Question 1

Using the accrual basis of accounting to measure net income creates the need for a separate financial statement that reports the impact of operations on cash flows.

Accepted Answer

The accrual basis of accounting records revenues and expenses when they are earned or incurred, not when cash is received or paid out. This can create a discrepancy between net income and the actual cash position of the company. Therefore, a separate statement of cash flows is necessary to report on the impact of operations on cash flows.

Question 2

Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure.

Accepted Answer

Some analysts believe that cash flow from operations is a more reliable indicator of a company's performance than net income, as it shows the actual cash generated by the business. Net income can be affected by non-cash items such as depreciation and amortization, which may not reflect the company's true cash position.

Question 3

Interpreting a statement of cash flows requires an understanding of the economic characteristics of the industries in which a firm conducts its activities, including capital intensity, growth characteristics, and similar factors.

Accepted Answer

Understanding the economic characteristics of the industries is crucial for interpreting the statement of cash flows, as it provides insights into the nature of cash flows, including the operating, investing, and financing activities of the firm. Factors such as capital intensity, growth characteristics, and other industry-specific factors could significantly impact the cash flows of a firm, and therefore, interpreting the cash flow statement requires a good understanding of these factors.

Question 4

Under both U.S.GAAP and IFRS, the issue or redemption of debt is a financing activity.

Accepted Answer

Both U.S.GAAP and IFRS consider the issue or redemption of debt as a financing activity.

Question 5

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period. As an outcome of correct double-entry recording of all transactions, the net change in cash will equal the net change in all noncash accounts.

Accepted Answer

This is true. The statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period to determine the net change in cash. This is because, under the double-entry accounting system, every transaction affects at least two accounts, one of which is a cash account. Therefore, the net change in all noncash accounts will be equal to the net change in cash.

Question 6

The acquisition of equipment by assuming a mortgage is a transaction that firms cannot report in their statement of cash flows but must report in a supplemental schedule or note.

Accepted Answer

This statement is true. The acquisition of equipment by assuming a mortgage does not involve cash inflows or outflows, so it cannot be reported in the statement of cash flows. However, it must be disclosed in a supplemental schedule or note to the financial statements.

Question 7

Many countries around the world require a

Accepted Answer

The statement of cash flows is a financial statement required by many countries that shows the inflows and outflows of cash and cash equivalents over a specified period of time. It provides information on how a company generates and uses its cash, helping investors and creditors assess the company's liquidity and financial health.

Question 8

Firms using the direct approach for the statement of cash flows must also present a reconciliation of cash flow from operations to net income.

Accepted Answer

The answer of Firms using the direct approach for the...

Question 9

Delaying payments to suppliers and others during the last several days of an accounting period conserves cash and thereby increases cash flow from operations for that period.

Accepted Answer

Delaying payments to suppliers and others can temporarily increase cash on hand during the accounting period, leading to a higher cash flow from operations. However, it can also damage relationships with suppliers and ultimately harm the business in the long term. It is important for companies to manage their cash flow in a sustainable and responsible manner.

Question 10

On the statement of cash flows, the issuance of capital stock for cash to be used for future expansion of a production facility is treated as an investing activity.

Accepted Answer

The issuance of capital stock for cash is considered a financing activity on the statement of cash flows, not an investing activity. Investing activities involve the acquisition and disposal of long-term assets and investments.

Question 11

Cash equivalents represent long-term, highly liquid investments in which a firm has temporarily placed excess cash.

Accepted Answer

Cash equivalents are short-term, highly liquid investments in which a firm has temporarily placed excess cash. Examples of cash equivalents include treasury bills, commercial paper, and money market funds.

Question 12

Although the guidance in U.S.GAAP and IFRS states a preference that companies present cash flows from operations using the indirect method, most companies present cash flows from operations as a reconciliation of net income to operating cash flow (the direct method).

Accepted Answer

The statement is partially incorrect. While U.S. GAAP and IFRS do allow both the direct and indirect methods for reporting cash flows from operations, it's the indirect method that is more commonly used by companies, not the direct method as stated. The indirect method starts with net income and adjusts for non-cash transactions and changes in working capital to arrive at operating cash flow.

Question 13

The disposal of equipment for an amount of cash greater than the carrying value of the equipment results in a cash receipt equal to the carrying value of the equipment plus the gain on the disposal, which appears in net income.

Accepted Answer

When equipment is disposed of for an amount greater than its carrying value, the difference between the carrying value and the amount received is recognized as a gain on disposal. This gain is added to the carrying value of the equipment to determine the amount of cash received. Therefore, the statement is true.

Question 14

A profitable firm can never run out of cash.

Accepted Answer

While it is true that profitability is important for ensuring a business can cover its expenses and generate funds for growth, a business can still run out of cash if it is not managing its cash flow effectively. This may be due to unexpected expenses, slow-paying customers, excessive debt, or other factors that can impact a company's cash position. It is important for businesses to regularly monitor their cash flow and maintain sufficient reserves to avoid running into cash flow problems.

Question 15

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period, as represented by the Cash Change Equation.

Accepted Answer

The statement of cash flows indeed requires analyzing changes in balance sheet accounts during the accounting period, as represented by the Cash Change Equation. Therefore, option A is correct.

Question 16

IFRS permits firms to classify cash from interest and dividend revenue as operating, investing, or financing activities, provided the classification is consistently applied across periods.

Accepted Answer

IFRS does allow for the classification of cash from interest and dividend revenue to be classified as operating, investing or financing activities, as long as it is consistently applied across periods.

Question 17

The second section of the statement of cash flows shows the amount of cash flow from investing activities.

Accepted Answer

The second section of the statement of cash flows does indeed show the amount of cash flow from investing activities, including any cash outflows for purchasing long-term assets or investments and any cash inflows from selling those assets or investments.

Question 18

Depreciation charges provide cash to the firm.because the indirect method adds depreciation expense to net income to calculate cash provided by operations.

Accepted Answer

Depreciation charges do not provide cash to the firm. The indirect method adds back depreciation expense to net income to calculate cash provided by operations because depreciation is a non-cash expense and does not involve any actual outflow of cash.

Question 19

Under U.S.GAAP, the statement of cash flows classifies cash expenditures for interest on debt as an operating activity but classifies cash expenditures for dividends to shareholders as a financing activity.

Accepted Answer

Cash expenditures for interest on debt are considered an operating activity because they are a normal part of a company's ongoing operations, while cash expenditures for dividends are considered a financing activity because they involve distributing profits to shareholders. This classification is in accordance with the Financial Accounting Standards Board's (FASB) guidance on the statement of cash flows.

Question 20

On the statement of cash flows, cash sale of property, plant and equipment used for the last 5 years in the company's operations is treated as an operating activity.

Accepted Answer

Cash proceeds from the sale of property, plant and equipment used in operations should be included in the investing activities section of the statement of cash flows, not the operating activities section.

Quiz 6: Statement of Cash Flows