Deck 7: Cash Flow Analysis

Question 1

Hupta Corporation reports for the year ended December 31, 2005 sales of $9,430 and cost of goods sold of $6,500. Other information as of December 31 is as follows:
$$\begin{array} { l l l } \text { Accounts Receivable } & \frac { \mathbf { 2 0 0 4 } } { \mathbf { S 5 0 0 } } & \frac { \mathbf { 2 0 0 5 } } { \mathbf { S 5 5 0 } } \\\text { Inventory } & \$ 400 & \$ 380 \\\text { Accounts Payable } & \$ 250 & \$ 290\end{array}$$

-An increase in accounts payable would be considered:

A) a source of cash
B) a use of cash
C) an adjusting entry
D) a noncash charge to income

Answer 1

a source of cash

Question 2

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
$\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net Income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000) \\& \$ 53,000 \\\hline\text{Cash from investing activities}&\\\text{Purchase of marketable securities}&\$(48,000) \\\text{Dividends paid}&\$(1,500) \\& \$(46,500)\\\hline\text{Cash from financing activities}&\\\text{Increase in Short-term debt}&\$(500) \\\text{Increase in Long-term debt}&(2,500)\\&\$(3,000)\\\text{Increase in cash}&\$ 3,500 \\\end{array}\end{array}$

-The correct Cash flows from investing activities is:

A) ($41,000)
B) ($45,500)
C) ($48,000)
D) none of the above

Answer 2

($48,000)

Question 3

A firm has net sales of $6,000, cash expenses (including taxes) of $2,800, and depreciation of $1,000. If accounts receivable increased in the period by $800, cash flows from operations equal

A) $2,400
B) $3,200
C) $3,400
D) $4,200

Answer 3

A

Question 4

What is net cash flow from investing?

A) $10,000
B) $5,000
C) ($5,000)
D) ($15,000)

Question 5

Which of the following represents an investing activity in the statement of cash flows

A) depreciation of plant assets
B) sale of plant assets at a loss
C) stock dividend
D) purchase of inventory

Question 6

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

A) depreciation is a direct source of cash
B) depreciation is an outflow of cash to a reserve account for the replacement of assets
C) depreciation reduces net income and involves an outflow of cash
D) depreciation reduces net income but does not involve an outflow of cash

Question 7

Hupta Corporation reports for the year ended December 31, 2005 sales of $9,430 and cost of goods sold of $6,500. Other information as of December 31 is as follows:
$$\begin{array} { l l l } \text { Accounts Receivable } & \frac { \mathbf { 2 0 0 4 } } { \mathbf { S 5 0 0 } } & \frac { \mathbf { 2 0 0 5 } } { \mathbf { S 5 5 0 } } \\\text { Inventory } & \$ 400 & \$ 380 \\\text { Accounts Payable } & \$ 250 & \$ 290\end{array}$$

-Cash paid to suppliers for year ended December 31, 2005 is:

A) $6,480
B) $6,440
C) $5,520
D) $6,560

Question 8

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable?

A) $344,000
B) $418,000
C) $378,000
D) $376,000

Question 9

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
$\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net Income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000) \\& \$ 53,000 \\\hline\text{Cash from investing activities}&\\\text{Purchase of marketable securities}&\$(48,000) \\\text{Dividends paid}&\$(1,500) \\& \$(46,500)\\\hline\text{Cash from financing activities}&\\\text{Increase in Short-term debt}&\$(500) \\\text{Increase in Long-term debt}&(2,500)\\&\$(3,000)\\\text{Increase in cash}&\$ 3,500 \\\end{array}\end{array}$

-The correct Cash flows from operating activities is:

A) 65,500
B) 63,500
C) 53,500
D) none of the above

Question 10

Hupta Corporation reports for the year ended December 31, 2005 sales of $9,430 and cost of goods sold of $6,500. Other information as of December 31 is as follows:
$$\begin{array} { l l l } \text { Accounts Receivable } & \frac { \mathbf { 2 0 0 4 } } { \mathbf { S 5 0 0 } } & \frac { \mathbf { 2 0 0 5 } } { \mathbf { S 5 5 0 } } \\\text { Inventory } & \$ 400 & \$ 380 \\\text { Accounts Payable } & \$ 250 & \$ 290\end{array}$$

-Cash collected from customers for the year ended December 31, 2005 is:

A) $9,480
B) $9,430
C) $8,930
D) $8,980

Question 11

Under the accrual basis of accounting, which of the following statements is true?
I) Reported net income provides a measure of operating performance
II) Revenue is recognized when cash is received, and expenses are recognized when payment is made
III) Cash inflows are recognized when they are received, and cash outflows are recognized when they are made

A) I only
B) III only
C) I and III
D) I, II and III

Question 12

Which of the following statements are correct?
I) A company's choice of accounting principles for financial reporting purposes does not affect net cash flow for the accounting period
II) A company's choice of accounting principles for financial reporting purposes does not affect operating cash flow
III) If a company sells its receivables this will increase operating cash flow
IV) If a company sells its receivables this will increase financing cash flow

A) I and III
B) I, II and III
C) II and IV
D) I and IV

Question 13

What is net cash flow from financing?

A) $6,000
B) $3,000
C) ($14,000)
D) ($17,000)

Question 14

Which of the following would require an adjustment in the computation of cash flow from operations using the indirect method?
I) Sale of machinery for $50,000 with a net book value of $35,000
II) Purchase of supplies for cash
III) Remittance by customer in payment of goods purchased this accounting period
IV) Acquisition of land with simultaneous issuance of long-term note

A) I
B) I and II
C) I and III
D) IV

Question 15

Which of the following would require an adjustment in the computation of cash flow from operations using the indirect method?
I) Depreciation expense
II) Loss on sale of asset
III) Sale of services to costumers for cash
IV) Utility bill received and paid in cash

A) I
B) I and II
C) I and III
D) IV

Question 16

The following information should be used to according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
$$\begin{array} { l l } \text { Net Income } & \$ 50,000 \\\text { Provision for bad debts } & \$ 2,000 \\\text { Increase in Inventory } & \$ 1,000 \\\text { Increase in accounts payable } & \$ 2,000 \\\text { Purchase of new equipment } & \$ 15,000 \\\text { Sale of equipment for } \$ 10,000 \text { gain } & \$ 20,000 \\\text { Depreciation expense } & \$ 5,000 \\\text { Repurchase of common stock } & \$ 10,000 \\\text { Payment of dividend } & \$ 4,000 \\\text { Interest payment } & \$ 3,000\end{array}$$

-What is net cash flow from operations?

A) $58,000
B) $55,000
C) $54,000
D) $48,000

Question 17

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
$\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net Income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000) \\& \$ 53,000 \\\hline\text{Cash from investing activities}&\\\text{Purchase of marketable securities}&\$(48,000) \\\text{Dividends paid}&\$(1,500) \\& \$(46,500)\\\hline\text{Cash from financing activities}&\\\text{Increase in Short-term debt}&\$(500) \\\text{Increase in Long-term debt}&(2,500)\\&\$(3,000)\\\text{Increase in cash}&\$ 3,500 \\\end{array}\end{array}$

-The correct Cash flows from financing activities is:

A) ($4,500)
B) $3,000
C) $1,000
D) none of the above

Question 18

Beginning accounts receivable are $76,000. Sales for the period total $384,000, of which $40,000 was directly for cash. $418,000 was collected from making sales and collecting accounts receivable. What is the ending balance for accounts receivable?

A) $42,000
B) $2,000
C) $82,000
D) $68,000

Question 19

Which of the following is not a financing activity in the statement of cash flows?

A) cash dividend
B) repurchase of common stock
C) payment of interest on debt
D) issuance of new debt

Question 20

What is change in cash?

A) $49,000
B) $46,000
C) $45,000
D) $39,000

Question 21

Tracy Company reports the following in its statement of cash flows:
$$\begin{array} { l c } \text { Net Income } & \$ 1,000 \\\text { Depreciation and Amortization } & 350 \\\text { Decrease (Increase) in accounts receivable } & ( 10 ) \\\text { Decrease (Increase) in inventory } & 200 \\\text { Decrease (Increase) in prepaid expenses } & 80 \\\text { Increase (Decrease) in trade payables } & ( 300 ) \\\text { Increase (Decrease) in taxes payable } & 75 \\\hline \text { Cash Flow from operations } & \$ 1,395 \\\hline \hline\end{array}$$

-If Tracy shows cost of goods sold of $2,050 on its income statement, cash paid to suppliers is:

A) $1,550
B) $1,950
C) $2,150
D) $2,650

Question 22

Schwerin Corporation reports the following on its 2005 financial statements.
$$\begin{array} { | l | c | c | } \hline & \underline { \mathbf { 2 0 0 4 } } & \underline { \mathbf { 2 0 0 5 } } \\\hline \text { Gross P, P \& E } & \mathbf { \$ 5 0 0 \mathrm { M } } & \$ 550 \mathrm { M } \\\hline \text { Accumulated depreciation } & \$ 400 \mathrm { M } & \$ 380 \mathrm { M } \\\hline \text { Net P, P \& E } & \$ 300 \mathrm { M } & \$ 270 \mathrm { M } \\\hline \text { From statement of cash flows: } & & \\\hline \text { Cash proceeds from sale of equipment } & & \$ 100 \mathrm { M } \\\hline \text { Cash outflow for purchase of equipment } & & \$ 170 \mathrm { M } \\\hline \text { Depreciation } & & \$ 50 \mathrm { M } \\\hline \text { Gain from sale of equipment } && \$ 40 \mathrm { M } \\\hline\end{array}$$

-The gross book value of equipment sold was:

A) $120M
B) $100M
C) $ 80M
D) $ 60M

Question 23

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
$\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net Income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000) \\& \$ 53,000 \\\hline\text{Cash from investing activities}&\\\text{Purchase of marketable securities}&\$(48,000) \\\text{Dividends paid}&\$(1,500) \\& \$(46,500)\\\hline\text{Cash from financing activities}&\\\text{Increase in Short-term debt}&\$(500) \\\text{Increase in Long-term debt}&(2,500)\\&\$(3,000)\\\text{Increase in cash}&\$ 3,500 \\\end{array}\end{array}$

-The correct change in cash for the year is:

A) $4,000
B) $15,000
C) $16,500
D) none of the above

Question 24

Tracy used the indirect method of determining cash flow from operations (CFO), had they used the direct method:

A) CFO would have been higher as gains are not deducted in arriving at CFO
B) CFO would have been lower as losses and depreciation are not added back in arriving at CFO
C) CFO would have been the same
D) it is not possible to determine what CFO would have been without more information

Question 25

Schwerin Corporation reports the following on its 2005 financial statements.
$$\begin{array} { | l | c | c | } \hline & \underline { \mathbf { 2 0 0 4 } } & \underline { \mathbf { 2 0 0 5 } } \\\hline \text { Gross P, P \& E } & \mathbf { \$ 5 0 0 \mathrm { M } } & \$ 550 \mathrm { M } \\\hline \text { Accumulated depreciation } & \$ 400 \mathrm { M } & \$ 380 \mathrm { M } \\\hline \text { Net P, P \& E } & \$ 300 \mathrm { M } & \$ 270 \mathrm { M } \\\hline \text { From statement of cash flows: } & & \\\hline \text { Cash proceeds from sale of equipment } & & \$ 100 \mathrm { M } \\\hline \text { Cash outflow for purchase of equipment } & & \$ 170 \mathrm { M } \\\hline \text { Depreciation } & & \$ 50 \mathrm { M } \\\hline \text { Gain from sale of equipment } && \$ 40 \mathrm { M } \\\hline\end{array}$$

-The net book value of equipment sold was:

A) $120M
B) $100M
C) $ 80M
D) $ 60M

Question 26

Which of the following is true? The choice of LIFO versus FIFO will:

A) not affect net income or cash flow from operations
B) not affect net income but will affect cash flow from operations
C) affect both net income and cash flow from operations
D) affect net income but will not affect cash flow from operations

Question 27

The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
$$\begin{array} { l l } \text { Net Income } & \$ 80,000 \\\text { Amortization of goodwill } & \$ 2,000 \\\text { Decrease in accounts receivable } & \$ 2,000 \\\text { Increase in inventory } & \$ 3,000 \\\text { Purchase of marketable securities } & \$ 13,000 \\\text { Sale of land for } \$ 10,000 \text { gain } & \$ 11,000 \\\text { Depreciation expense } & \$ 4,000 \\\text { Repayment of debt } & \$ 8,000 \\\text { Payment of dividend } & \$ 3,000 \\\text { Interest payment } & \$ 2,000\end{array}$$

-What is net cash flow from operations?

A) $74,000
B) $75,000
C) $83,000
D) $85,000

Question 28

Which of the following would be considered a use of cash?

A) depreciation
B) an increase in working capital
C) sale of bonds
D) an increase in wages payable

Question 29

Firms report payments for capital leases in the cash flow statement:

A) only as financing cash flows
B) only as investing cash flows
C) partly as operating cash flows and partly as investing cash flows
D) partly as operating cash flows and partly as financing cash flows

Question 30

Tracy Company reports the following in its statement of cash flows:
$$\begin{array} { l c } \text { Net Income } & \$ 1,000 \\\text { Depreciation and Amortization } & 350 \\\text { Decrease (Increase) in accounts receivable } & ( 10 ) \\\text { Decrease (Increase) in inventory } & 200 \\\text { Decrease (Increase) in prepaid expenses } & 80 \\\text { Increase (Decrease) in trade payables } & ( 300 ) \\\text { Increase (Decrease) in taxes payable } & 75 \\\hline \text { Cash Flow from operations } & \$ 1,395 \\\hline \hline\end{array}$$

-If Tracy shows depreciation expense of $ 275 in its income statement, cash paid for amortization is:

A) $0
B) $75
C) $525
D) not determinable

Question 31

The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
$$\begin{array} { l l } \text { Net Income } & \$ 80,000 \\\text { Amortization of goodwill } & \$ 2,000 \\\text { Decrease in accounts receivable } & \$ 2,000 \\\text { Increase in inventory } & \$ 3,000 \\\text { Purchase of marketable securities } & \$ 13,000 \\\text { Sale of land for } \$ 10,000 \text { gain } & \$ 11,000 \\\text { Depreciation expense } & \$ 4,000 \\\text { Repayment of debt } & \$ 8,000 \\\text { Payment of dividend } & \$ 3,000 \\\text { Interest payment } & \$ 2,000\end{array}$$

-What is net cash flow from financing?

A) ($5,000)
B) ($10,000)
C) ($11,000)
D) ($13,000)

Question 32

The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
$$\begin{array} { l l } \text { Net Income } & \$ 80,000 \\\text { Amortization of goodwill } & \$ 2,000 \\\text { Decrease in accounts receivable } & \$ 2,000 \\\text { Increase in inventory } & \$ 3,000 \\\text { Purchase of marketable securities } & \$ 13,000 \\\text { Sale of land for } \$ 10,000 \text { gain } & \$ 11,000 \\\text { Depreciation expense } & \$ 4,000 \\\text { Repayment of debt } & \$ 8,000 \\\text { Payment of dividend } & \$ 3,000 \\\text { Interest payment } & \$ 2,000\end{array}$$

-What is net cash flow from investing?

A) $11,000
B) $7,000
C) ($2,000)
D) ($12,000)

Question 33

What is change in cash?

A) $81,000
B) $72,000
C) $71,000
D) $62,000

Question 34

Schwerin Corporation reports the following on its 2005 financial statements.
$$\begin{array} { | l | c | c | } \hline & \underline { \mathbf { 2 0 0 4 } } & \underline { \mathbf { 2 0 0 5 } } \\\hline \text { Gross P, P \& E } & \mathbf { \$ 5 0 0 \mathrm { M } } & \$ 550 \mathrm { M } \\\hline \text { Accumulated depreciation } & \$ 400 \mathrm { M } & \$ 380 \mathrm { M } \\\hline \text { Net P, P \& E } & \$ 300 \mathrm { M } & \$ 270 \mathrm { M } \\\hline \text { From statement of cash flows: } & & \\\hline \text { Cash proceeds from sale of equipment } & & \$ 100 \mathrm { M } \\\hline \text { Cash outflow for purchase of equipment } & & \$ 170 \mathrm { M } \\\hline \text { Depreciation } & & \$ 50 \mathrm { M } \\\hline \text { Gain from sale of equipment } && \$ 40 \mathrm { M } \\\hline\end{array}$$

-Beginning and ending plant assets are, respectively, $325,000 and $370,000. Beginning and ending accumulated depreciation is, respectively, $82,800 and $95,000. Depreciation expense for the period was $30,000, and new assets of $76,000 were purchased. Plant assets were sold at a $10,500 loss. What were the cash proceeds from the sale?

A) $17,800
B) $3,100
C) $2,700
D) $31,000

Question 35

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
$\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net Income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000) \\& \$ 53,000 \\\hline\text{Cash from investing activities}&\\\text{Purchase of marketable securities}&\$(48,000) \\\text{Dividends paid}&\$(1,500) \\& \$(46,500)\\\hline\text{Cash from financing activities}&\\\text{Increase in Short-term debt}&\$(500) \\\text{Increase in Long-term debt}&(2,500)\\&\$(3,000)\\\text{Increase in cash}&\$ 3,500 \\\end{array}\end{array}$

-The management of a company wishes to window-dress its cash flow from operations. Which of the following will improve cash flow from operations?
I. factoring accounts receivable
II. paying suppliers more quickly
III. selling of some excess marketable securities
IV. deferring payment of taxes

A) IV only
B) III and IV
C) II, III and IV
D) I and IV

Question 36

Which of the following items is deducted from net income to arrive at cash flow from operations when using the indirect method?

A) depreciation expense
B) amortization expense
C) decrease in accounts receivable
D) decrease in accounts payable

Question 37

Which of the following is true? Depreciation:

A) is recorded so that net book value represents fair value of assets
B) does not affect the amount of cash realized from operations as it is a non-cash flow
C) is added back to net income to calculate cash from operations under the direct method
D) represents a fund from which to purchase future assets

Question 38

Which of the following would affect cash flow from operations?

A) Sale of land for a gain
B) Payment of dividends
C) Depreciation of fixed assets
D) Capitalizing costs that were previously expensed

Question 39

The following information is given for Building Inc.:
$$\begin{array} { | l | c | c | } \hline \text { As of } 12 / 31 & 2005 &{ 2004 } \\\hline \text { PP\&E } & \$ 570,000 & \$ 530,000 \\\hline \text { Accumulated Depreciation } & \$ 102,000 & \$ 92,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 32,000 \\\hline\end{array}$$ During 2005 new assets were purchased for of $78,000, and plant assets were sold at a $10,000 loss.

-What was the book value of the sold assets?

A) $38,000
B) $18,000
C) $10,000
D) $8,000

Question 40

Compared with firms with capital leases, firms with operating leases generally report:

A) higher cash flow from operations
B) lower cash flow from operations
C) identical cash flow from operations
D) lower or higher cash flow from operations depending upon market interest rates

Question 41

The following information is given for Building Inc.:
$$\begin{array} { | l | c | c | } \hline \text { As of } 12 / 31 & 2005 &{ 2004 } \\\hline \text { PP\&E } & \$ 570,000 & \$ 530,000 \\\hline \text { Accumulated Depreciation } & \$ 102,000 & \$ 92,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 32,000 \\\hline\end{array}$$ During 2005 new assets were purchased for of $78,000, and plant assets were sold at a $10,000 loss.

-Beginning and ending prepaid insurance is, respectively, $36,000 and $26,500. During the period, $30,500 of insurance expense was recorded. How much new insurance was purchased?

A) $2,500
B) $15,600
C) $49,000
D) $21,000

Question 42

The following information is given for Building Inc.:
$$\begin{array} { | l | c | c | } \hline \text { As of } 12 / 31 & 2005 &{ 2004 } \\\hline \text { PP\&E } & \$ 570,000 & \$ 530,000 \\\hline \text { Accumulated Depreciation } & \$ 102,000 & \$ 92,000 \\\hline \text { Depreciation Expense } & \$ 30,000 & \$ 32,000 \\\hline\end{array}$$ During 2005 new assets were purchased for of $78,000, and plant assets were sold at a $10,000 loss.

-What were the cash proceeds from the sale?

A) $38,000
B) $18,000
C) $10,000
D) $8,000

Question 43

Cash flow from operations will often be negative for companies experiencing tremendous growth.

Question 44

Cash flow from operations is usually less volatile than net income.

Question 45

Depreciation and amortization expense needs to be added back to net income if preparing the statement of cash flows using the indirect method.

Question 46

Practice requires separate disclosure of cash flows in the statement of cash flows.

Question 47

The balance for supplies is $41,000 and $27,000 for 12/31/05 and 12/31/06, respectively. During the 2006, the company recorded $30,500 of supplies expense was recorded. How much new supplies were purchased?

A) $44,500
B) $16,500
C) $14,000
D) $30,500

Question 48

Cash flow from investing when averaged over an extended period of time would normally be expected to be negative (i.e. net outflow).

Question 49

An increase in assets would usually show as an outflow in the statement of cash flows.

Question 50

Payment of a 5% stock dividend will not appear in the statement of cash flows.

Question 51

Companies can construct the statement of cash flows using either the direct method or the indirect method.

Question 52

The cash flow adequacy ratio

A) Measures a company's ability to generate sufficient cash flow from investing to cover debt repayments
B) Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures and debt repayment
C) Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures, inventory additions and dividends
D) Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures, debt repayment and dividends

Question 53

Cash flow from financing is normally negative during the start-up phase for a company.

Question 54

The only time a company experiences a negative cash flow from operations is when they are in trouble.

Question 55

A gain on sale of an asset would require adjusting net income if preparing the statement of cash flows using the indirect method.

Question 56

Over an extended period of time average cash flow from operations would be expected to be higher than average net income.

Question 57

A cash flow adequacy ratio, when measured over the last several years, of less than one:

A) Indicates that a company's net income is too low relative to its sales level
B) Indicates that a company should decrease its dividend payout ratio
C) Indicates that a company needs to pay down its debt to decrease interest costs
D) Indicates that a company's internally generated cash flows have not been sufficient to cover dividend payments and support past growth levels
True / False Questions

Question 58

A decrease in liabilities would usually show as an outflow in the statement of cash flows.

Question 59

An increase in accounts receivable does not require adjusting net income if preparing the statement of cash flows using the indirect method.

Question 60

Amortization of goodwill reduces net income and is a cash outflow.

Question 61

An increase in a liability is a use of cash.

Question 62

Below is the income statement and balance sheet of Closely Held Corporation. From this information prepare a statement of cash flows for the year ended September 30, 2005.

Question 63

The cash reinvestment ratio measures the percentage of money reinvested in the company's operating asset's that is funded by retained earnings.
Essay Questions

Question 64

Net cash flow is not affected by a company's choice of accounting principles for financial reporting purposes.

Question 65

The financing section of the statement of cash flows (prepared in accordance with SFAS 95) contains all cash inflows and cash outflows relating to the financing of a company.

Question 66

Increases in working capital are a source of funds.

Question 67

In firms that are experiencing tremendous growth, it is rare that net income will exceed cash generated by all activities.

Question 68

Cash flows from operations is better measure of profitability than net income as it is less susceptible to manipulation by management.

Question 69

Three formats are acceptable under SFAS 95 for presenting cash flow from operations: the direct method, the summary method and the indirect method.

Question 70

The cash adequacy ratio is normally measured over an extended period of time to remove the effect of random disturbances.

Question 71

Identify whether each of the following is an operating, investing or financing cash outflow or inflow or if it is a non cash flow, under SFAS No. 95.
Purchase marketable equity securities
Dividends on marketable equity securities
Wages to employees
Depreciation
Issuance of new stock
Interest paid
Goodwill amortization
Acquisition of company using purchase accounting
Sale of land
Tax paid on sale of land
Cash paid by customers

Question 72

Use the following selected data about Tiles Ltd. and prepare the operating activities section of a statement of cash flows for the company for 2005 using the indirect method.

Question 73

Depreciation expense decreases net income but is not a use of cash.

Question 74

GAAP requires that the Statement of Cash Flows (SCFs) is prepared in a specific manner. For the following items, discuss in which section (operating, investing or financing) of the SCFs they are found, where they might more appropriately be placed and why.
a. dividends received
b. interest paid
c. income taxes

Question 75

Interest income is recorded as an investing inflow of cash.

Question 76

Users sometimes compute net income plus depreciation and amortization (for example EBITDA) as a crude proxy for operating cash flows.

Question 77

Many financial analysts subtract interest paid from cash from operations, and reclassify it as part of cash from financing activities.

Question 78

Taxes paid on capital gains from the sale of marketable securities are recorded as cash outflows from operations.

Question 79

a. Is it possible to have a positive net income and negative cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this.
b. Is it possible to have a negative net income and positive cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this.

Question 80

The following cash flow data of Signet Sales for the year ended December 31, 2005 are as follows:
a. Prepare a statement of cash flows for Signet Sales in accordance using the direct method in accordance with SFAS 95
b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by SFAS 95