Deck 12: Statement of Cash Flows

Question 1

Purchase of equipment is a financing activity.

Answer 1

False

Question 2

In general,the cash flow from operating activities is considered by many to be the most important component of the Statement of Cash Flows.

Answer 2

True

Question 3

When calculating net cash flow from financing activities,a company must convert interest expense to cash payments for interest.

Answer 3

False

Question 4

When the indirect method is used,Depreciation expense is added to net income in order to calculate net cash flow from operating activities.

Question 5

Compared with the other major financial statements,the Statement of Cash Flows has become required relatively recently.

Question 6

Cash flows from investing activities are calculated by making adjustments to net income.

Question 7

Changes in current assets are used in determining net cash flows from operating activities.

Question 8

When the indirect method is used,changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flow from operating activities.

Question 9

Interest and dividends from investments held by a company are reported as cash inflows from investing activities on the statement of cash flows.

Question 10

A negative cash flow is referred to as a cash outflow.

Question 11

While dividends paid to a company's shareholders are reported as cash flows from financing activities,dividends received from investments in the shares of other companies are reported as cash flows from investing activities.

Question 12

A company could have a net increase in cash while reporting a net loss in income.

Question 13

Major investing and financing activities that do not involve cash do not have to be reported on the statement of cash flows.

Question 14

When the cash flows from operating,investing,and financing activities are combined to give net cash flow for the period,a net decrease in cash is subtracted from the beginning cash to calculate the ending cash balance.

Question 15

Cash equivalents are assets that are easily converted to cash regardless of their time to maturity.

Question 16

When a company issues shares,it reports a cash inflow from financing activities; when it repurchases shares,it reports a cash outflow for financing activities.

Question 17

When the direct method is used,each revenue and expense account on the income statement is individually adjusted to calculate net cash flow from operating activities.

Question 18

Noncash revenues and expenses must be included in net cash flow from operating activities when preparing a Statement of Cash Flows using the direct method.

Question 19

The proceeds from sales of investments are reported as cash flows from investing activities.

Question 20

Although Generally Accepted Accounting Principles prefer the direct method of accounting for cash flows from operations,most Canadian companies use the indirect method.

Question 21

Regardless of their use of ASPE or IFRS,all companies are required to report material investing and financing transactions that did not have cash flow effects.

Question 22

All other things equal,when net income and operating cash flows are similar,there is a likelihood that revenues are realized in cash and that expenses are associated with cash outflows.

Question 23

Under IFRS every company is required to report a statement of cash flows.

Question 24

Fraudulent financial reporting is more likely to result in overstatements of net cash flow from operating activities than as overstatement of net income.

Question 25

The income statement reports the cost of merchandise sold during the period,but cash flow from operating activities must report cash purchases of inventory.

Question 26

Cash received from the sale of land would be classified in the statement of cash flows as investing activity.

Question 27

The choice between the direct and indirect methods of reporting operating cash flows affects only the operating activities section of the statement of cash flows,not the investing and financing sections.

Question 28

Indirect method is more detailed as it shows the operating cash receipts and cash payments and is thus more time-consuming and costly.

Question 29

Under ASPE every company is required to report a statement of cash flows.

Question 30

Cash prepayments increase the balance in prepaid expenses,and recording of expenses increases the balance in prepaid expenses.

Question 31

If a company uses the direct method of calculating net cash flows from operating activities,it must adjust net income for gains or losses when selling property,plant,and equipment.

Question 32

An overall increase in accounts receivable implies that cash collections were less than sales on account.

Question 33

The direct method shows the reconciliation of accrual income to cash flows from operations,which is an advantage over the indirect method.

Question 34

The statement of cash flows uses the same transactions that have been reported in the income statement and balance sheet; it simply converts them from the accrual basis to a cash basis.

Question 35

ASPE and IFRS currently allow companies to use only the indirect method.

Question 36

Retained earnings increase net income and any dividends declared decrease retained earnings.

Question 37

Recording accrued expenses decreases the balance in Accrued Liabilities and cash payments for the expenses decreases Accrued Liabilities.

Question 38

If a company's current assets are allowed to grow out of control,its operating cash flows will increase too rapidly for the company to finance.

Question 39

Suppose a company generally records revenues and expenses before receiving or making cash payments.Which of the following statements is then true?

A)If sales are falling,net losses could occur even though the company reports net cash inflows from operating activities.
B)If sales are rising,net profits could occur even though the company reports net cash outflows from operating activities.
C)Net income and cash flows will not always agree because revenues and expenses can be recorded in different time periods than their related cash flows.
D)All of the answers are acceptable.

Question 40

Most analysts believe cash flow from operating activities is the most important section of the statement of cash flows.

Question 41

If inventory decreases and deferred revenue increase during an accounting period while the indirect method is used,what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

A)Both are added to net income.
B)The change in inventory is added to net income; the change in unearned revenue is subtracted.
C)Both are subtracted from net income.
D)The change in unearned revenue is added to net income; the change in inventory is subtracted.

Question 42

Which of the following is not needed to prepare a statement of cash flows?

A)Statement of retained earnings.
B)Comparative balance sheet.
C)Additional information on financing and investing activities.
D)Income statement.

Question 43

Brighton,Inc.,uses the indirect method to determine its net cash flow from operating activities.During the course of the year,Brighton,Inc.'s accounts receivable increased by $10,000 and its accounts payable decreased by $5,000.As a result of these two items,the calculation of cash flow from operations will be:

A)increased by $5,000.
B)decreased by $5,000.
C)increased by $15,000.
D)decreased by $15,000. Increase in A/R,decreases cash flow: $10,000
Decrease in A/P,decreases cash flow: $5,000
Total decrease $15,000.

Question 44

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } \hline \begin{array} { r } \text { Cash flow } \\\text { from } \\\text { operating } \\\text { activities }\end{array} & \begin{array} { r } \text { Net } + \\\text { Income }\end{array} & \text { Depreciation- } & \begin{array} { r } \text { Change } + \\\text { in } \\\text { Act/Rec }\end{array} & \begin{array} { c } \text { Change in - } \\\text { inventory }\end{array} & \begin{array} { r } \text { Change in } \\\text { Act/Payables }\end{array} \\\hline \$ 22,500 & \$ 20,000 & \$ 10,000 & \$ 6,500 & \$ 7,000 & \$ 8,000 \\\hline\end{array}$$

-Which of the following adjusting journal entries would change the Net Cash Flows from Operating Activities line of the statement of cash flows?

A)Recording bad debts expense.
B)Recording depreciation.
C)All of the answers are acceptable.
D)None of the answers are acceptable.

Question 45

When the indirect method is used,details from which of the following balance sheet accounts are used in calculating both operating and financing cash flows?

A)Bonds payable.
B)Taxes payable.
C)Retained earnings.
D)Contributed capital.

Question 46

When the indirect method is used,if accounts receivable increases during the accounting period,the change in accounts receivable is:

A)added to the change in the cash account.
B)subtracted from net income.
C)added to net income.
D)subtracted from the change in the cash account.

Question 47

Which of the following would be included in calculating net cash flows from investing activities?

A)Cash proceeds from sales.
B)Cash received from an issuance of bonds.
C)Dividends paid to shareholders.
D)Cash used for purchases of equipment.

Question 48

The supplies account decreases and accounts payable increases during an accounting period.When the indirect method is used,what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

A)Both are added to net income.
B)The change in accounts payable is added to net income; the change in supplies is subtracted.
C)Both are subtracted from net income.
D)The change in supplies is added to net income; the change in accounts payable is subtracted.

Question 49

Which of the following is not provided by the statement of cash flows?

A)Company management of current assets and liabilities.
B)Expenditures on long-term assets.
C)Current profitability as measured by specific revenues and expenses.
D)Reliance on external financing.

Question 50

Which of the following would be included in calculating net cash flows from operating activities?

A)Cash proceeds from sales.
B)Cash received from an issuance of bonds.
C)Dividends paid to shareholders.
D)Cash used for purchases of equipment.

Question 51

Cash flows from investing activities include cash:

A)inflows and outflows reflecting revenues and expenses.
B)outflows from the sale of long-term investments.
C)inflows from the sale of long-term investments.
D)inflows from the sale of a company's own shares to its shareholders.

Question 52

Cash flows from financing activities:

A)are always negative because the company pays dividends as well as interest and principal on debt.
B)includes all cash inflows and outflows between a company and its shareholders.
C)includes all cash inflows and outflows associated with a company's lending activities.
D)are always positive unless the company is experiencing serious financial trouble.

Question 53

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } \hline \begin{array} { r } \text { Cash flow } \\\text { from } \\\text { operating } \\\text { activities }\end{array} & \begin{array} { r } \text { Net } + \\\text { Income }\end{array} & \text { Depreciation- } & \begin{array} { r } \text { Change } + \\\text { in } \\\text { Act/Rec }\end{array} & \begin{array} { c } \text { Change in - } \\\text { inventory }\end{array} & \begin{array} { r } \text { Change in } \\\text { Act/Payables }\end{array} \\\hline \$ 22,500 & \$ 20,000 & \$ 10,000 & \$ 6,500 & \$ 7,000 & \$ 8,000 \\\hline\end{array}$$

-Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it:

A)reduces income but not cash.
B)is a cash inflow.
C)is a revenue.
D)is a valuation concept.

Question 54

When the indirect method is used,if prepaid expenses decreases during the accounting period,the change in prepaid expenses is:

A)added to the change in the cash account.
B)subtracted from net income.
C)added to net income.
D)subtracted from the change in the cash account.

Question 55

Cash and cash equivalents include:

A)assets that have stable long-term value.
B)assets that are short-term and highly liquid and have an original maturity of less than three months.
C)assets that consistently grow in value over the long run.
D)all of the answers are acceptable.

Question 56

What is the first step in identifying cash flows from operations when the indirect method is used?

A)Find net income from the balance sheet.
B)Calculate the net change in the cash account.
C)Add the change in accounts receivable to sales revenue.
D)Identify the balance sheet accounts that relate to operating activities.

Question 57

Which of the following would be included in calculating net cash flows from financing activities?

A)Cash proceeds from sales.
B)Cash received from an issuance of bonds.
C)Dividends received from investments.
D)Cash used for purchases of equipment.

Question 58

If the calculation of net cash flows from operating activities starts with net income,the company:

A)is using the net income method.
B)will then remove all noncash items included in the calculation of net income.
C)is using the direct method.
D)will then add all additional noncash items not included in the calculation of net income.

Question 59

Cinno Company reported net income of $20,000 for the year ended December 31,2018.During the year,inventories decreased by $7,000,accounts payable decreased by $8,000,depreciation expense was $10,000,and accounts receivable increased by $6,500.Net cash provided by operations in 2018,computed using the indirect method,was:

A)$10,500.
B)$22,500.
C)$38,500.
D)$51,500.

Question 60

A change in a company's cash account is equal to the:

A)changes in liabilities and shareholders' equity minus the change in noncash assets.
B)changes in liabilities minus the changes in shareholders' equity and noncash assets.
C)sum of the changes in liabilities,shareholders' equity and noncash assets.
D)change in noncash assets minus the changes in liabilities and shareholders' equity.

Question 61

Which of the following statements is true regarding cash flows from financing activities?

A)When companies borrow,cash outflows for financing activities have occurred.
B)When companies receive dividends,cash inflows from financing activities have occurred.
C)When companies repurchase their own stock,cash outflows for financing activities have occurred.
D)When companies pay dividends,cash inflows from financing activities have occurred.

Question 62

Additional Cash flows from operations leftover after paying for replacement of existing plant,property and equipment and dividends to shareholders are:

A)Cash flows from investing.
B)Free cash flows.
C)Cash flows from financing activities.
D)Cash flows from investing activities.

Question 63

Sales revenue was $171,356 and cash collected from customers was $167,803.Which of the following would be consistent with this difference?

A)Accounts receivable could have decreased.
B)Cash payments could have been larger than the expense accounts.
C)Accounts receivable could have increased.
D)Cash payments could have been smaller than the expense accounts.

Question 64

When the direct method is used to determine the net cash flow from operating activities,if accounts receivable increase over the accounting period,the change in accounts receivable is:

A)added to the change in the cash account to calculate cash collected from customers.
B)subtracted from sales revenue to calculate the cash collected from customers.
C)added to sales revenue to calculate the cash collected from customers.
D)subtracted from the change in the cash account to calculate cash collected from customers.

Question 65

$$\begin{array} { | l | r | } \hline \text { Net income } & \$ 7,000 \\\hline \text { Dividends paid to shareholders } & 2,000 \\\hline \text { Cash received from selling land } & \mathbf { 3 , 0 0 0 } \\\hline \text { Cash received from new barik loarn } & 5,000 \\\hline \text { Cash paid for principal on old bark loarn } & 1,000 \\\hline \text { Cash paid to purchase office equipment } & 4,000 \\\hline\end{array}$$

-Refer to the above Table.The company would report a net cash inflow (outflow)from investing activities of:

A)-$1,000
B)$2,000
C)$5,000
D)$7,000

Question 66

The retained earnings account has a beginning balance of $321,975 and an ending balance of $356,413.Net income is $40,251.Which of the following statements is true?

A)$5,813 would be subtracted when determining cash flows from financing activities.
B)$40,251 would be added when determining cash flows from financing activities.
C)$34,438 would be added when determining cash flows from financing activities.
D)All of the answers are acceptable. Dividends would be reported as cash outflows from financing activities.
Beg Bal Ret Earnings + NI - Dividends = End Bal Ret Earnings $321,975 + $40,251 - Dividends = $356,413
Dividends = $5,813.

Question 67

When a company uses the direct method to determine the net cash flow from operating activities,cash flows from operating activities will:

A)be identical to the amount reported using the indirect method.
B)be larger if there is a net cash inflow and smaller if there is a net cash outflow compared to the amount reported using the indirect method.
C)always be larger than the amount reported using the indirect method.
D)be larger if there is a net cash outflow and smaller if there is a net cash inflow compared to the amount reported using the indirect method.

Question 68

Two years ago,your company bought $40,000 in bonds from another company.This month,it sold half of those bonds for $20,640 and lent $1,000 to an employee with a promissory note.On the statement of cash flows for this accounting period,your company would report a net cash:

A)outflow of $19,640 from investing activities.
B)inflow of $19,640 from investing activities.
C)inflow of $20,640 from investing activities.
D)outflow of $20,640 from investing activities. Buying and selling long-lived assets are investing activities.
Net Cash Flow = inflow - outflow
Net Cash Flow = $20,640 - $1,000
Net Cash Flow = $19,640.

Question 69

Your company owned equipment with a book value of $120,000 that was sold during this accounting period for $30,500 in cash,and purchased new equipment for $148,000.Your company would record:

A)a credit of $30,500 and a debit of $148,000 to the cash account for a net cash outflow of $117,500.
B)a debit of $148,000 and a credit of $89,500 to the cash account for a net cash outflow of $58,500.
C)a debit of $30,500 and a credit of $148,000 to the cash account for a net cash outflow of $117,500.
D)a debit of $89,500 and a credit of $148,000 to the cash account for a net cash outflow of $58,500. Cash increased from the proceeds of the sale,so the cash account should be debited for $30,500.Cash decreased by the amount paid for the equipment purchase,so the cash account should be credited for $148,000.The net cash outflow would be $117,500 ($148,000 - $30,500).

Question 70

$$\begin{array} { | l | r | } \hline \text { Net income } & \$ 7,000 \\\hline \text { Dividends paid to shareholders } & 2,000 \\\hline \text { Cash received from selling land } & \mathbf { 3 , 0 0 0 } \\\hline \text { Cash received from new barik loarn } & 5,000 \\\hline \text { Cash paid for principal on old bark loarn } & 1,000 \\\hline \text { Cash paid to purchase office equipment } & 4,000 \\\hline\end{array}$$

-Refer to the above Table.The company would report a net cash inflow (outflow)from financing activities of:

A)$7,000
B)$2,000
C)$5,000
D)$6,000

Question 71

Consider the following information: $$\begin{array} { | l | r | } \hline \text { Net income } & \mathbf { 2 0 } , 000 \\\hline \text { Depreciation } & \mathbf { 3 } , 000 \\\hline \text { Increase (decrease) in accounts receivable } & 1,000 \\\hline \text { Increase (decrease) in prepaid rent } & ( 400 ) \\\hline \text { Increase (decrease) in accrued Liabilities } & 900 \\\hline \text { Cash paid to purchase office equipment } & 4,000 \\\hline\end{array}$$ The company would report a net cash inflow from operating activities of:

A)$17,500.
B)$18,500.
C)$21,500.
D)$23,300.

Question 72

Which of the following represent cash outflows from financing activities?

A)Distributing a stock dividend.
B)Paying a bond's face value at maturity.
C)Issuing long-term bonds at a discount.
D)Paying interest on promissory notes.

Question 73

Cash transactions relating to the purchase and sale of which types of assets affect a company's cash flows from investing activities?

A)All of a company's assets.
B)All of a company's assets except inventory.
C)All of a company's non-current assets.
D)Only property,plant,and equipment.

Question 74

Buffers,Inc.,uses cash when buying and selling all of its investment assets.Consider the following statements: i.When investment asset accounts increase,net cash inflows have occurred.
Ii)When investment asset accounts increase,net cash outflows have occurred.
Iii)When the investment asset accounts decreased,net cash inflows have occurred.
Iv)When the investment asset accounts decrease,net cash outflows have occurred.
Which of the following combination is true?

A)i and iii
B)ii and iv
C)i and iv
D)ii and iii Investment asset accounts increase when investments are purchased which results in cash outflows; investment accounts decrease when investments are sold which results in cash inflows.

Question 75

Inventory and accounts payable increase during the accounting period.What is done with these changes to determine the net cash flow from operating activities when the direct method is used?

A)The changes in each account are both added to net income.
B)The change in inventory is subtracted from cost of goods sold and the change in accounts payable is added to cost of goods sold to find the cash paid to suppliers.
C)The changes in each account are both subtracted from net income.
D)The change in inventory is added to cost of goods sold and the change in accounts payable is subtracted from cost of goods sold to find the cash paid to suppliers.

Question 76

When the direct method is used to determine the net cash flow from operating activities,other operating expenses are converted into cash outflows for payments to suppliers of services by:

A)adding changes in prepaid expenses and accrued liabilities to other expenses.
B)subtracting increases in prepaid expenses and decreases in accrued liabilities from other expenses.
C)adding increases in prepaid expenses and decreases in accrued liabilities to other expenses.
D)subtracting changes in prepaid expenses and accrued liabilities from other expenses.

Question 77

When the direct method is used to determine the net cash flow from operating activities,the following adjustments must be made to interest expense to determine total interest payments:

A)add all changes in interest payable.
B)add decreases in interest payable and subtract increases in interest payable.
C)add increases in interest payable and subtract decreases in interest payable.
D)subtract all changes in interest payable.

Question 78

Which of the following would be reported as a cash outflow from investing activities?

A)Donating an old piece of equipment to charity.
B)Repaying the bond principal.
C)Buying another company's bonds with cash.
D)Paying for an investment asset by issuing company shares.

Question 79

When the direct method is used to determine the net cash flow from operating activities,the following adjustments must be made to income tax expense to determine total income tax payments:

A)add all changes in income taxes and income taxes payable.
B)add decreases in income taxes payable and subtract increases in income taxes payable.
C)add increases in income taxes payable and subtract decreases in income taxes payable.
D)subtract all changes in income taxes payable.

Question 80

Which of the following are used to determine cash flows from financing activities?

A)Short-term debt,accrued liabilities,contributed capital,and notes payable.
B)Short-term debt,long-term debt,contributed capital,and retained earnings.
C)Short-term debt,accrued liabilities,retained earnings,and bonds payable.
D)Long-term debt,notes payable,interest expense,and bonds payable.