Question 1

When one enters a $50,000 credit entry to the Land account in a spreadsheet for the statement of cash flows, it represents a negative change in that account and probably is due to selling such assets.

Accepted Answer

A $50,000 credit entry to the Land account decreases the asset's value on the balance sheet, indicating a disposal or sale of land, which impacts the statement of cash flows by reflecting a cash inflow from investing activities.

Question 2

Which of the following never requires an outflow of cash?

Accepted Answer

Amortization of patent is a non-cash expense, which means it does not require an outflow of cash. Option A, B, and C all involve some form of payments, resulting in an outflow of cash.

Question 3

All of the following may qualify as cash equivalents except:

Accepted Answer

Cash equivalents are highly liquid investments that can be easily converted to cash, with low risk of loss of principal. Newly issued corporate bonds do not meet these criteria as they are not considered highly liquid and there is some risk of loss of principal. Money market accounts, certificates of deposit, and U.S. Treasury bills are all commonly considered cash equivalents.

Question 4

The purchase of treasury stock is an investing cash outflow.

Accepted Answer

The purchase of treasury stock is considered a financing cash outflow, not an investing cash outflow, according to the statement of cash flows classification.

Question 5

A decrease in cash dividends payable means that dividends declared were less than dividends paid.

Accepted Answer

A decrease in cash dividends payable means that less cash is owed to shareholders for dividends that have been declared but not yet paid. This can happen when the company pays out less in dividends than originally planned or when it changes the timing of the dividend payments.

Question 6

Which of the following is not required by generally accepted accounting principles?

Accepted Answer

Cash flow per share is not required by generally accepted accounting principles. However, earnings per share, statement of cash flows, and disclosure notes are all required.

Question 7

When a transfer is made between cash and cash equivalents with no gain or loss, how is the transaction treated in the statement of cash flows?

Accepted Answer

Transfers between cash and cash equivalents with no gain or loss are not reported in the statement of cash flows as they do not impact cash flows from operating, investing, or financing activities.

Question 8

Cash paid for taxes and interest must be disclosed on the face of the statement or in the disclosure notes under both the direct and indirect methods of reporting cash flows from operating activities.

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), cash paid for taxes and interest must be disclosed on the face of the statement or in the disclosure notes under both the direct and indirect methods of reporting cash flows from operating activities. Therefore, the statement is true.

Question 9

In using a spreadsheet to prepare the statement of cash flows, the summary entries duplicate the actual journal entries used to record the transactions during the year.

Accepted Answer

The summary entries in the statement of cash flows are based on the actual journal entries used to record the transactions during the year, and therefore, they may duplicate the journal entries.

Question 10

The primary objective of the statement of cash flows is to provide information about a company's:

Accepted Answer

The primary objective of the statement of cash flows is to provide information about a company's cash receipts and disbursements. It shows the inflows and outflows of cash from operating, investing, and financing activities. This helps investors and analysts understand a company's liquidity and ability to meet its financial obligations. Noncash financing and investing activities are also reported but are not the primary focus of the statement. Financial position and profitability are reported on the balance sheet and income statement, respectively.

Question 11

Creditors and investors would generally find the statement of cash flows least useful for assessing the:

Accepted Answer

The statement of cash flows is designed to provide information about a company's cash inflows and outflows during a specific period. Creditors and investors are more interested in the financial position of the company at a given point in time, which is better reflected in the balance sheet. The statement of cash flows is more useful in assessing a company's ability to generate future cash flows and pay dividends, as well as the quality of its earnings.

Question 12

Which of the following financial statements is prepared as of a particular point in time rather than for a period of time?

Accepted Answer

The balance sheet is prepared as of a specific date, showing the financial position of a company at that point in time.

Question 13

How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method?

Accepted Answer

Amortization of patents is a non-cash expense and is not reported in the statement of cash flows when using the direct method.

Question 14

Generally speaking, cash flows from operating activities include the elements of net income reported on a cash basis.

Accepted Answer

Cash flows from operating activities generally include the elements of net income reported on a cash basis, such as sales/revenues received, expenses paid, and changes in working capital.

Question 15

Which of the following is not an inflow of cash?

Accepted Answer

Depletion is a non-cash expense associated with the use of natural resources such as oil, gas, and minerals. It does not involve any actual inflow of cash.

Question 16

If the direct method is used to report cash flows from operating activities in the body of the statement of cash flows, a reconciliation of net income to net cash flows from operating activities also is required.

Accepted Answer

This is true. The direct method reports actual cash inflows and outflows from operating activities, but a reconciliation is still required to show how net income was adjusted to arrive at the net cash flows from operating activities.

Question 17

Interest payments on debt are classified as cash outflows from financing activities.

Accepted Answer

Interest payments on debt are classified as cash outflows from operating activities according to most accounting standards, including the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

Question 18

Transactions that represent noncash investing and financing activities must be reported in the statement of cash flows or in disclosure notes.

Accepted Answer

Noncash investing and financing activities such as issuing common stock in exchange for assets, or acquiring assets through the assumption of a liability, should be reported in either the statement of cash flows or in the accompanying notes to the financial statements, according to Generally Accepted Accounting Principles (GAAP).

Question 19

Which one of the following financial statements does not report amounts primarily on an accrual basis?

Accepted Answer

The statement of cash flows reports amounts primarily on a cash basis. The income statement, balance sheet, and statement of shareholders' equity report amounts primarily on an accrual basis.

Question 20

Amounts held in cash equivalent investments must be reported separately from amounts held as cash in the statement of cash flows.

Accepted Answer

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so close to their maturity that they present insignificant risk of changes in value because of changes in interest rates. Therefore, in the statement of cash flows, amounts held in cash equivalents are combined with cash, not reported separately.

Quiz 21: The Statement of Cash Flows Revisited