Question 1

Cash inflows and outflows are easier to manipulate than earnings.

Accepted Answer

False

Question 2

Investors could use the statement of cash flows to determine whether the company will be able to pay dividends and interest.

Accepted Answer

The statement of cash flows provides information on a company's cash inflows and outflows from operating, investing, and financing activities. By analyzing this information, investors can determine the company's ability to generate enough cash to pay dividends and interest. Therefore, the statement of cash flows can be a valuable tool for investors in making investment decisions.

Question 3

Interest received on investments would be included in the operating activities category on the statement of cash flows.

Accepted Answer

Interest received on investments is considered part of the cash inflows from operating activities because it reflects the return on financial investments directly related to the core business operations.

Question 4

The statement of cash flows discloses the effect on cash of the purchase and sale of both short- and long-term investments.

Accepted Answer

The statement of cash flows includes the cash inflows and outflows from investing activities, which includes the purchase and sale of both short- and long-term investments. Therefore, the statement of cash flows does indeed disclose the effect on cash of these transactions.

Question 5

For purposes of preparing the statement of cash flows,cash is defined as including both cash and cash equivalents.

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), cash is defined as including both cash and cash equivalents for the purpose of preparing a statement of cash flows. Cash equivalents are highly liquid investments with original maturities of three months or less, such as money market funds, treasury bills, and commercial paper.

Question 6

Cash equivalents include money market accounts,commercial paper,and U.S.Treasury bills.

Accepted Answer

Cash equivalents are highly liquid investments that can easily be converted into cash. Money market accounts, commercial paper, and U.S. Treasury bills are all considered to be cash equivalents.

Question 7

The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations.

Accepted Answer

The statement of cash flows shows the sources and uses of cash during a certain period, including the net cash flows generated from operations. It also reconciles the differences between net income and cash flows from operating activities, which are affected by non-cash items like depreciation and changes in working capital. Therefore, the statement of cash flows explains the adjustments that reconcile net income to net cash flows from operations.

Question 8

The income statement indicates a business's success or failure in earning an income from its operating activities,but it does not reflect the inflow and outflow of cash from operating activities.

Accepted Answer

The income statement measures a company's financial performance over a specific period, focusing on revenues and expenses to determine net income or loss. It does not directly show cash inflows and outflows; that information is provided by the cash flow statement.

Question 9

Because noncash investing and financing transactions do not affect cash,they should not be reflected in the body of the statement of cash flows.

Accepted Answer

Noncash investing and financing transactions are not included in the main body of the statement of cash flows because they do not involve cash flow. Instead, they are disclosed in a separate schedule or in the notes to the financial statements.

Question 10

Under the indirect method,gains or losses from the sale of equipment used in operations would appear as adjustments in the cash flows from operating activities section of the statement of cash flows.

Accepted Answer

This statement is true. Gains or losses from the sale of equipment used in operations are considered adjustments to the cash flows from operating activities section of the statement of cash flows under the indirect method.

Question 11

The primary purpose of the statement of cash flows is to provide information about a company's investing and financing activities during an accounting period.

Accepted Answer

The primary purpose of the statement of cash flows is to provide information about a company's cash inflows and outflows from operating, investing, and financing activities during an accounting period, not just investing and financing activities.

Question 12

The payment of taxes would be included in the operating activities section of the statement of cash flows.

Accepted Answer

The payment of taxes is considered an operating expense and therefore, it would be included in the operating activities section of the statement of cash flows. This section reports cash inflows and outflows related to the company's primary business operations, such as revenue received from customers and payments made to suppliers and employees.

Question 13

Interest paid on bonds payable would be included in the financing activities category on the statement of cash flows.

Accepted Answer

Interest paid on bonds payable is typically included in the operating activities category on the statement of cash flows, as it is considered a part of the company's ongoing operational expenses.

Question 14

Cash payments made on accounts payable or accrued liabilities are considered repayments of loans and are classified as financing activities on the statement of cash flows.

Accepted Answer

Cash payments made on accounts payable or accrued liabilities are considered operating activities, not financing activities, on the statement of cash flows.

Question 15

The statement of cash flows shows the effects on net income of a company's operating,investing,and financing activities for an accounting period.

Accepted Answer

The statement of cash flows shows the cash inflows and outflows from a company's operating, investing, and financing activities for an accounting period, not the effects on net income.

Question 16

The purchase of trading securities with cash is considered an investing activity.

Accepted Answer

The purchase of trading securities with cash is considered an operating activity, as trading securities are bought and sold by the company as part of its normal business operations.

Question 17

The acquisition of treasury stock with cash is shown as a financing activity on the statement of cash flows.

Accepted Answer

When a company acquires its own shares, it reduces the number of outstanding shares and increases the percentage of ownership for the remaining shareholders. The cash used to purchase the shares is considered a financing activity because it affects the company's capital structure and equity position. This activity is reported in the financing section of the statement of cash flows.

Question 18

Noncash investing and financing transactions,such as the exchange of a long-term asset for a long-term liability,represent significant investing and financing activities and are reflected in a separate schedule as part of the statement of cash flows.

Accepted Answer

Noncash investing and financing transactions are significant and are reported separately as a schedule in the statement of cash flows. This is in accordance with the accounting standard GAAP.

Question 19

A U.S.Treasury bill with an original maturity of 90 days or less is considered a cash equivalent.

Accepted Answer

This is true. U.S. Treasury bills with original maturities of 90 days or less are highly liquid and considered to be cash equivalents in financial accounting. They are often used by companies as short-term investments.

Question 20

The primary purpose of the statement of cash flows is to provide information about a company's cash receipts and cash payments during an accounting period.

Accepted Answer

The statement of cash flows is a financial statement that reports on a company's cash inflows and outflows during a specific period of time. Its primary purpose is to provide information about the sources of a company's cash and how that cash was used, including operating activities, investing activities, and financing activities.

Quiz 15: The Statement of Cash Flows