Deck 3: Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Question 1

Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers because:

A) their cash flow from operations will be much greater than their working capital from operations.
B) their cash flow from operations will not differ much from their working capital from operations.
C) their cash flow from operations will be much less than their working capital from operations.
D) there will be no relation between their cash flow from operations and working capital from operations.

Answer 1

B

Question 2

Normally, cash flows from operations will peak during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Answer 2

C

Question 3

Free cash flows to all debt and common equity shareholders represents the excess of cash flows from:

A) operating activities over cash flows for financing activities
B) investing over cash flows for operating activities
C) investing over cash flows for financing activities
D) operating activities over cash flows for investing activities

Answer 3

D

Question 4

In a statement of cash flows, interest received from sources other than a company's investments would be classified as cash inflows from:

A) lending activities.
B) operating activities.
C) investing activities.
D) financing activities.

Question 5

Outback Corp. recorded sales of $1,300,000 in 2010, in addition the company's accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010. How much cash did Outback collect from customers in 2010?

A) $1,300,000
B) $1,345,000
C) $1,255,000
D) $1,135,000

Question 6

Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 7

When preparing the statement of cash flows using the indirect method, an increase in inventories would appear as:

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section

Question 8

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

A) A sale of equipment is an investing activity; the transaction will not affect the operating activities section.
B) The gain is added back to net income in the operating activities section.
C) The gain is subtracted from net income in the operating activities section.
D) The entire sales price is subtracted from net income in the operating activities section.

Question 9

An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is:

A) depreciation expense.
B) compensation expense related to stock option plans.
C) income from an investment accounted for using the equity method.
D) unrealized losses on trading investments

Question 10

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be:

A) greater than net income
B) less than net income
C) greater than the change in working capital from operations
D) greater than the change in cash

Question 11

When preparing the statement of cash flows using the indirect method, the payment of dividends would appear as:

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the financing activities section
D) a source of cash in the financing activities section

Question 12

Toro Company recognized $655,000 of cost of goods sold in 2010, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2010. How much cash did Toro spend for inventory in 2010?

A) $655,000
B) $980,000
C) $560,000
D) $620,000

Question 13

When preparing the statement of cash flows using the indirect method, an increase in accounts payable would appear as:

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section

Question 14

One rationale for the statement of cash flows is to:

A) ensure that the cash account balances at year-end.
B) reconcile differences between net income and cash receipts and disbursements.
C) calculate the company's free cash flow.
D) examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles.

Question 15

When preparing the statement of cash flows using the indirect method, the sale of marketable securities would appear as:

A) a use of cash in the investing activities section
B) a source of cash in the investing activities section
C) a use of cash in the financing activities section
D) a source of cash in the financing activities section

Question 16

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method?

A) Subtract amortization expense
B) subtract gain on sale of subsidiary
C) add an increase in accounts receivable
D) add a decrease in accounts payable

Question 17

Which of the following is the correct formula for calculating cash collections from customers?

A) sales for the period plus accounts receivable at the beginning of the period
B) sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period
C) sales for the period plus accounts receivable at the end of the period
D) sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period

Question 18

A company in the growth phase of its product life cycle will normally have which of the following patterns of cash flows?

A) Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing.
B) Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.
C) Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing.
D) Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing.

Question 19

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?

A) non-cash items, such as depreciation and amortization
B) changes in working capital accounts
C) gains and losses related to the sale of plant, property and equipment
D) sale or repurchase of capital stock

Question 20

Normally, cash flows from financing will start using cash during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 21

Under the indirect method of preparing the statement of cash flows, add backs to net income include all of the following except :

A) depreciation expense
B) deferred tax expense
C) gains on sale of equipment
D) share-based compensation

Question 22

All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers, except :

A) restaurants
B) wineries
C) construction companies
D) aerospace manufacturers

Question 23

The expense incurred by issuing stock options should be:

A) classified as a financing activity.
B) added back to net income in the operating activities section.
C) subtracted from net income in the operating activities section.
D) does not appear in the statement of cash flows.

Question 24

Kraco Corporation reported 2010 net income of $450,000, including the effects of depreciation expense of $60,000, and amortization expense on a patent of $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities using the indirect method for 2010 was:

A) $570,000
B) $520,000
C) $470,000
D) $440,000

Question 25

Academic research has found that market rates of return on common stock are the most highly correlated with:

A) net income.
B) cash flow from operations.
C) EBITDA.
D) cash flow from investing activities.

Question 26

A firm's cash flows will differ from net income each period for all of the following reasons except :

A) cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues.
B) cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses.
C) the company is sustaining losses each period.
D) cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement.

Question 27

Which of the following companies would you expect to report significant amounts of cash provided by financing activities?

A) A yet-to-be-profitable biotechnology company.
B) A mature company operating in the oil refinery industry.
C) A profitable established company in the retail industry.
D) A large multinational pharmaceutical company.

Question 28

Which of the following would not be a cash flow from investing activities?

A) Sale of a patent.
B) Collection of interest revenue on a long-term note receivable.
C) Collection of principal of a note receivable.
D) Purchase of long-term investments.

Question 29

Lag os Corp. recorded sales of $345,000 in 2010. In addition, its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows:
How much cash did Lagos collect from customers in 2010?

A) $345,000
B) $320,000
C) $324,000
D) $316,000

Question 30

Which of the following is a cash flow from operating activities?

A) Sale of long-term investments in common stock.
B) Purchase of merchandise for resale.
C) Payment of a note payable.
D) Sale of a piece of land no longer used in operations.

Question 31

Norton Company reported total sales revenue of $55,000, total expenses of $45,000, and net income of $10,000 on its income statement for the year ended December 31, 2010. During 2010, accounts receivable increased by $4,000, merchandise inventory increased by $6,000, accounts payable decreased by $2,000, and depreciation of $18,000 was recorded. Therefore, based only on this information, the net cash flow from operating activities using the indirect method for 2010 was:

A) $30,000
B) $10,000
C) $16,000
D) $19,000

Question 32

Tinker Company reported sales revenue of $500,000 and total expenses of $450,000 (including depreciation) for the year ended December 31, 2010. During 2010, accounts receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for 2010 was:

A) $60,000
B) $67,000
C) $44,000
D) $51,000

Question 33

Which of the following statements about the statement of cash flows is correct?

A) A purchase of equipment is classified as a cash inflow from investing activities.
B) Cash dividends paid are classified as cash flows from operating activities.
C) Cash dividends received on stock investments are classified as cash flows from operating activities.
D) A company with a net loss on the income statement will always have a net cash outflow from operating activities.

Question 34

Adophus, Inc.'s 2010 income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2010 balance sheet reported the following: accounts receivable beginning balance of $50,000 and ending balance of $40,000; accounts payable beginning balance of $22,000 and ending balance of $28,000. Therefore, based only on this information and using the indirect method, the 2010 net cash inflow from operating activities was:

A) $126,000
B) $186,000
C) $166,000
D) $174,000

Question 35

As products move through the maturity phase, companies invest to ___________ productive capacity.

A) increase
B) decrease
C) maintain
D) Not enough information to answer this question.

Question 36

Which of the following transactions would not create a cash flow?

A) Payment of a cash dividend.
B) The company purchased some of its own stock from a stockholder.
C) Amortization of patent for the period.
D) Sale of equipment at book value (i.e. no gain or loss).

Question 37

As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except :

A) The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash.
B) The existence of negative cash flows from operations can be eliminated by using this financial statement.
C) The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm's reported earnings.
D) Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm's industry, its strategy, and the stage in its life cycle.

Question 38

A cash inflow from financing activities includes:

A) receipt of interest payments.
B) proceeds from selling equipment.
C) proceeds from issuance of bonds payable.
D) proceeds from selling investments in equity securities of another company.

Question 39

When net income is high relative to operating cash flows, we describe the firm as having recorded:

A) income-decreasing accruals.
B) income-increasing accruals.
C) income-neutral accruals.
D) abnormal accruals.

Question 40

When net income is low relative to operating cash flows, we describe the firm as having recorded:

A) income-decreasing accruals.
B) income-increasing accruals.
C) income neutral accruals.
D) abnormal accruals.

Question 41

Which of the following statements is true?

A) A cash dividend is an operating cash outflow.
B) Cash paid to repurchase treasury stock is an investing cash outflow.
C) Cash paid to acquire stock in another company is a financing outflow.
D) Purchase of a patent is an investing cash outflow.

Question 42

Krenshaw Company reported total sales revenue of $80,000, total expenses of $72,000, and net income of $8,000 for the year ended December 31, 2009. During 2009, accounts receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments to net income are needed, the net cash inflow from operating activities using the indirect method was:

A) $19,000
B) $13,000
C) $10,000
D) $11,000

Question 43

The length of the operating cycle is another factor that may cause cash flow from operations to differ from __________________________________________________.

Question 44

Amortization of bond discount and premiums would be additions or subtractions from net income in the ___________________________ section of the statement of cash flows

Question 45

Lui Company 's 2010 income statement reported total sales revenue of $350,000. The 2009-2010 comparative balance sheets showed that accounts receivable increased by $20,000. The 2010 "cash receipts from customers" would be:

A) $270,000
B) $250,000
C) $330,000
D) $40,000

Question 46

Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.

Question 47

The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.

Question 48

The period in which a firm commences the manufacture of its product to the time it receives cash is called the ______________________________.

Question 49

Cash flows from ____________________ activities will normally be negative during the introduction and growth phase of the product life cycle.

Question 50

The financial statements for Warren Company show the following:
Based on this information, cash paid for merchandise was:

A) $736,000
B) $719,000
C) $731,000
D) $741,000

Question 51

Which of the following statements is false ?

A) Purchase of equipment is an investing cash outflow.
B) Sale of equipment creates investing cash outflow equal to its selling price.
C) Purchase of short-term investments is an investing cash outflow.
D) Purchase of a patent is an investing cash outflow.

Question 52

The acquisition of new investments would be classified as ____________________ activities in the statement of cash flows.

Question 53

The payment of dividends would be classified as ____________________ activities in the statement of cash flows.

Question 54

____________________ activities relate to the acquisition and sale of noncurrent assets, particularly property, plant and equipment.

Question 55

____________________ ___________________ equals current assets minus current liabilities

Question 56

Which statement is false regarding the preparation of the indirect method of the statement of cash flows?

A) An increase in merchandise inventory is subtracted from net income.
B) Depreciation expense is added to net income.
C) An increase in accounts receivable is added to net income.
D) An increase in accounts payable is added to net income.

Question 57

A decrease in accounts receivable during a period indicates that a firm collected more ____________________ as the amount of revenues included in net income.

Question 58

____________________ activities relate to the normal operations of the firm, selling goods and providing services.

Question 59

Under the _________________________, firms begin with net income to calculate cash flow from operations for the period.

Question 60

Free cash flows to all debt and common equity shareholders represents the excess of cash flow from operations over cash flows from ___________________________________.

Question 61

Discuss the correlations that have been found between net income, net income plus or minus Type 1 adjustments (i.e., adjustments to net income for revenues, expenses, gains, and losses that are recognized in income and are associated with changes in noncurrent assets, noncurrent liabilities, and shareholders' equity, but do not affect cash by the same amounts for the period), and cash flow from operations.

Question 62

The receipt of cash when employees exercise stock options is a(n) ____________________ activity.

Question 63

Luke Corporation is a manufacturer of home furnishings. Selected financial information about Luke is listed below:
· Borrowed $850,000 from a bank.
Purchased equipment for $210,000 in cash.
· Purchase investments for $285,000.
· Received dividends of $51,000 from an investment in Davis Corp.
· Paid dividends of $55,000.
· Issued shares of preferred stock for $500,000.
Repurchased outstanding common shares using $100,000 in cash.
·Purchased land for $100,000 cash.
· Paid $36,000 interest expense on a bank loan.
· Increased Inventories by $320,000
· Increased accounts receivable by $217,000.
· Increased accounts payable $85,000.
Use the above information to calculate Luke's:
a. cash used or provided by investing activities
b. cash used or provided by financing activities

Question 64

Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the ____________________ method

Question 65

For the following types of companies, discuss whether you think their cash flows from operations, investing, and financing will be positive (the activity provides cash) or negative (the activity uses cash). Provide support for your answer.
1. Tech Corporation is a developer of computer software for the gaming industry. The company recently launched its first software title. The company is expanding its operations by hiring additional developers and administrative staff. The company is not yet profitable, but expects to break even within two years. Investors view it as having a first mover advantage and have been happy to invest in the company.
2. Midwest Corporation is a supplier to the agricultural industry. The company is experiencing its 25th year of profitability, but is concerned that sales have contracted for the fifth year in a row. Midwest prides itself in paying dividends and having no debt on its balance sheet.
3. Semi Inc. manufactures semiconductors. The company has just introduced its ninth new product and is the leader in market share for the industry. The company continues to invest in research and development and expand by purchasing competitors. The company has yet to pay dividends, but is considering it in the future. The company's largest current asset is cash, due to its high profit margin.

Question 66

Cilca Corporation is a supplier to the pulp and paper industry. Selected financial information about Cilca is listed below:
· Purchased real estate for $440,000 in cash. The cash was borrowed from a bank.
·Sold investments for $400,000.
· Paid dividends of $480,000.
· Issued shares of common stock for $200,000.
· Purchased machinery and equipment for $100,000 cash.
· Paid $360,000 on a bank loan.
·Reduced accounts receivable by $80,000.
· Increased accounts payable $160,000.
Sales for the period were $450,000
Use the above information to calculate Cilca's:
a. cash used or provided by operating activities
b. cash used or provided by financing activities

Question 67

Selected financial statement information for Filmco appears below:

Calculate the amount of cash collected from customers and the amount of cash spent on inventory for 2010 by Filmco.

Question 68

Discuss operating, investing, and financing cash flows in relation to the various stages of the product life cycle.

Question 69

The issuance of debt would be classified as a(n) ____________________ activity in the statement of cash flows.

Question 70

Under the ______________________________ of preparing the statement of cash flow's operating activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to providers of goods and services.

Question 71

One factor that may cause cash flow from operations to differ from net income is the length of the ______________________________.

Question 72

What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different?

Question 73

Cash flow from operations should include none of the cash flows associated with marketable securities if such transactions are viewed as ___________________________________.

Question 74

The calculation of cash flow from operations under the indirect method involves two types of adjustments. Discuss each type of adjustment and provide an example of each type of adjustment.