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.

Accepted Answer

The financing activities section of the statement of cash flows includes activities related to obtaining or repaying funds by borrowing or issuing/selling equity securities. This includes analyzing not only shareholders' equity, but also any long-term debts, short-term loans, or other financing activities.

Question 2

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

Accepted Answer

Noncash investing and financing activities are not reported in the body of the statement of cash flows; instead, they are disclosed in the notes to the financial statements or in a separate schedule.

Question 3

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

Accepted Answer

A statement of cash flows summarizes the inflows and outflows of cash during a specific period and categorizes them as operating, investing, or financing activities. This report provides useful information about a company's ability to generate cash, pay debts, and fund investments or dividends.

Question 4

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

Accepted Answer

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Question 5

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

Accepted Answer

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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.

Accepted Answer

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

Question 7

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

Accepted Answer

The statement of cash flows can be prepared using cash and cash equivalents, which includes not just cash in hand and cash in bank accounts, but also short-term investments that are highly liquid and easily convertible into cash. This broader definition of cash enables the statement of cash flows to provide a more accurate picture of a company's liquidity and ability to meet its short-term obligations.

Question 8

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

Accepted Answer

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Question 9

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

Accepted Answer

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so close to their maturity that they present insignificant risk of changes in value because of changes in interest rates, typically within 3 months or less.

Question 10

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

Accepted Answer

The sale of land for cash is a type of investing activity where the company is disposing of its long-term asset (land) to generate cash inflow. Thus, it would be classified as a cash receipt from an investing activity in the statement of cash flows.

Question 11

Complete the statement of cash flows.

Accepted Answer

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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.

Accepted Answer

The acquisition of a building by issuing a mortgage payable is a non-cash investing and financing activity. Such transactions do not affect cash flows directly and are therefore reported in the notes to the financial statements rather than in the statement of cash flows.

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.

Accepted Answer

The statement of cash flows shows the cash inflows and outflows from operating, investing, and financing activities, not the effects on profit.

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.

Accepted Answer

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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.

Accepted Answer

The statement of cash flows reconciles the differences between profit or net income and the net cash flows generated from operating activities, investing activities, and financing activities. It provides information about the cash inflows and outflows during a specific period, which are not always reflected in the income statement.

Question 16

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

Accepted Answer

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Question 17

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

Accepted Answer

Operating activities involve transactions that affect the revenue and expenses of a company, which impacts the cash flow. Examples of operating activities include sales of products or services, payment of salaries to employees, and purchase of inventory.

Question 18

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

Accepted Answer

Cash flow information provides insights into a company's operational efficiency, liquidity, and financial flexibility. It helps investors and analysts in evaluating a company's ability to meet its financial obligations, invest in growth opportunities, and pay dividends to shareholders. Therefore, 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.

Accepted Answer

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Question 20

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

Accepted Answer

For external reporting, a company must prepare both an income statement and a statement of cash flows, as both provide important information to stakeholders and investors.

Quiz 13: Financial Analysis: the Big Picture