Deck 16: Reporting the Statement of Cash Flows

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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

Question 7

Cash paid for merchandise is an operating activity.

Question 8

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

Question 9

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 10

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

Question 11

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 12

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

Question 13

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.

Question 14

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

Question 15

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

Question 16

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 on the statement of cash flows and/or in the notes to the financial statements.

Question 17

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

Question 18

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

Question 19

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 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

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

Question 27

The usual first step in preparing the statement of cash flows is computing the net increase or net decrease in cash.

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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 36

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 37

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

Question 38

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

Question 39

The cash flow on total assets ratio reflects actual cash flows and is therefore affected by the accounting constraints of recognition and measurement for net income.

Question 40

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 41

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

Question 42

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 relatively insensitive to interest rate changes is a(n):

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

Question 43

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

Question 44

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 45

The appropriate section in the statement of cash flows for reporting the cash payment of wages is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)None of these.This is not reported on the statement of cash flows.

Question 46

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 47

The appropriate section in the statement of cash flows for reporting the purchase of equipment for cash is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)None of these.This is not reported on the statement of cash flows.

Question 48

The statement of cash flows reports:

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

Question 49

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

Question 50

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

Question 51

Which of the following items is reported on the statement of cash flows under financing activities?

A)Declaration of a cash dividend.
B)Payment of a cash dividend.
C)Declaration of a stock dividend.
D)Payment of a stock dividend.
E)Stock split.

Question 52

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 53

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 54

The appropriate section in the statement of cash flows for reporting the issuance of common stock for cash is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)None of these.This is not reported on the statement of cash flows.

Question 55

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

Question 56

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 57

A cash equivalent is an investment that:

A)Is readily convertible to a known amount of cash.
B)Is sufficiently close to its maturity date so its market value is unaffected by interest rate changes.
C)Generally is within 3 months of its maturity date.
D)Is highly liquid.
E)All of the choices are correct.

Question 58

The statement of cash flows reports:

A)Cash flows from operating activities.
B)Cash flows from financing activities.
C)Cash flows from investing activities.
D)Significant noncash financing and investing activities.
E)All of the choices are reported on a statement of cash flows.

Question 59

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

Question 60

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 61

The cash flow on total assets ratio is calculated by:

A)Dividing cash flows from operations by average total assets.
B)Dividing total cash flows by average total assets.
C)Dividing average total assets by cash flows from investing activities.
D)Dividing average total assets by total cash flows.
E)Total cash flows divided by average total assets times 365.

Question 62

The purchase of long-term assets by issuing a note payable for the entire amount is reported on the statement of cash flows in the:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash financing and investing activities.
E)Reconciliation of cash balance.

Question 63

The accounting principle that requires important noncash financing and investing activities be reported on the statement of cash flows or in a footnote is the:

A)Historical cost principle.
B)Materiality principle.
C)Full disclosure principle.
D)Going concern principle.
E)Business entity principle.

Question 64

If a company borrows money from a bank,the interest paid on this loan should be reported on the statement of cash flows as a(n):

A)Operating activity.
B)Investing activity.
C)Financing activity.
D)Noncash investing and financing activity.
E)None of these.This is not reported in the statement of cash flows.

Question 65

Noncash investing and financing activities may be disclosed in:

A)A note in the financial statements or a schedule attached to the statement of cash flows.
B)The operating activities section of the statement of cash flows.
C)The investing activities section of the statement of cash flows.
D)The financing activities section of the statement of cash flows.
E)The reconciliation of cash balance section.

Question 66

Which one of the following is representative of typical cash flows from operating activities?

A)Proceeds from collecting the principal amounts of loans.
B)Repayment of principals on loans.
C)Proceeds from the issuance of bonds and notes payable.
D)Payments by a merchandiser to acquire equity securities of other companies.
E)Receipts of cash sales.

Question 67

The appropriate section in the statement of cash flows for reporting the purchase of land in exchange for common stock is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)Reconciliation of cash balance.

Question 68

The statement of cash flows helps address questions such as

A)How is the increase in investments financed?
B)What is the source of cash for new plant assets?
C)How much cash is generated from or used in operations?
D)Why is cash flow from operations different from income?
E)The statement of cash flows helps to address all of the questions listed.

Question 69

Accounting standards:

A)Allow companies to omit the statement of cash flows from a complete set of financial statements if cash is an insignificant asset.
B)Require that companies omit the statement of cash flows from a complete set of financial statements if the company has no investing activities.
C)Require that companies include a statement of cash flows in a complete set of financial statements.
D)Allow companies to include the statement of cash flows in a complete set of financial statements if the cash balance makes up more than 50% of the current assets.
E)Allow companies to omit the statement of cash flows from a complete set of financial statements if the company has no financing activities.

Question 70

The statement of cash flows helps analysts evaluate the:

A)Source of cash used for debt repayments.
B)Source of cash used for plant expansion.
C)Differences between net income and net operating cash flow.
D)Source of cash used to finance investing activities.
E)All of the choices are correct.

Question 71

The cash flow on total assets ratio:

A)Is the same as return on assets.
B)Is the same as profit margin.
C)Can be an indicator of earnings quality.
D)Is highly affected by accounting principles of income recognition and measurement.
E)Is average net assets divided by cash flows from operations.

Question 72

A company had average total assets of $1,760,000,total cash flows of $1,320,000,cash flows from operations of $205,000,and cash flows from financing of $850,000.The cash flow on total assets ratio equals:

A)1.33%.
B)8.58%.
C)11.65%.
D)15.5%.
E)75%.

Question 73

A company had net cash flows from operations of $120,000,cash flows from financing of $330,000,total cash flows of $500,000,and average total assets of $2,500,000.The cash flow on total assets ratio equals:

A)4.8%.
B)5.0%.
C)20.0%.
D)20.8%.
E)24.0%.

Question 74

Cash flows from interest received on loans are reported in the statement of cash flows as part of:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Noncash activities.
E)None of these.This is not reported in the statement of cash flows.

Question 75

A company's transactions with its creditors to borrow money and/or to repay the principal amounts of both short- and long-term debt are reported as cash flows from:

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

Question 76

Cash flows from selling trading securities are usually reported in the statement of cash flows as part of:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Noncash activities.
E)None of these.This is not reported in the statement of cash flows.

Question 77

Typical cash flows from investing activities include each of the following except:

A)Payments to purchase property, plant and equipment or other productive assets (excluding inventory).
B)Proceeds from collecting the principal amount of notes receivable arising from customer sales.
C)Proceeds from collecting the principal amount of notes receivable arising from intercompany transactions.
D)Payments to acquire held-to maturity securities of other entities, except cash equivalents.
E)Proceeds from the sale of equipment.

Question 78

Which of the following is included in the cash flows from financing activities section of the statement of cash flows?

A)Interest revenue.
B)Sale of equipment.
C)Interest expense.
D)Purchase of treasury stock.
E)Purchase of stock in another company.

Question 79

An example of a transaction that must be disclosed as a noncash investing and financing activity includes:

A)The retirement of debt by issuance of equity.
B)The purchase of long-term assets financed by a cash down payment and a note payable to the seller for the balance.
C)The leasing of assets in a transaction that qualifies as a capital lease.
D)The purchase of noncash assets in exchange for equity or debt securities.
E)All of the choices are examples of noncash investing and financial activities.

Question 80

The appropriate section in the statement of cash flows for reporting the receipt of cash dividends from investments in securities is:

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)None of these.This is not reported on the statement of cash flows.