Question 1

Under IFRS firms are encouraged to use the direct method and are required to provide a reconciliation of net income to cash flows from operating activities.

Accepted Answer

The answer of Under IFRS firms are encouraged to use...

Question 2

Cash flows arising from the payment of dividends are cash flows from

Accepted Answer

Dividends are paid to shareholders from profits and are considered a distribution of earnings. Therefore, they are classified as financing activities in the statement of cash flows.

Question 3

Cash flows arising from the purchase or sale of marketable securities are cash flows from

Accepted Answer

Cash flows arising from the purchase or sale of marketable securities are part of investing activities, as they represent the company's investments in assets that are not directly related to the normal operations of the business.

Question 4

GAAP mandates that firms provide a

Accepted Answer

GAAP mandates that firms provide a cash flow statement, which shows the inflows and outflows of cash and cash equivalents during a specific period. This statement helps investors and creditors understand the company's liquidity, solvency, and financial flexibility. Working capital statement, statement showing inflows and outflows of current assets and current liabilities, and statement reporting changes in current operations are not required by GAAP.

Question 5

Under IFRS rules,nonfinancial firms are permitted to report interest and dividends received either as operating or investing activities and interest paid as either an operating or financing activity.

Accepted Answer

Under IFRS rules, nonfinancial firms have the flexibility to report interest and dividends received as either operating or investing activities and interest paid as either operating or financing activities. This is known as the "dual approach" and provides companies with the ability to choose the classification that they believe best reflects the nature of the cash flows.

Question 6

Cash flows arising from the acquisitions and divestitures of other companies are cash flows from

Accepted Answer

Cash flows arising from the acquisitions and divestitures of other companies are classified as investing activities under the indirect method of preparing the statement of cash flows. This is because the cash flows are related to the purchase or sale of long-term assets, such as subsidiaries, associated companies, or joint ventures, which represent investments of the company.

Question 7

Under IFRS firms that use bank overdrafts repayable on demand as part of their normal cash management activities must include those overdrafts as part of financing activities.

Accepted Answer

Under IFRS, bank overdrafts repayable on demand that are used as part of the entity's cash management are included in cash and cash equivalents, not as financing activities.

Question 8

The direct method and the indirect method are alternative presentations for presenting cash flows from

Accepted Answer

The direct method and the indirect method are alternative presentations for presenting cash flows from operating activities. These methods describe how cash was generated and used during the period from operating activities such as sales, inventory, and expenses. The direct method reports cash inflows and outflows from operating activities independently, whereas the indirect method adjusts net income for non-cash items such as depreciation, changes in working capital, and other items to derive cash flow from operating activities.

Question 9

Analysts prefer the indirect method for the preparation of the cash flow statement because the size and direction of the items reconciling net income to net cash flow from operating activities provide a yardstick for measuring the

Accepted Answer

The indirect method reconciles net income to net cash flow from operating activities by adjusting for non-cash expenses, changes in current assets and liabilities, and other non-operating items. This reconciliation provides insights into the quality of earnings, which refers to how much of the reported earnings are due to actual business operations and how much are due to accounting adjustments or one-time events. Therefore, analysts prefer the indirect method for the preparation of the cash flow statement because it provides a yardstick for measuring the quality of earnings. Choices A, B, and D are not directly related to the preparation of the cash flow statement nor are they affected by the reconciling items in the statement.

Question 10

Cash flows arising from the purchase or sale of productive assets are cash flows from

Accepted Answer

Cash flows related to productive assets, such as the purchase or sale of property, plant, and equipment, are considered investing activities. This is because they have an impact on the long-term productive capacity of the business and are not directly related to the day-to-day operations of the business (operating activities) or the financing of the business (financing activities).

Question 11

Which one of the following would be reported in the cash flow from operating activities section of the cash flow statement under the direct method?

Accepted Answer

Interest and dividends received are classified as operating activities under the direct method on the cash flow statement, reflecting cash inflows from these sources during the reporting period.

Question 12

Cash flows arising from the purchase or sale of a company's own stock are cash flows from

Accepted Answer

Cash flows arising from the purchase or sale of a company's own stock are classified as financing activities in the statement of cash flows. This is because the issuance or repurchase of stock affects the company's equity financing and the resulting cash flows are considered to be a part of its overall financing activities.

Question 13

The FASB's agenda lists as "inactive" a project that would require firms to use the direct method of reporting cash flows from operating activities.

Accepted Answer

The FASB's agenda lists the project as "inactive" which means it is no longer being pursued.

Question 14

IFRS rules allow firms to classify dividends paid as a component of cash flows from operating activities in order to help users to determine the ability of an entity to pay dividends out of operating cash flows.

Accepted Answer

IFRS rules do allow dividends paid to be classified as a component of cash flows from operating activities.

Question 15

The method of preparing the statement of cash flows used by the majority of firms is the

Accepted Answer

The majority of firms use the indirect method of preparing the statement of cash flows, which starts with net income and adjusts for non-cash items and changes in working capital to arrive at cash flows from operating activities. The direct method is an alternative approach that presents actual cash inflows and outflows from operating activities, but it is less commonly used due to its complexity and additional time and resources required for preparation. The revenue method and dividend method are not methods of preparing the statement of cash flows.

Question 16

Cash flows that arise from transactions of a firm related to the production and delivery of goods and services to customers are cash flows from

Accepted Answer

Cash flows related to production and delivery of goods and services to customers are part of operating activities. Investing activities refer to cash flows from property, plant, and equipment purchases or sales, while financing activities relate to cash flows from borrowing or stock issuances. Research activities are not a specific category of cash flows in the statement of cash flows.

Question 17

Which one of the following items is the most common adjustment to the cash flow from operating activities under the indirect method because cash does not increase or decrease?

Accepted Answer

Depreciation expense is the most common adjustment to the cash flow from operating activities under the indirect method because it is a non-cash expense that reduces net income but does not involve an actual outflow of cash. Therefore, it must be added back to net income in the operating activities section of the statement of cash flows to reflect the actual cash flow from operating activities.

Question 18

Under IFRS firms are encouraged to use the direct method.The result is that firms that follow IFRS rarely use the indirect method of presenting cash flows from operating activities.

Accepted Answer

While IFRS encourages the use of the direct method for reporting cash flows from operating activities, in practice, many firms that follow IFRS still commonly use the indirect method due to its simplicity and the ease of linking it to the accrual-based income statement.

Question 19

Accrual accounting net income can differ from operating cash flows for all of the following reasons except

Accepted Answer

Dividend declaration and payment dates do not affect the difference between accrual accounting net income and operating cash flows. The other options all involve differences between the timing of revenue recognition and the actual receipt of cash, which affect operating cash flows.

Question 20

Under IFRS rules,if a firm uses the direct method,a reconciliation of net income to cash flows from operating activities is not required.

Accepted Answer

Under IFRS, if a company uses the direct method for presenting cash flows from operating activities, a reconciliation of net income to cash flows from operating activities is not required, unlike under US GAAP.

Quiz 17: Statement of Cash Flows