Deck 12: Reporting and Analyzing Cash Flows

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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 6

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 balance.

Question 7

The full disclosure principle requires that noncash investing and financing activities be disclosed as part of the statement of cash flows.

Question 8

Managers only use the cash flow statement to evaluate the overall 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 9

Both cash dividends received and interest received are considered to be investing inflows.

Question 10

A noncash investing transaction should be disclosed as either a footnote or small schedule attached to the statement of cash flows.

Question 11

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

Question 12

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 13

The FASB requires the reporting of cash flows per share as a measure of earnings performance.

Question 14

Cash flow information can assist internal users in planning day-to-day operating activities.

Question 15

To be classified as a cash equivalent, an investment must be readily convertible to an unknown amount of cash because the market value may be affected by interest rate changes.

Question 16

Accounting standards require that the statement of cash flows be included in a complete set of financial statements.

Question 17

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

Question 18

Financing activities include the purchase and sale of long-term assets.

Question 19

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 its notes.

Question 20

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 21

When preparing the operating section of the statement of cash flows using the indirect method, noncash operating expenses are added back to net income.

Question 22

The purchase of stock in another company is considered to be a financing activity.

Question 23

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

Question 24

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

Question 25

The cash flow on total assets ratio is defined as average total assets divided by operating income.

Question 26

Depreciation expense is not reported on the statement of cash flows when the direct method is used.

Question 27

The cash flow on total assets ratio is defined as the total cash flows from operations divided by the average total assets.

Question 28

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

Question 29

The direct method of preparing the statement of cash flows is usually viewed as user friendly since it requires less accounting knowledge to understand it.

Question 30

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

Question 31

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

Question 32

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

Question 33

The indirect method reports individual operating cash outflows and cash inflows by activity.

Question 34

Noncash financing activities are disclosed in a note in the financing section of the statement of cash flows.

Question 35

Cash paid out for merchandise is considered to be an operating activity.

Question 36

The direct method for preparing and reporting the statement of cash flows reports net income and then adjusts the necessary items to calculate net cash provided or used by operating activities.

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000.This implies that $90,000 cash was received from the sale.

Question 43

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

Question 44

The statement of cash flows reports:

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

Question 45

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

Question 46

Under IFRS, interest revenue may be classified as an operating or investing activity, assuming that this classification is applied consistently across all periods.

Question 47

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

Question 48

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

Question 49

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

Question 50

A company's transactions with its creditors to borrow money and/or to repay the principal amounts of loans are reported as cash flows from:

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

Question 51

The FASB requires a reconciliation of net income to net cash provided or used by operating activities when the direct method is used.

Question 52

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 as this is not reported on the statement of cash flows.

Question 53

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 as this is not reported on the statement of cash flows.

Question 54

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

Question 55

The statement of cash flows is:

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

Question 56

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

Question 57

The reporting of financing activities is identical under either the direct and indirect methods for preparing the statement of cash flows.

Question 58

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

Question 59

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 as this is not reported on the statement of cash flows.

Question 60

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 61

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)None of these as this is not reported on the statement of cash flows.

Question 62

A company's cash flow on total assets ratio equals 16%.If average total assets equal $2,937,500 and total cash flows equal $600,000, what is the amount of cash flows from operations?

A)$18,359,375
B)$600,000
C)$470,000
D)$96,000
E)$566,000

Question 63

A statement of cash flows should reconcile the differences between the beginning and ending balances of:

A)Net income.
B)Equity.
C)Cash and cash equivalents.
D)Working capital.
E)Cash, cash equivalents and short-term investments.

Question 64

The direct method of reporting operating cash flows:

A)Is recommended but not required by the FASB.
B)Must be used by all companies.
C)Is used by most companies.
D)Is considered supplementary disclosure.
E)Is not recommended by the FASB, but is commonly used.

Question 65

The direct method for the preparation of the operating activities section of the statement of cash flows:

A)Separately lists each major item of operating cash receipts and cash payments.
B)Reports adjustments to reconcile net income to net cash provided or used by operating activities in the statement.
C)Reports an amount of cash flows from operations different from the amound determined using the indirect method.
D)Is required if the company is a merchandiser.
E)Is required by the FASB.

Question 66

Cash flows from selling trading securities 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 as this is not reported in the statement of cash flows.

Question 67

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 68

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 69

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)None of these as this is not reported on the statement of cash flows.

Question 70

A company had total assets of $745,000, total cash flows of $230,000, and cash flows from operations of $50,000.The cash flow on total assets ratio is equal to:

A)30.87%
B)21.74%
C)6.71%
D)5.13%
E)37.58%

Question 71

The indirect method for the preparation of the operating activities section of the statement of cash flows:

A)Separately lists each major item of operating cash receipts.
B)Separately lists each major item of operating cash payments.
C)Reports net income and then adjusts it for items necessary to determine net cash provided or used by operating activities.
D)Is required if the company is a merchandiser.
E)Must not be used in all circumstances.

Question 72

Cash flows from interest received 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 as this is not reported in the statement of cash flows.

Question 73

A company had net cash flows from operations of $120,000, 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

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 75

A company had total assets of $1,760,000, total cash flows of $1,320,000, and cash flows from operations of $205,000.The cash flow on total assets ratio is equal to:

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

Question 76

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 as this is not reported on the statement of cash flows.

Question 77

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 78

The accounting principle that requires significant noncash financing and investing activities be reported on the statement of cash flows is the:

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

Question 79

The reporting of net cash provided or used by operating activities that lists the major items of operating cash receipts, such as receipts from customers, and subtracts the major items of operating cash disbursements, such as cash paid for merchandise, is referred to as the:

A)Direct method of reporting net cash provided or used by operating activities.
B)Cash basis of accounting.
C)Classified statement of cash flows.
D)Indirect method of reporting net cash provided or used by operating activities.
E)Net method of reporting cash flows from operating activities.

Question 80

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

A)Proceeds from collecting the principal amount of loans.
B)Repayment of principal 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.