Question 1

Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.

Accepted Answer

Significant financing and investing activities that do not affect cash, such as issuing stock or buying long-term assets through financing, are reported in the notes to the financial statements or other supplemental schedules. They are not reported in the statement of cash flows, but they may have an impact on the overall financial position of the organization.

Question 2

Free cash flow is net income less capital expenditures and dividends.

Accepted Answer

Free cash flow is calculated as operating cash flow minus capital expenditures, not net income less capital expenditures and dividends.

Question 3

Liquidity refers to the ability of an enterprise to pay its debts as they mature.

Accepted Answer

False

Question 4

Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.

Accepted Answer

Land held for speculation is not considered property, plant, and equipment, but rather an investment. It would be reported in the investments section of the balance sheet.

Question 5

Financial flexibility is a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Accepted Answer

Financial flexibility is defined as a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities. This includes having access to cash reserves or lines of credit, managing debt levels, and having a diversified portfolio of investments, among other things.

Question 6

Financial statement readers often assess liquidity by using the current cash debt coverage.

Accepted Answer

Current cash debt coverage is a liquidity ratio that measures the ability of a company to pay off its current liabilities using its operating cash flows. Therefore, financial statement readers often use this ratio to assess the liquidity of a company.

Question 7

Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.

Accepted Answer

This statement is true. Companies often use additional disclosures, such as supporting schedules or notes, to provide context and relevant information in their financial statements.

Question 8

On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners' equity account.

Accepted Answer

An adjunct account increases the value of an associated account, rather than reducing it. It is typically used to increase the book value of a liability or an asset, not to decrease it.

Question 9

The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.

Accepted Answer

The answer of The primary purpose of a statement of...

Question 10

Companies have the option of disclosing information about the nature of their operations and the use of estimates in preparing financial statements.

Accepted Answer

The answer of Companies have the option of disclosing information...

Question 11

The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively.

Accepted Answer

The balance sheet only includes items that can be recorded objectively, such as assets, liabilities, and equity. It cannot include subjective items such as the value of a company's brand or reputation.

Question 12

Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.

Accepted Answer

Financial flexibility is the ability of a company to adjust its cash flows by taking strategic actions. It includes the ability to raise funds when required, managing debt levels effectively, and managing the timing and amount of cash flows. It helps companies to respond to unexpected events and changes in market conditions.

Question 13

A company excludes from the current assets section, the amount of cash restricted for purposes other than payment of current obligations or for use in current operations.

Accepted Answer

This statement is true. Cash that is restricted for non-current purposes, such as long-term investments, should not be included in the current assets section of the balance sheet.

Question 14

Collection of a loan is reported as an investing activity in the statement of cash flows.

Accepted Answer

The answer of Collection of a loan is reported as...

Question 15

The statement of cash flows reports only the cash effects of operations during a period and financing transactions.

Accepted Answer

The statement of cash flows reports the cash effects of operations, investing, and financing activities during a period, not just operations and financing transactions.

Question 16

Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.

Accepted Answer

Companies adjust net income (which is calculated on an accrual basis) for non-cash items and changes in working capital to determine cash provided by operating activities, effectively converting accrual basis accounting to cash basis for this purpose.

Question 17

The account form and the report form of the balance sheet are both acceptable under GAAP.

Accepted Answer

Both the account form and the report form of the balance sheet are acceptable under GAAP, as long as all required information is presented and the financial statements are fairly presented.

Question 18

Activity ratios measure the degree of protection for long-term creditors and investors.

Accepted Answer

Activity ratios measure a company's efficiency in utilizing its assets to generate revenue, and are not directly related to the degree of protection for long-term creditors and investors.

Question 19

Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.

Accepted Answer

Companies typically provide information about the terms, interest rates, maturity dates, and other important details of their long-term liabilities in the notes to their financial statements. This allows stakeholders to better understand the company's financial position and the risks associated with its debt obligations.

Question 20

Because of the historical cost principle, fair values may not be disclosed in the balance sheet.

Accepted Answer

The historical cost principle requires that most assets and liabilities be reported at their original acquisition cost. However, fair value disclosures are often required in the notes to the financial statements, even if not directly reflected on the balance sheet itself.

Quiz 5: Balance Sheet and Statement of Cash Flows