Deck 16: Reporting the Statement of Cash Flows

Question 1

Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term investment and financing decisions.

Answer 1

True

Question 2

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

Answer 2

True

Question 3

The purchase of stock in another company is classified as a financing activity.

Answer 3

False

Question 4

The primary purpose of the statement of cash flows is to report all major cash receipts (inflows)and cash payments (outflows)during a period.

Question 5

To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

Question 6

A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000 note payable. The entire transaction is disclosed to users in the financing section of the statement of cash flows.

Question 7

A purchase of land in exchange for a long-term note payable must be disclosed as a noncash investing and financing activity.

Question 8

The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.

Question 9

A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

Question 10

Receipts of cash dividends and interest earned on loans are classified as investing activities.

Question 11

The statement of cash flows reports and proves the net change in cash for a reporting period.

Question 12

Conversion of preferred stock to common stock is disclosed in the financing section of the statement of cash flows.

Question 13

Investing activities include (a)the purchase and sale of long-term assets, (b)the purchase and sale of short-term investments, and (c)lending and collecting on loans.

Question 14

A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Question 15

The purchase of stock in another company is classified as an investing activity.

Question 16

Cash paid for merchandise is an operating activity.

Question 17

Financing activities include (a)the purchase and sale of long-term assets, (b)the purchase and sale of short-term investments, and (c)lending and collecting on loans.

Question 18

A noncash investing transaction should be disclosed in either a footnote or at the bottom of the statement of cash flows.

Question 19

The payment of cash dividends to shareholders is classified as a financing activity.

Question 20

The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

Question 21

The cash flows from operating activities section of an indirect method of cash flows begins with net income or loss.

Question 22

A purchase of land in exchange for shares of stock is disclosed at the bottom of the statement of cash flows or in a note to the statement.

Question 23

The reporting of financing activities in the statement of cash flows is identical under either the direct or indirect methods.

Question 24

Cash flow amounts and their timing should be considered when planning and analyzing operating activities.

Question 25

The cash flow on total assets ratio is computed by dividing average total assets by operating income.

Question 26

The statement of cash flows explains how transactions and events impact the end-of-period cash balance to produce the end-of-period net income.

Question 27

A cash coverage of growth ratio of less than 1 indicates cash inadequacy to meet asset growth.

Question 28

The direct method for computing and reporting net cash flows from operating activities involves adjusting the net income figure to obtain net cash provided or used by operating activities.

Question 29

The FASB recommends that the operating section of the statement of cash flows be reported using the direct method.

Question 30

The cash flow on total assets ratio is computed by dividing cash flows from operations by average total assets.

Question 31

A cash-based measure to help business decision makers estimate the amount and timing of cash flows is the cash flow on total assets ratio.

Question 32

Managers only use the cash flow statement to evaluate the net cash increase or decrease, and do not pay much attention to the details of cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Question 33

Information to prepare the statement of cash flows usually comes from (a)comparative balance sheets, (b)current income statement, and (c)additional information.

Question 34

Both the direct and indirect methods yield the identical net cash flow amount provided or used by operating activities.

Question 35

Most managers stress the importance of understanding and predicting cash flows for business decisions.

Question 36

The reporting of investing activities in the statement of cash flows is identical under either the direct or indirect methods.

Question 37

Since it is recommended by the FASB, the direct method of preparing the statement of cash flows is most frequently used.

Question 38

The cash flow on total assets ratio compared to the total assets ratio can be used as an indicator of earnings quality.

Question 39

Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.

Question 40

The cash flow on total assets ratio reflects actual cash flows and is therefore affected by income recognition and measurement.

Question 41

When preparing the operating activities section of the statement of cash flows using the indirect method, decreases in current operating liabilities are added to net income.

Question 42

When preparing the operating activities section of the statement of cash flows using the indirect method, an increase in income taxes payable is added to net income.

Question 43

When preparing the operating activities section of the statement of cash flows using the indirect method, decreases in current operating assets are added to net income.

Question 44

The direct method separately lists each major item of operating cash receipts and cash payments.

Question 45

When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income.

Question 46

When preparing the operating activities section of the statement of cash flows using the direct method, non-operating losses are added to net income.

Question 47

When preparing the operating activities section of the statement of cash flows using the indirect method, depreciation is subtracted from net income.

Question 48

The indirect method for computing and reporting net cash flows from operating activities involves adjusting the net income figure to obtain net cash provided or used by operating activities.

Question 49

Cash flows are essentially the same as net income because they are both measured using accrual accounting principles.

Question 50

Financing activities include receiving cash dividends from investments in other companies' stocks.

Question 51

When preparing the operating activities section of the statement of cash flows using the indirect method, depreciation is added to net income.

Question 52

When preparing the operating activities section of the statement of cash flows using the indirect method, decreases in current operating liabilities are subtracted from net income.

Question 53

Companies have the option of using either the direct or indirect method to prepare the operating section of the statement of cash flows.

Question 54

When preparing the operating activities section of the statement of cash flows using the direct method, non-operating gains are added to net income.

Question 55

When preparing the operating activities section of the statement of cash flows using the indirect method, decreases in current operating assets are subtracted from net income.

Question 56

The gain or loss from retirement of debt is reported under cash flows from operating activities on the statement of cash flows using the indirect method.

Question 57

The indirect method separately lists each major item of operating cash receipts and cash payments.

Question 58

When preparing the operating activities section of the statement of cash flows using the indirect method, expenses with no cash outflows are added back to net income.

Question 59

When preparing the operating activities section of the statement of cash flows using the indirect method, non-operating losses are added to net income.

Question 60

When preparing the operating activities section of the statement of cash flows using the indirect method, non-operating gains are added to net income.

Question 61

The payment of cash dividends never changes the balance of retained earnings.

Question 62

The statement of cash flows reports all but which of the following:

A)Cash flows from operating activities.
B)The financial position of the company at the end of the accounting period.
C)Cash flows from investing activities.
D)Cash flows from financing activities.
E)Significant noncash financing and investing activities.

Question 63

On a spreadsheet used to prepare the operating activities section of the statement of cash flows, depreciation expense does not require an entry in the Analysis of Changes columns because it is a noncash item.

Question 64

Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000. This implies that $40,000 cash was received from the sale.

Question 65

When using a spreadsheet to prepare the statement of cash flows, an increase in accounts payable is entered in the Analysis of Changes columns with a debit in the statement of cash flows section and a credit in the balance sheet section.

Question 66

The FASB requires a reconciliation of net income to net cash provided or used by operating activities when the direct method is used (which can be reported in the notes).

Question 67

Depreciation expense is not reported on a statement of cash flows prepared under the direct method.

Question 68

The statement of cash flows is:

A)A financial statement that lists the types and amounts of the revenues and expenses of a business for an accounting period.
B)Another name for the statement of financial position.
C)A financial statement that lists the types and amounts of assets, liabilities, and equity of a business on a specific date.
D)A financial statement that presents information about changes in equity during a period.
E)A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.

Question 69

Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business, are classified as:

A)Direct activities.
B)Indirect activities.
C)Financing activities.
D)Operating activities.
E)Investing activities.

Question 70

Equipment costing $200,000 with accumulated depreciation of $160,000 is sold at a loss of
$10,000. This implies that $30,000 cash was received from the sale.

Question 71

A cash equivalent is:

A)Another name for cash.
B)Generally within 12 months of its maturity date.
C)An investment readily convertible to a known amount of cash.
D)Is not considered highly liquid.
E)Close to its maturity date but its market value may still be affected by interest rate changes.

Question 72

Investing activities include receiving cash dividends from investments in other companies' stocks.

Question 73

Investing activities include: (a)the purchase and sale of long-term assets, (b)lending and collecting on notes receivable, and (c)the purchase and sale of short-term investments in the securities of other entities, other than cash equivalents and trading securities.

Question 74

When using a spreadsheet to prepare the statement of cash flows, a decrease in accounts payable is entered in the Analysis of Changes columns with a debit in the statement of cash flows section and a credit in the balance sheet section.

Question 75

Financing activities include receiving cash from issuing debt and receiving cash dividends from investments in other companies' stocks.

Question 76

An investment that is readily convertible to a known amount of cash and that is sufficiently close to its maturity date so that its market value is unaffected by interest rate changes is a(n):

A)Operating activity.
B)Cash equivalent.
C)Short-term marketable equity security.
D)Common stock.
E)Financing activity.

Question 77

Financing activities include receiving cash from issuing debt and paying cash dividends to shareholders.

Question 78

A spreadsheet can help organize the information needed to prepare a statement of cash flows.

Question 79

The gain or loss from retirement of debt is reported under cash flows from operating activities on the statement of cash flows using the direct method.

Question 80

The statement of cash flows reports:

A)Cash inflows and cash outflows for an accounting period.
B)Changes in equity.
C)Equity, net income, and dividends.
D)Assets, liabilities, and equity.
E)Revenues, gains, expenses, and losses.