Question 1

Some companies use a work sheet approach, which functions like the T account approach, as a tool to aid in preparing the statement of cash flows.

Accepted Answer

Some companies do use the worksheet approach, which is similar to the T account approach, as a tool for preparing the statement of cash flows.

Question 2

The Financial Accounting Standards Board (FASB) has expressed a strong preference for the indirect method, but allows companies to use the direct method in calculating the cash flow from operating activities.

Accepted Answer

The answer of The Financial Accounting Standards Board (FASB) has...

Question 3

If the December 31, 2016, balance of accounts receivable is higher than the January 1, 2016, balance, then the amount of cash collections will be less than the sales on account for the year.

Accepted Answer

If accounts receivable increased over the year, it indicates that not all sales on account were collected in cash, meaning cash collections were less than sales on account.

Question 4

Many companies report cash flow per common share on the statement of cash flows.

Accepted Answer

Companies typically report cash flow information in the statement of cash flows as total amounts rather than on a per-share basis. Per-share data, such as earnings per share, is usually found in the income statement.

Question 5

The issuance of common stock in exchange for a building would appear both as a cash inflow in the financing activities section of the cash flow statement and also as a cash outflow in the investing activities section.

Accepted Answer

The issuance of common stock in exchange for a building would not involve cash inflow or outflow, and therefore would not appear on the cash flow statement. It would be reflected in the balance sheet as an increase in the asset (building) and an increase in the equity (common stock) accounts.

Question 6

Because the cash received from the sale of long-term assets is reported in the investing activities section of the statement of cash flows, any gain or loss is built into the cash received under the direct method.

Accepted Answer

The direct method of preparing the statement of cash flows reports the actual cash inflows and outflows during the period. Therefore, any gain or loss on the sale of long-term assets would already be included in the cash received from the sale and reported in the investing activities section. Hence, the first statement is true.

Question 7

Under the indirect method, the first line in the operating activities section of the statement of cash flows is the net income or loss for the period.

Accepted Answer

This is true. The indirect method starts with the net income or loss for the period and then adjusts for non-cash items and changes in working capital to arrive at the net cash flow from operating activities.

Question 8

Determining the cash flows from operating activities generally requires analyzing each item on the income statement as well as the current asset (except cash) and current liability accounts.

Accepted Answer

Cash flows from operating activities are derived from changes in all current assets and current liabilities accounts, as well as analyzing items on the income statement, such as revenue and expenses. Therefore, the statement is true.

Question 9

Cash flow per share is computed by dividing cash on the balance sheet by the number of shares outstanding.

Accepted Answer

Cash flow per share is calculated by dividing the cash flow from operating activities (not the cash on the balance sheet) by the number of shares outstanding.

Question 10

The statement of cash flows emphasizes explanations for the change in net income.

Accepted Answer

The statement of cash flows emphasizes explanations for the change in cash flows, not net income. While net income may be a factor in changes in cash flows, it is not the primary focus of the statement.

Question 11

Under the indirect method, instead of reporting cash receipts and payments, net income is reconciled with net cash from operating activities.

Accepted Answer

This is true. The indirect method starts with net income and adjusts for non-cash items and changes in operating assets and liabilities to arrive at net cash from operating activities.

Question 12

The cash flow adequacy ratio can only be calculated if a company uses the direct method to report cash flows from operating activities.

Accepted Answer

The cash flow adequacy ratio can be calculated using either the direct method or the indirect method of reporting cash flows from operating activities.

Question 13

The basic accounting equation can be restated in terms of cash by the following equation: Cash = current liabilities + long-term liabilities + capital stock - retained earnings - noncash current assets + long-term assets.

Accepted Answer

The accurate equation in terms of cash would be Cash = Current Assets - Current Liabilities + Long-term Assets.

Question 14

Significant noncash transactions are not reported on the statement of cash flows, but either in a separate schedule or in a note to the financial statements.

Accepted Answer

Significant noncash transactions, such as the issuance of common stock, conversion of debt to equity, and acquisition of assets through financing, are not reported on the statement of cash flows but are disclosed in a separate schedule or note to the financial statements. This is done to provide investors and analysts with a more comprehensive understanding of the company's financial performance and position.

Question 15

Under the direct method, depreciation expense is treated as an outflow in the Investing Activities section of the statement of cash flows.

Accepted Answer

Under the direct method, depreciation expense is not separately shown in the statement of cash flows since it is a non-cash expense. However, it is included in the calculation of net cash flow from operating activities.

Question 16

If the December 31, 2016, balance of accounts payable is higher than the January 1, 2016, balance, then the amount of cash payments will exceed the purchases on account for the year.

Accepted Answer

This statement is not necessarily true. It is possible that additional purchases were made on account during the year, resulting in the higher balance of accounts payable at the end of the year. Additionally, cash payments may not have been made for all purchases on account during the year.

Question 17

The work sheet used to prepare a statement of cash flows (indirect method to determine cash flows from operating activities) should have a total in the Changes column equal to total assets.

Accepted Answer

The total in the Changes column of the worksheet used to prepare a statement of cash flows should equal the change in cash and cash equivalents, not total assets.

Question 18

A decrease in retained earnings indicates that a cash dividend has been paid.

Accepted Answer

A decrease in retained earnings can result from a cash dividend, but it can also be due to a stock dividend, a net loss, or other adjustments. It does not exclusively indicate a cash dividend has been paid.

Question 19

All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.

Accepted Answer

The cash flow adequacy ratio requires information from both the income statement and the cash flow statement, in addition to the balance sheet. Therefore, all the information needed to compute the cash flow adequacy ratio is not found on the balance sheet alone.

Question 20

The cash flow adequacy ratio is defined as: $\frac {\text {Total Cash Flow - Capital Expenditures } } {\text {Average Debt Maturing over Next Five Years } }$

Accepted Answer

The cash flow adequacy ratio is typically defined as the ratio of operating cash flows to the total of capital expenditures, dividends, and debt maturities, to assess whether a company can cover its investment and financing costs from its operations. The formula provided does not accurately represent this definition.

Quiz 12: The Statement of Cash Flows