Question 1

The Statement of Cash Flows and Statement of Income are both important measurements of long term profitability.

Accepted Answer

While the Statement of Cash Flows and Statement of Income are both important financial statements, they measure different aspects of a company's financial performance. The Statement of Cash Flows tracks the inflow and outflow of cash for a specific period, while the Statement of Income shows a company's revenues, expenses, and net income for that same period. The two statements together provide a more comprehensive view of a company's financial health, but they do not specifically measure long-term profitability.

Question 2

Cash paid for dividends to shareholders is classified as an investing activity.

Accepted Answer

Cash paid for dividends to shareholders is classified as a financing activity, not an investing activity.

Question 3

The Statement of Income reflects the lead/lag relationships in cash flows.

Accepted Answer

The Statement of Income may reflect the timing of revenue and expenses, but it does not necessarily reflect the timing of cash inflows and outflows. Cash flow statements are used to track the actual cash flows in and out of a business.

Question 4

All companies must present operating activities first on the statement of cash flows.

Accepted Answer

This is because operating activities provide information on a company's day-to-day operations and cash inflows and outflows.

Question 5

Non-cash expenses will reduce the amount of cash a company is able to generate from its operations.

Accepted Answer

Non-cash expenses, such as depreciation and amortization, do not involve an actual outflow of cash; therefore, they do not reduce the amount of cash a company generates from its operations.

Question 6

Accounting standard setters have established three acceptable methods for preparing a Statement of Cash Flows.

Accepted Answer

The two primary methods for preparing a Statement of Cash Flows are the direct method and the indirect method.

Question 7

A positive cash flow from operating activities indicates that a company's financing activities are generating more cash than required for operations.

Accepted Answer

A positive cash flow from operating activities indicates that a company's operations are generating more cash than required, not financing activities. Financing activities include things like issuing bonds or taking out loans, which are used to secure additional funds for operations or investing activities.

Question 8

If prepaid expenses are shown as having a positive effect on cash flow, it is because prepaid expenses increased during the year.

Accepted Answer

Prepaid expenses are essentially payments made in advance for goods or services that will be received in the future. Therefore, when prepaid expenses increase, this means that cash was used to make these payments, resulting in a decrease in cash flow. A decrease in prepaid expenses would have a positive effect on cash flow, as it represents a decrease in payments made in advance, resulting in an increase in cash flow.

Question 9

The Statement of Cash Flows and the Statement of Income both measure a company's performance.

Accepted Answer

Both the Statement of Cash Flows and the Statement of Income provide important information about a company's financial performance. The Statement of Income shows a company's revenue, expenses, and net income or loss for a specific period, while the Statement of Cash Flows records a company's cash inflows and outflows for the same period. Both statements are essential in evaluating a company's financial health and profitability.

Question 10

If a company has used a line of credit, then the amount of the borrowing can be considered "positive cash".

Accepted Answer

Using a line of credit means taking on debt, which is a liability and not positive cash.

Question 11

Companies can raise an unlimited amount of cash from financing activities as long as they are willing to pay higher interest rates.

Accepted Answer

Companies cannot raise an unlimited amount of cash from financing activities due to factors like market conditions, creditworthiness, regulatory limits, and investor appetite, which constrain their ability to borrow or issue equity regardless of the interest rate they are willing to pay.

Question 12

The Statement of Cash Flows provides a perspective of an organization's performance by highlighting the results in the net change in its cash position during the year.

Accepted Answer

The statement of cash flows reports the net change in an organization's cash position during the year, providing valuable insight into its financial performance.

Question 13

A company can only analyze its operations properly provided it has all detailed financial statements.

Accepted Answer

Detailed financial statements provide essential information for a company to analyze its operations properly, including revenue, expenses, assets, liabilities, and cash flow. Without these statements, a company cannot accurately assess its financial health and make informed decisions. Therefore, having all detailed financial statements is crucial for effective financial analysis.

Question 14

In the early part of the cash-to-cash cycle, net cash flows are normally inflows.

Accepted Answer

In the early part of the cash-to-cash cycle, net cash flows are normally outflows, as this period involves purchasing inventory and materials before any sales revenue is generated.

Question 15

The direct method is also known as the reconciliation method.

Accepted Answer

The direct method is a way of preparing the cash flow statement that lists actual cash inflows and outflows, whereas the reconciliation method, often referred to as the indirect method, starts with net income and adjusts for non-cash transactions.

Question 16

The most common type of non-cash item is depreciation expense.

Accepted Answer

Depreciation expense is a non-cash item that represents the decrease in value of an asset over time. It is the most common type of non-cash expense found on a company's income statement.

Question 17

Cash from operating activities will be the same using either the direct or indirect method to prepare the Statement of Cash Flows.

Accepted Answer

The direct and indirect methods of preparing the Statement of Cash Flows may arrive at different figures for the cash from operating activities, but the final result should be the same.

Question 18

Cash position takes into consideration cash and cash equivalents.

Accepted Answer

Cash position is the total amount of cash and cash equivalents that a company has on hand at any given time. Cash equivalents are highly liquid and easily traded financial assets such as money market funds, treasury bills, and short-term government bonds that can be quickly converted into cash.

Question 19

Cash equivalents include investments that can be readily converted into cash; investment maturity dates are irrelevant.

Accepted Answer

Cash equivalents include investments that are short-term and highly liquid, typically with original maturities of three months or less at the time of purchase, making the maturity dates highly relevant.

Question 20

The components of a Statement of Cash Flows are investing, financing, and operating activities.

Accepted Answer

The Statement of Cash Flows includes sections for investing activities, financing activities, and operating activities, which provide information about a company's cash inflows and outflows related to those activities.

Quiz 5: Revenue Recognition and the Statement of Income