet.

Quiz 12: The Statement of Cash Flows