Question 1

A decrease in inventory is added to net income when preparing the operating activities section under the indirect method.

Accepted Answer

When preparing the operating activities section under the indirect method, a decrease in inventory is considered a non-cash adjustment and is added back to net income because it implies that less cash was spent on inventory, thereby increasing cash flow from operations.

Question 2

A statement of cash flows provides information on cash inflows and outflows for a specified period of time.

Accepted Answer

A statement of cash flows is a financial statement that shows an organization's cash inflows and outflows during a specified period of time. It includes information on cash received from sales, investments, financing activities, and other sources, as well as cash used for operating expenses, investments, and other activities. This statement provides valuable information for investors, creditors, and other stakeholders who are interested in an organization's ability to generate and manage cash.

Question 3

Cash paid for wages and salaries is determined by adding a decrease in wages payable or subtracting an increase in wages payable to the amount of wages and salaries expense. 18. When the direct method of preparing the statement of cash flows is used, the payment of dividends to stockholders appears in the operating activities section.

Accepted Answer

The payment of dividends to stockholders is a cash outflow from financing activities and would appear in the financing activities section.

Question 4

Cash equivalents are short-term investments that are highly liquid and can be readily converted into cash.

Accepted Answer

Cash equivalents, such as money market funds, treasury bills, and commercial paper, are highly liquid investments that can be easily converted into cash within a short period of time.

Question 5

The format of a statement of cash flows prepared using the direct method is much like an income statement prepared on the cash-flow basis.

Accepted Answer

The statement of cash flows prepared using the direct method shows the various cash inflows and outflows during the period, much like an income statement does. However, the format and content may differ as the statement of cash flows focuses on cash flows rather than revenues and expenses.

Question 6

Proceeds from the sale of equipment is reported as an investing activity when using the direct method to prepare the statement of cash flows.

Accepted Answer

Proceeds from the sale of equipment are considered a cash inflow from investing activities, as it represents a sale of a long-term asset. Thus, it is reported as an investing activity in the statement of cash flows when using the direct method.

Question 7

Cost of goods sold less any increase in accounts payable equals cash paid for inventory.

Accepted Answer

The formula for cash paid for inventory is Cost of goods sold plus any increase in accounts payable, not less.

Question 8

Cash used to retire long-term debt that was used to build a new factory is classified as an investing activity.

Accepted Answer

Cash used to retire long-term debt that was used to build a new factory is classified as a financing activity, not investing. Investing activities involve the acquisition or disposal of long-term assets or investments, such as property, plant, and equipment, or securities.

Question 9

Cash proceeds from issuing a long-term note payable is classified as an operating activity.

Accepted Answer

Cash proceeds from issuing a long-term note payable is classified as a financing activity, not an operating activity.

Question 10

Financing activities are presented as the first classification on a statement of cash flows because a company must first obtain financing when it begins operations before it can acquire assets to start operations.

Accepted Answer

Financing activities are presented as a separate section on the statement of cash flows, but they are not necessarily presented first. The order of presentation depends on the specific transactions of the company. Additionally, a company can acquire assets through financing activities, such as taking out a loan to purchase equipment, so financing activities may not necessarily come before acquiring assets.

Question 11

Issuing common stock is an investing activity.

Accepted Answer

Issuing common stock is considered a financing activity, as it relates to raising capital for the business's operations and growth.

Question 12

Cash payments for salaries to employees are classified as an operating activity.

Accepted Answer

Cash payments for salaries to employees are part of the operating expenses of a business and therefore classified as an operating activity in the cash flow statement.

Question 13

Financial statement users focus a great deal of attention on cash flows related to operating activities, because, over the long run, a business must generate positive cash flows from its profit-oriented activities to be successful.

Accepted Answer

This statement correctly identifies that cash flows related to operating activities are an important aspect of a business's financial statements, as they reflect the ability of the business to generate positive cash flows from its core operations. Ultimately, positive cash flows from operating activities are necessary for a business to be successful over the long run, as this enables the business to reinvest in its operations, pay dividends to shareholders, and meet its obligations to creditors.

Question 14

Cash paid for interest expense is shown as an operating activity under the direct method.

Accepted Answer

Cash paid for interest expense is considered an operating activity under the direct method because it is a cash outflow related to the ongoing operations of the business.

Question 15

Under the direct method, a gain on the sale of equipment is included in net income and subtracted in the operating activities section of the statement of cash flows because it is not a cash flow.

Accepted Answer

Under the direct method, gains on the sale of equipment would be included in the investing activities section, not subtracted from operating activities.

Question 16

A firm may have a significant amount of net income, as computed under the accrual basis of accounting, yet have an insignificant net inflow of cash.

Accepted Answer

This is because net income is calculated by subtracting expenses from revenues, which includes revenues earned but not necessarily received and expenses incurred but not necessarily paid. Therefore, it is possible for a firm to have a high net income but a low net cash flow if, for example, a large portion of their income is tied up in accounts receivable or if they have incurred significant non-cash expenses such as depreciation.

Question 17

For purposes of a statement of cash flows, cash is defined to include cash and investments such as those in stock of other companies.

Accepted Answer

Cash, for purposes of a statement of cash flows, is defined as cash on hand and demand deposits. It does not include investments such as stocks, which are generally reported in the investing activities section of the statement.

Question 18

A loss on the sale of a building is added to net income in the operating activities section of the statement of cash flows under the direct method.

Accepted Answer

A loss on the sale of a building is a non-operating activity and should be reported in the investing activities section of the statement of cash flows.

Question 19

Cash received from customers includes cash from current period sales plus cash from customer payments on account.

Accepted Answer

Cash received from customers includes both cash from current period sales and from customer payments on account, as both constitute a form of revenue for the business.

Question 20

When the indirect method is used, GAAP requires a separate schedule reconciling cash flows from operating activities to net income.

Accepted Answer

The answer of When the indirect method is used, GAAP...

Quiz 13: Statement of Cash Flows