Deck 13: Financial Analysis: the Big Picture

Question 1

The activity from the statement of financial position to be presented in the financing activities section of the statement of cash flows is based on an analysis of shareholders' equity only.

Answer 1

False

Question 2

Noncash investing and financing activities must be reported in the body of a statement of cash flows.

Answer 2

False

Question 3

A statement of cash flows reports the sources and uses of cash during a specific period.

Answer 3

True

Question 4

Use the statement of cash flows to evaluate a company's liquidity and solvency.

Question 5

Describe the purpose and content of the statement of cash flows.

Question 6

Noncash investing and financing transactions, such as the exchange of common shares to purchase assets, represent significant investing and financing activities and are reported in a note to the financial statements.

Question 7

The statement of cash flows can be prepared using cash and cash equivalents rather than just cash, as its base.

Question 8

Prepare the investing activities section of a statement of cash flows.

Question 9

Cash equivalents can include both short-term and long-term investments.

Question 10

The sale of land for cash would be classified as a cash receipt from an investing activity.

Question 11

Complete the statement of cash flows.

Question 12

The acquisition of a building by issuing a mortgage payable would be considered an investing and financing activity that did not affect cash and would be reported in the notes to the financial statements.

Question 13

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

Question 14

Prepare the operating activities section of a statement of cash flows using one of two approaches: (a) the indirect method or (b) the direct method.
(a)the indirect method or
(b)the direct method.The first step in the preparation of a statement of cash flows is to determine the net cash provided (used) by operating activities using either the indirect or direct method (preferred).In the indirect method, we convert profit from an accrual basis to a cash basis.In the direct method, we convert each individual revenue and expense account from an accrual basis to a cash basis.

Question 15

The statement of cash flows explains the difference between profit, as shown on the income statement, and the net cash flows generated from operating activities.

Question 16

The statement of cash flows classifies cash receipts and payments as operating, non-operating, and financial activities.

Question 17

Operating activities include the cash effects of transactions that create revenues and expenses.

Question 18

Cash flow information is useful in assessing a company's ability to generate future cash flows.

Question 19

Prepare the financing activities section of a statement of cash flows.

Question 20

For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

Question 21

The direct method is considered to be more informative and easier to compare with the other financial statements.

Question 22

Investing activities affect non-current asset accounts.

Question 23

In the investing activities section of the statement of cash flows, all the cash payments for purchase of non-current assets should be totalled and reported as one number.

Question 24

The statement of cash flows is a required statement for both public and private corporations.

Question 25

Under IFRS, the receipt of dividends from equity investments may be classified as a cash receipt provided (used) by investing activities.

Question 26

Under the indirect method, an increase in accounts receivable during a period is deducted from profit in calculating cash provided by operating activities.

Question 27

A disadvantage of the indirect method of reporting cash flows provided (used) by operating activities is that the difference between the net amount of cash flows from operating activities and profit is not emphasized.

Question 28

Under the direct method, an increase in inventory would be added to cost of goods sold to determine net purchases for the period.

Question 29

Under the direct method, as an adjustment to operating expenses per the income statement, a decrease in prepaid expenses would be added to operating expenses to determine cash payments for operating expenses.

Question 30

Cash flow provided (used) by investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected profit.

Question 31

Under the indirect method, an increase in accounts payable during a period is deducted from profit in calculating cash provided by operating activities.

Question 32

Cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers during a period.

Question 33

In calculating cash flow provided (used) by operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

Question 34

Under the direct method, as an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

Question 35

A loss on sale of equipment is included in the investing activities on the statement of cash flows.

Question 36

Under the indirect method, a loss on the sale of equipment is added to profit in calculating cash provided by operating activities.

Question 37

Like the other financial statements, the statement of cash flows is prepared from an adjusted trial balance.

Question 38

Under ASPE, the payment of interest on a mortgage payable may be classified as a cash payment from financing activities.

Question 39

During the year, Income Tax Expense was $22,000 and Income Tax Payable increased by $3,000; therefore, the cash paid for income tax was $19,000.

Question 40

Cash provided by operating activities is generally the same as the profit reported on the income statement.

Question 41

In preparing a statement of cash flows, the issue of debt should be reported separately from the retirement of debt.

Question 42

A high cash total debt coverage ratio could signal a long-term solvency problem.

Question 43

The cash current debt coverage ratio is a measure of solvency.

Question 44

If a company has combined cash equivalents with cash, it must disclose the components of the cash equivalents, with a reconciliation of the amounts reported on the statement of cash flows with those reported on the statement of financial position.

Question 45

Investing activities include
(a)repayment of debts.
(b)obtaining cash from creditors.
(c)obtaining capital from investors.
(d)collecting the principal on loans receivable.

Question 46

On the statement of cash flows of a growing company, the reader should expect to see cash provided by its financing activities, not cash used.

Question 47

In preparing a statement of cash flows, an increase in the Common Shares account during a period would be classified as an investing activity.

Question 48

Free cash flow is a solvency-based measure that helps creditors and investors understand how much discretionary cash flow a company has left from operating activities.

Question 49

The statement of cash flows will not report the
(a)amount of cheques outstanding at the end of the period.
(b)sources of cash in the current period.
(c)uses of cash in the current period.
(d)change in the cash balance for the current period.

Question 50

Free cash flow is calculated as cash provided (used) by operating activities less net capital expenditures and dividends paid.

Question 51

If accumulated other comprehensive income increases or decreases during the year, the change must be reported in the financing activities section.

Question 52

For a company using the direct method, both the operating activities and investing activities will report the same net amounts provided or used as the indirect method, but the amount reported under financing activities will be different.

Question 53

The statement of cash flows
(a)must be prepared on a daily basis.
(b)summarizes the operating, financing, and investing activities of a company.
(c)is another name for the income statement.
(d)is a special section of the income statement.

Question 54

The acquisition of land by issuing common shares is
(a)a cash transaction and would be reported in the body of a statement of cash flows.
(b)a noncash transaction that is not reported in the body of a statement of cash flows.
(c)a noncash transaction but would be reported in the body of a statement of cash flows.
(d)only reported if the statement of cash flows is prepared using the direct method.

Question 55

Preparing the financing activities section of the statement of cash flows requires the analysis of non-current liability and equity accounts, as well as any short-term loans incurred for lending purposes rather than trade.

Question 56

The order of presentation of activities on the statement of cash flows is
(a)operating, investing, and financing.
(b)operating, financing, and investing.
(c)financing, operating, and investing.
(d)financing, investing, and operating.

Question 57

Financing activities involve
(a)lending money.
(b)acquiring investments.
(c)issuing debt.
(d)acquiring long-lived assets.

Question 58

The cash total debt coverage ratio is calculated as cash provided (used) by operating activities divided by average total liabilities.

Question 59

The primary purpose of the statement of cash flows is to
(a)provide information about the investing and financing activities during a period.
(b)prove that revenues exceed expenses if there is a profit.
(c)provide information about cash receipts and cash payments during a period.
(d)report to Canada Revenue Agency.

Question 60

If a company reports a loss, it
(a)may still have a net increase in cash.
(b)will not be able to pay cash dividends.
(c)will not be able to get a loan.
(d)will not be able to make capital expenditures.

Question 61

Which one of the following transactions does not affect cash during a period?
(a)write-off of an uncollectible account receivable
(b)collection of an account receivable
(c)sale of common shares
(d)repayment of a bank loan

Question 62

If accounts payable have increased during a period,
(a)revenues on an accrual basis are less than revenues on a cash basis.
(b)expenses on an accrual basis are less than expenses on a cash basis.
(c)expenses on an accrual basis are greater than expenses on a cash basis.
(d)expenses on an accrual basis are the same as expenses on a cash basis.

Question 63

If accounts receivable have increased during a period,
(a)revenues on an accrual basis are less than revenues on a cash basis.
(b)revenues on an accrual basis are greater than revenues on a cash basis.
(c)revenues on an accrual basis are the same as revenues on a cash basis.
(d)expenses on an accrual basis are greater than expenses on a cash basis.

Question 64

In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of
(a)the adjusted trial balance.
(b)the current period's statement of retained earnings.
(c)a comparative statement of financial position.
(d)a comparative income statement.

Question 65

In preparing the operating activities section of the statement of cash flows, most companies in Canada prefer to
(a)use the direct method.
(b)use the indirect method.
(c)present both the indirect and direct methods in their financial reports.
(d)prepare the operating activities section on the accrual basis.

Question 66

Ingles Corp., a private company reporting under ASPE, engaged in the following transactions.For each transaction, indicate where, if at all, it would be classified on the statement of cash flows.Assume the indirect method is used. payment of interest on a long-term bank loan:
(a)operating activities section
(b)investing activities section
(c)financing activities section
(d)does not represent a cash flow

Question 67

Cash flows provided (used) by operating activities, prepared using the indirect method, would include
(a)receipts from the sale of investments.
(b)profit.
(c)payments for dividends.
(d)receipts from the issue of preferred shares.

Question 68

The statement of cash flows
(a)is prepared instead of an income statement under ASPE.
(b)is used to assess a company's ability to generate cash and the needs of the company in using the cash flows.
(c)is prepared from a comparative income statement.
(d)reports earnings per share figures on a cash basis in the body of the statement.

Question 69

Under IFRS, cash receipts from interest and dividends are classified as
(a)operating activities.
(b)investing activities.
(c)either operating or investing activities.
(d)either financing or investing activities.

Question 70

Ingles Corp., a private company reporting under ASPE, engaged in the following transactions.For each transaction, indicate where, if at all, it would be classified on the statement of cash flows.Assume the indirect method is used. increase in merchandise inventory:
(a)operating activities section
(b)investing activities section
(c)financing activities section
(d)does not represent a cash flow

Question 71

In preparing a statement of cash flows, the conversion of bonds into common shares will be reported in the
(a)financing activities section.
(b)notes to the financial statements.
(c)investing activities section.
(d)shareholders' equity section.

Question 72

The category that is generally considered to be the best measure of a company's ability to continue as a going concern is
(a)cash flows provided (used) by financing activities.
(b)cash flows provided (used) by investing activities.
(c)cash flows provided (used) by operating activities.
(d)usually different from year to year.

Question 73

In preparing a statement of cash flows, preferred shares issued in exchange for land would be reported in the
(a)financing activities section.
(b)investing activities section.
(c)operating activities section.
(d)notes to the financial statements.

Question 74

Ingles Corp., a private company reporting under ASPE, engaged in the following transactions.For each transaction, indicate where, if at all, it would be classified on the statement of cash flows.Assume the indirect method is used. decrease in income tax payable:
(a)operating activities section
(b)investing activities section
(c)financing activities section
(d)does not represent a cash flow

Question 75

Ingles Corp., a private company reporting under ASPE, engaged in the following transactions.For each transaction, indicate where, if at all, it would be classified on the statement of cash flows.Assume the indirect method is used. Ingles Corp.experienced a decrease in accounts receivable:
(a)operating activities section
(b)investing activities section
(c)financing activities section
(d)does not represent a cash flow

Question 76

Which one of the following items is not generally used in preparing a statement of cash flows?
(a)adjusted trial balance
(b)comparative statements of financial position
(c)current income statement
(d)additional information

Question 77

Significant noncash transactions would not include
(a)conversion of preferred shares into common shares.
(b)asset acquisition through issue of a note payable.
(c)loans to other companies.
(d)exchange of equipment.

Question 78

Generally, the first category shown on the statement of cash flows is cash flows provided (used) by
(a)operating activities.
(b)investing activities.
(c)financing activities.
(d)significant noncash activities.

Question 79

Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively.Profit reported on the income statement for the year was $120,000.Ignoring the effect of any other adjustments, the cash flow provided (used) by operating activities, prepared using the indirect method, is
(a)$120,000.
(b)$125,000.
(c)$155,000.
(d)$115,000.

Question 80

Ingles Corp., a private company reporting under ASPE, engaged in the following transactions.For each transaction, indicate where, if at all, it would be classified on the statement of cash flows.Assume the indirect method is used. receipt of dividends on trading investments:
(a)operating activities section
(b)investing activities section
(c)financing activities section
(d)does not represent a cash flow