Question 1

Firms receive cash inflows and disburse cash outflows for investing activities such as to

Accepted Answer

Investing activities involve the acquisition or disposal of long-term assets, such as property, plant, and equipment. Therefore, option B is the correct choice as it highlights building productive capacity by acquiring property, plant, and equipment. The other options listed are related to financing activities (dividend payments) and operating activities (debt service payments).

Question 2

Cash equivalents represent _____ in which a firm has temporarily placed excess cash.We use the term cash flows to refer to flows of both cash and cash equivalents.

Accepted Answer

Cash equivalents are short-term, highly liquid investments that can be quickly converted into cash without significant loss in value. Examples of cash equivalents include treasury bills, commercial paper, and money market funds. These investments are considered to be safe and low risk, making them a prudent choice for companies to hold excess cash.

Question 3

Which of the following statements is/are true concerning the statement of cash flows?

Accepted Answer

The answer of Which of the following statements is/are true...

Question 4

In the Statement of Cash Flows, U.S.GAAP views cash received in the form of interest and dividends as coming from _____.

Accepted Answer

According to U.S.GAAP, cash received in the form of interest and dividends is considered to be related to the company's operating activities. This is because interest and dividends are typically earned on investments that are made as part of the company's primary operations, rather than being directly related to financing or investing activities.

Question 5

U.S.GAAP requires that firms classify cash payments for interest expense as a(n) _____ activity.

Accepted Answer

Under U.S. GAAP, cash payments for interest expense are classified as operating activities in the cash flow statement.

Question 6

_____ usually represents a major ongoing use of cash.

Accepted Answer

The acquisition of noncurrent assets, particularly property, plant, and equipment, usually requires a significant amount of cash and is considered a major ongoing use of cash. Borrowing funds and issuance of common shares may provide cash inflows, while sales of existing noncurrent assets may provide cash outflows but are not typically considered ongoing uses of cash. Therefore, option D is the best choice.

Question 7

Both U.S.GAAP and IFRS permit considerable flexibility with respect to the display of information in the statement of cash flows.Firms must report cash flows from operations, investing, and financing for the _____.

Accepted Answer

Both U.S. GAAP and IFRS require firms to report cash flows from operations, investing, and financing for the current year and the prior two years. Therefore, choice C is the correct answer. The other options are not consistent with the requirements of both U.S. GAAP and IFRS.

Question 8

The statement of cash flows provides information about

Accepted Answer

The statement of cash flows shows the relationship between operations and liquidity by reporting the cash inflows and outflows of a firm from operating, investing, and financing activities during a specific period. It does not provide information about cumulative effects of operations over several years or balances in shareholders' equity accounts. While the statement of cash flows may indicate the success of management's cash management strategy, this is not its primary purpose.

Question 9

The faster a firm grows, the greater is the shortfall in cash and the firm might borrow funds from the bank on a revolving credit arrangement.Why?

Accepted Answer

All of the given options contribute to the shortfall in cash for a fast-growing firm. Expenses such as salaries, rent, and supplies have to be paid before the firm receives cash inflows from the sale of goods or services. This time lag between cash outflows and inflows can lead to cash shortages that need to be managed through borrowing. Additionally, payments to employees and suppliers precede cash collections from customers, further exacerbating the cash shortfall.

Question 10

Which is a use of cash?

Accepted Answer

An increase in inventory is a use of cash because purchasing more inventory requires spending cash, thereby reducing the company's cash balance.

Question 11

A firm uses cash to _____ These amounts appear as cash flow from financing activities in the statement of cash flows.

Accepted Answer

All of the options listed involve the use of cash for financing activities, including paying dividends, repaying borrowing, and reacquiring outstanding common or preferred shares. All of these activities would be reflected in the cash flow from financing activities section of the statement of cash flows.

Question 12

Net income for a particular period does not equal cash flow from operations because

Accepted Answer

All of the options (A, B, C, D) can contribute to the difference between net income and cash flow from operations. The accrual basis of accounting used by most firms recognizes revenue and expenses when they are earned, regardless of when cash is exchanged. This can result in revenue being recognized in one period while the corresponding cash is received in a different period. Additionally, some firms may receive cash before providing services, resulting in increased cash but no corresponding revenue, while others may provide goods or services and recognize revenue before receiving payment, resulting in decreased cash but recognized revenue.

Question 13

U.S.GAAP requires that the statement of cash flows explain the changes in the firm's

Accepted Answer

The statement of cash flows under U.S. GAAP is required to explain the changes in cash and cash equivalents during the accounting period. It presents the sources and uses of cash, including operating, investing, and financing activities, to provide information on the firm's ability to generate cash, meet its obligations, and invest in new opportunities. While U.S. GAAP requires other financial statements to disclose information on the firm's resources, obligations, income, accounts receivable, and accounts payable, these are not the focus of the statement of cash flows.

Question 14

Under U.S.GAAP, the classification of interest expense as an operating activity and dividends paid on common or preferred shares as a financing activity appears inconsistent to some observers as both are payments to suppliers of funds.Authoritative guidance requires the different treatments because

Accepted Answer

Interest expense is classified as an operating activity because it is considered an expense in computing net income, while dividends paid are classified as a financing activity because they represent a distribution of assets generated by net income, not an expense reducing net income.

Question 15

The statement of cash flows

Accepted Answer

The statement of cash flows accomplishes all of the above by reporting the cash flow for the period, providing information about a firm's cash flow needs, and how the firm has dealt with them, as well as the impact of operations and investing activities on cash flows.

Question 16

IFRS permits firms to classify cash from interest and dividend revenue as _____ activities, provided the classification is consistently applied across periods.

Accepted Answer

Under IFRS, firms have the flexibility to classify cash flows from interest and dividend revenue as operating, investing, or financing activities, as long as the classification is consistent over time.

Question 17

A firm obtains cash from all of the following except for:

Accepted Answer

Paying dividends to shareholders does not result in obtaining cash for the firm, but rather it involves distributing cash to shareholders.

Question 18

Firms receive cash inflows and disburse cash outflows for financing activities such as to

Accepted Answer

Financing activities include transactions with the firm's owners and creditors, such as paying dividends to shareholders.

Question 19

Under U.S.GAAP, the classification of interest expense as a(n) _____ activity and dividends paid on common or preferred shares as a(n) _____ activity appears inconsistent to some observers as both are payments to suppliers of funds.

Accepted Answer

Under U.S. GAAP, interest expense is classified as an operating activity because it is considered part of the entity's ongoing major or central operations, while dividends paid on common or preferred shares are classified as a financing activity, reflecting the cost of obtaining financial resources.

Question 20

Which is a source of cash?

Accepted Answer

A decrease in accounts receivable means that a company has collected payment from its customers, resulting in an inflow of cash.

Quiz 6: Statement of Cash Flows