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

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 3

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

This is true as the cash flows from operating activities show the changes in cash related to the company's normal operations, which include items on the income statement and changes in current assets and liabilities (except cash).

Question 4

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 in terms of cash is: Cash = Total assets - Total liabilities. The equation given in the statement is incorrect.

Question 5

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

The answer of Significant noncash transactions are not reported on...

Question 6

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 work sheet approach similar to the T account method to assist in preparing the statement of cash flows.

Question 7

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.

Question 8

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.

Question 9

If the December 31,2012,balance of accounts payable is higher than the January 1,2012,balance,then the amount of cash payments will exceed the purchases on account for the year.

Accepted Answer

If the accounts payable balance increased over the year, it means that purchases on account exceeded cash payments, not the other way around.

Question 10

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 also be calculated using the indirect method of reporting cash flows from operating activities, although it may require some adjustments to non-cash items.

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 of the worksheet used to prepare a statement of cash flows should equal the net increase or decrease in cash for the period, not total assets.

Question 12

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 correctly describes the indirect method of reporting cash flows from operating activities.

Question 13

The cash flow adequacy ratio is defined as:

Accepted Answer

The cash flow adequacy ratio is not a defined financial ratio.

Question 14

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 15

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 ignored when reporting the cash flow from operating activities under the direct method.

Accepted Answer

The cash received from the sale of long-term assets is reported in the investing activities section, and any gain or loss is not considered when reporting the cash flow from operating activities under the direct method.

Question 16

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 answer of The Financial Accounting Standards Board (FASB)has expressed...

Question 17

If the December 31,2012,balance of accounts receivable is higher than the January 1,2012,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 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

Issuing common stock is not a cash transaction, therefore it would not appear as a cash inflow in the financing activities section. Rather, it would appear only as a noncash transaction in the investing section.

Question 19

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 its equivalents, not net income. However, net income is used in calculating the cash flow from operating activities section of the statement.

Question 20

A work sheet is an alternative to T accounts to help in the preparation of a statement of
cash flows.

Accepted Answer

A worksheet can be used to organize and summarize the changes in cash account balances for each category of cash flow (operating, investing, financing) and assist in the preparation of a statement of cash flows. T accounts can also be used for this purpose, but a worksheet may be more efficient for some individuals or businesses.

Quiz 12: The Statement of Cash Flows