Deck 12: Reporting and Analyzing Cash Flows

Question 1

Conversion of preferred stock to common stock is disclosed in the financing section of the statement of cash flows.

Answer 1

False

Question 2

To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

Answer 2

False

Question 3

The purchase of stock in another company is classified as a financing activity.

Answer 3

False

Question 4

The statement of cash flows reports and proves the net change in cash for a reporting period.

Question 5

A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

Question 6

A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000 note payable. The entire transaction is disclosed to users in the financing section of the statement of cash flows.

Question 7

The statement of cash flows explains how transactions and events impact the end-of-period cash balance to produce the end-of-period net income.

Question 8

Receipts of cash dividends and interest earned on loans are classified as investing activities.

Question 9

Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term investment and financing decisions.

Question 10

The purpose of the statement of cash flows is to report cash receipts (inflows) and cash payments (outflows) during a period.

Question 11

A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Question 12

Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.

Question 13

The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.

Question 14

A purchase of land in exchange for shares of stock is disclosed at the bottom of the statement of cash flows or in a note to the statement.

Question 15

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

Question 16

A noncash investing transaction should be disclosed in either a footnote or at the bottom of the statement of cash flows.

Question 17

Cash paid for merchandise is an operating activity.

Question 18

Financing activities include: (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

Question 19

The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

Question 20

The payment of cash dividends to shareholders is classified as a financing activity.

Question 21

The direct method for computing and reporting net cash flows from operating activities involves adjusting the net income figure to obtain net cash provided or used by operating activities.

Question 22

Managers only use the cash flow statement to evaluate the net cash increase or decrease, and do not pay much attention to the details of cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Question 23

Cash flow amounts and their timing should be considered when planning and analyzing operating activities.

Question 24

A cash coverage of growth ratio of less than 1 indicates cash inadequacy to meet asset growth.

Question 25

The indirect method separately lists each major item of operating cash receipts and cash payments.

Question 26

Both the direct and indirect methods yield the identical net cash flow amount provided or used by operating activities.

Question 27

The cash flow on total assets ratio compared to the total assets ratio can be used as an indicator of earnings quality.

Question 28

Companies have the option of using either the direct or indirect method to prepare the operating section of the statement of cash flows.

Question 29

The reporting of financing activities in the statement of cash flows is identical under either the direct or indirect methods.

Question 30

Since it is recommended by the FASB, the direct method of preparing the statement of cash flows is most frequently used.

Question 31

The cash flow on total assets ratio reflects actual cash flows and is therefore affected by income recognition and measurement.

Question 32

Information to prepare the statement of cash flows usually comes from: (a) comparative balance sheets, (b) current income statement, and (c) additional information.

Question 33

The FASB recommends that the operating section of the statement of cash flows be reported using the direct method.

Question 34

The usual first step in preparing the statement of cash flows is computing the net increase or net decrease in cash.

Question 35

The cash flow on total assets ratio is computed by dividing cash flows from operations by average total assets.

Question 36

The cash flow on total assets ratio is computed by dividing average total assets by operating income.

Question 37

Cash flows are essentially the same as net income because they are both measured using accrual accounting principles.

Question 38

Most managers stress the importance of understanding and predicting cash flows for business decisions.

Question 39

When preparing the operating activities section of the statement of cash flows using the indirect method, expenses with no cash outflows are added back to net income.

Question 40

A cash-based measure to help business decision makers estimate the amount and timing of cash flows is the cash flow on total assets ratio.

Question 41

When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income.

Question 42

The statement of cash flows reports all but which of the following?

A)Cash flows from operating activities.
B)Cash flows from financing activities.
C)Cash flows from investing activities.
D)Significant noncash financing and investing activities.
E)The financial position of the company at the end of the accounting period.

Question 43

When preparing the operating activities section of the statement of cash flows using the indirect method, an increase in income taxes payable is added to net income.

Question 44

Depreciation expense is not reported on a statement of cash flows prepared under the direct method.

Question 45

When using a spreadsheet to prepare the statement of cash flows, a decrease in accounts payable is entered in the Analysis of Changes columns with a debit in the statement of cash flows section and a credit in the balance sheet section.

Question 46

A spreadsheet can help organize the information needed to prepare a statement of cash flows.

Question 47

The gain or loss from retirement of debt is reported under cash flows from operating activities on the statement of cash flows using the direct method.

Question 48

A cash equivalent satisfies which of the following criteria?

A)Readily convertible to a known amount of cash.
B)Close to its maturity date but its market value may still be affected by interest rate changes.
C)Generally within 12 months of its maturity date.
D)Is not considered highly liquid.
E)The same as cash.

Question 49

Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000. This implies that $40,000 cash was received from the sale.

Question 50

When preparing the operating activities section of the statement of cash flows using the indirect method, non-operating gains are added to net income.

Question 51

When preparing the operating activities section of the statement of cash flows using the indirect method, depreciation is subtracted from net income.

Question 52

The statement of cash flows reports:

A)Assets, liabilities, and equity.
B)Revenues, gains, expenses, and losses.
C)Cash inflows and cash outflows for an accounting period.
D)Equity, net income, and dividends.
E)Changes in equity.

Question 53

The FASB requires a reconciliation of net income to net cash provided or used by operating activities when the direct method is used (which can be reported in the notes).

Question 54

Financing activities include receiving cash dividends from investments in other companies' stocks.

Question 55

The payment of cash dividends never changes the balance of retained earnings.

Question 56

Financing activities include receiving cash from issuing debt and receiving cash dividends from investments in other companies' stocks.

Question 57

Investing activities include: (a) the purchase and sale of long-term assets, (b) lending and collecting on notes receivable, and (c) the purchase and sale of short-term investments in the securities of other entities, other than cash equivalents and trading securities.

Question 58

An investment that is readily convertible to a known amount of cash and that is sufficiently close to its maturity date so that its market value is unaffected by interest rate changes is a(n):

A)Short-term marketable equity security.
B)Operating activity.
C)Common stock.
D)Cash equivalent.
E)Financing activity.

Question 59

On a spreadsheet used to prepare the operating activities section of the statement of cash flows, depreciation expense does not require an entry in the Analysis of Changes columns because it is a noncash item.

Question 60

The statement of cash flows is:

A)Another name for the statement of financial position.
B)A financial statement that presents information about changes in equity during a period.
C)A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.
D)A financial statement that lists the types and amounts of assets, liabilities, and equity of a business on a specific date.
E)A financial statement that lists the types and amounts of the revenues and expenses of a business for an accounting period.

Question 61

Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business, are classified as:

A)Financing activities.
B)Investing activities.
C)Operating activities.
D)Direct activities.
E)Indirect activities.

Question 62

Which one of the following is representative of typical cash flows from operating activities?

A)Proceeds from collecting the principal amounts of loans.
B)Repayment of principals on loans.
C)Proceeds from the issuance of bonds and notes payable.
D)Payments by a merchandiser to acquire equity securities of other companies.
E)Receipts of cash sales.

Question 63

Cash flows from selling trading securities are usually reported in the statement of cash flows as part of:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Noncash activities.
E)This is not reported in the statement of cash flows.

Question 64

The appropriate section in the statement of cash flows for reporting the issuance of common stock for cash is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)This is not reported on the statement of cash flows.

Question 65

Cash flows from interest received on loans are reported in the statement of cash flows as part of:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Noncash activities.
E)This is not reported in the statement of cash flows.

Question 66

Investing activities do not include the:

A)Purchase of plant assets.
B)Lending and collecting on notes receivable.
C)Issuance of common stock.
D)Sale of plant assets.
E)Sale of short-term investments other than cash equivalents.

Question 67

A company's transactions with its creditors to borrow money and/or to repay the principal amounts of both short- and long-term debt are reported as cash flows from:

A)Operating activities.
B)Investing activities.
C)Financing activities.
D)Direct activities.
E)Indirect activities.

Question 68

Typical cash flows from investing activities include each of the following except:

A)Payments to purchase property, plant and equipment or other productive assets (excluding inventory).
B)Proceeds from collecting accounts receivable arising from customer sales.
C)Payments to buy intangible assets.
D)Payments to acquire held-to maturity securities of other entities, except cash equivalents.
E)Proceeds from the sale of equipment.

Question 69

The appropriate section in the statement of cash flows for reporting the purchase of land in exchange for common stock is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)Reconciliation of cash balance.

Question 70

The appropriate section in the statement of cash flows for reporting the purchase of equipment for cash is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)This is not reported on the statement of cash flows.

Question 71

Which of the following is included in the cash flows from financing activities section of the statement of cash flows?

A)Interest revenue.
B)Sale of equipment.
C)Interest expense.
D)Purchase of treasury stock.
E)Purchase of stock in another company.

Question 72

If a company borrows money from a bank, the interest paid on this loan should be reported on the statement of cash flows as a(n):

A)Operating activity.
B)Investing activity.
C)Financing activity.
D)Noncash investing and financing activity.
E)This is not reported in the statement of cash flows.

Question 73

Noncash investing and financing activities may be disclosed in:

A)A note in the financial statements or a schedule attached to the statement of cash flows.
B)The operating activities section of the statement of cash flows.
C)The investing activities section of the statement of cash flows.
D)The financing activities section of the statement of cash flows.
E)The reconciliation of cash balance section.

Question 74

The purchase of long-term assets by issuing a note payable for the entire amount is reported on the statement of cash flows in the:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash financing and investing activities.
E)Reconciliation of cash balance.

Question 75

The appropriate section in the statement of cash flows for reporting the receipt of cash dividends from investments in securities is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)This is not reported on the statement of cash flows.

Question 76

The appropriate section in the statement of cash flows for reporting the cash payment of wages is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)This is not reported on the statement of cash flows.

Question 77

Accounting standards:

A)Allow companies to omit the statement of cash flows from a complete set of financial statements if cash is an insignificant asset.
B)Require that companies omit the statement of cash flows from a complete set of financial statements if the company has no investing activities.
C)Require that companies include a statement of cash flows in a complete set of financial statements.
D)Allow companies to include the statement of cash flows in a complete set of financial statements if the cash balance makes up more than 50% of the current assets.
E)Allow companies to omit the statement of cash flows from a complete set of financial statements if the company has no financing activities.

Question 78

An example of a transaction that must be disclosed as a noncash investing and financing activity includes all but which of the following?

A)The retirement of debt by issuing equity stock.
B)A transaction exchanging cash equivalents for cash.
C)The leasing of assets in a transaction that qualifies as a capital lease.
D)The purchase of noncash assets in exchange for equity or debt securities.
E)The purchase of long-term assets financed by a cash down payment and a note payable to the seller for the balance.

Question 79

The accounting principle that requires important noncash financing and investing activities be reported on the statement of cash flows or in a footnote is the:

A)Historical cost principle.
B)Materiality principle.
C)Full disclosure principle.
D)Going concern principle.
E)Business entity principle.

Question 80

Which of the following items is reported on the statement of cash flows under financing activities?

A)Declaration of a cash dividend.
B)Payment of a cash dividend.
C)Declaration of a stock dividend.
D)Payment of a stock dividend.
E)Stock split.