Question 1

The statement of cash flows includes a firm's cash equivalents such as money market funds, in addition to cash.

Accepted Answer

Cash equivalents, including money market funds, are short-term, highly liquid investments that are readily convertible to known amounts of cash and so are included in the statement of cash flows along with cash.

Question 2

Cash received from the sale of one of a company's warehouses is classified as a cash flow from investing activities in a statement of cash flows.

Accepted Answer

The sale of a warehouse, which is a long-term asset, results in cash inflows that are classified as cash flows from investing activities in the statement of cash flows.

Question 3

Cash paid as dividends to stockholders is classified as a cash flow from investing activities in a statement of cash flows.

Accepted Answer

Dividends paid to stockholders are classified as a cash outflow from financing activities.

Question 4

Cash received from customers for services rendered is classified as a cash flow from operating activities in a statement of cash flows.

Accepted Answer

Cash received from customers for services rendered directly relates to the primary revenue-producing activities of a business, thus it is classified as a cash flow from operating activities.

Question 5

Two different methods of determining and presenting the net cash flows from operating activities are the indirect method and the reconciliation method.

Accepted Answer

The indirect method and the direct method are two ways to determine and present the statement of cash flows. The indirect method is most popular.

Question 6

The operating activities section of the statement of cash flows shows a reconciliation of net income to the net cash provided by operating activities amount under the direct method.

Accepted Answer

The indirect method begins with net income and removes noncash amounts to arrive at cash flows provided by operating activities.

Question 7

The direct method of presenting the net cash flow from operating activities shows the major categories of operating cash receipts and payments.

Accepted Answer

The direct method of presenting the net cash flow from operating activities involves listing the major categories of gross cash receipts and payments, providing a clear view of actual cash flows from operating activities.

Question 8

If accounts payable increase during an accounting period, then the cash paid for merchandise purchased is less than the merchandise purchases for the period.

Accepted Answer

When accounts payable increase, it means that the company has purchased merchandise on credit and has not yet paid for these purchases in cash, resulting in the cash paid being less than the total merchandise purchases for the period.

Question 9

If prepaid insurance decreases during an accounting period, then the cash paid for insurance is less than the period's insurance expense.

Accepted Answer

If prepaid insurance decreases, it means that the insurance expense recognized is greater than the cash paid, as some of the expense is covered by the prepaid amount.

Question 10

Depreciation expense is deducted from net income in determining cash flows provided by operating activities under the indirect method.

Accepted Answer

Depreciation does not involve cash. It is added back to net income in the operating section of the statement of cash flows under the indirect method because it was deducted in determining net income though it did not use cash.

Question 11

The operating-cash-flow-to-capital-expenditures ratio in excess of 1.0 means that the firms' current operating activities are providing cash in excess of the amount needed to fund its desired investment in plant and intangible assets.

Accepted Answer

This ratio measures the ability of the company to fund its capital expenditures from its operating cash flow. A ratio greater than 1.0 indicates that the company generates more cash from its operations than is needed for investments in plant, property, and equipment, thus having excess cash for other uses.

Question 12

The statement of cash flows explains changes in a firm's:

Accepted Answer

The statement of cash flows explains changes in a firm's cash and cash equivalents, detailing how these balances change over a period due to operating, investing, and financing activities.

Question 13

Which of the following is a cash equivalent for purposes of preparing a statement of cash flows?

Accepted Answer

Investment in a money market fund is considered a cash equivalent because it is a short-term, highly liquid investment that is readily convertible to known amounts of cash and has an insignificant risk of changes in value.

Question 14

To qualify as a cash equivalent, an investment must be:

Accepted Answer

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Options B and C are not criteria for an investment to qualify as a cash equivalent.

Question 15

A typical example of a cash equivalent is an investment in:

Accepted Answer

Commercial paper is considered a cash equivalent because it is a short-term, highly liquid investment with a maturity date of less than three months when purchased, making it easily convertible to known amounts of cash.

Question 16

Which of the following is not a cash equivalent for purposes of preparing a statement of cash flows?

Accepted Answer

Investment in common stock of other companies is not considered a cash equivalent because it does not have the same liquidity and low risk of changes in value as the other options. 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 due to changes in interest rates.

Question 17

A firm's net cash flow from operating activities includes:

Accepted Answer

C) Cash received from sale of merchandise is considered a part of a firm's net cash flow from operating activities, as it directly relates to the primary revenue-generating activities of the business. Choices A, B, and D are related to investing and financing activities, not operating activities.

Question 18

A firm's cash flow from investing activities includes:

Accepted Answer

Cash flow from investing activities includes transactions involving the sale or purchase of long-term assets, such as property, plant, and equipment. Therefore, cash received from the sale of a plant asset falls under investing activities. Cash paid as dividends is classified under financing activities, cash received from rendering services is an operating activity, and cash paid to retire bonds payable is also a financing activity.

Question 19

A firm's cash flow from financing activities includes:

Accepted Answer

Cash flow from financing activities includes transactions involving raising capital and returning capital to shareholders. Cash paid to reacquire treasury stock is a way of returning capital to shareholders, thus it falls under financing activities.

Question 20

In a statement of cash flows, interest paid to creditors is classified as a cash flow from:

Accepted Answer

Interest paid to creditors is classified as a cash flow from operating activities because it is considered an expense related to the core business operations of a company.

Quiz 13: Statement of Cash Flows