Deck 12: The Statement of Cash Flows

Question 1

The accrual-based income statement is considered to be a good indicator of current cash inflows and outflows.

Answer 1

False

Question 2

For the statement of cash flows,companies are required to classify their cash activities into three categories: operating,investing,and borrowing.

Answer 2

False

Question 3

Companies can use two different methods to report the amount of cash flow from their investing and financing activities.

Answer 3

False

Question 4

It is not possible for Cash to decrease from Year 1 to Year 2 if income rises over this period.

Question 5

Operating activities involve the acquiring and selling of goods and services for cash or on account.

Question 6

Net income was $61,000 for the year.The accumulated depreciation balance increased by $14,000 over the year.There were no sales of fixed assets or changes in noncash current assets or liabilities.Under the indirect method,the cash flow from operations is $47,000.

Question 7

The statement of cash flows summarizes the operating,investing,and financing activities of a business for a period of time.

Question 8

Cash flows from operating activities usually relate to an increase or decrease in either a current asset or a current liability.

Question 9

The direct method of reporting cash flows from operating activities involves reconciling net income and cash flow from operations.

Question 10

Cash equivalents are reported in the Operating Activities section of the statement of cash flows.

Question 11

Most experts now agree that there has been a tendency to rely far too heavily on net income and its companion,earnings per share,and in many cases to ignore a company's cash flows.

Question 12

Under certain conditions,an investment in common stock can be considered a cash equivalent.

Question 13

The repurchase of a company's own stock should be reported on the statement of cash flows as an investing activity.

Question 14

In terms of the statement of cash flows,cash includes actual cash items plus certain cash equivalents such as commercial paper,money market funds,and Treasury bills.

Question 15

A building with a cost of $163,000 and accumulated depreciation of $32,000 was sold for an $11,000 gain.When using the indirect method,the cash generated from this investing activity was $131,000.

Question 16

Depreciation is a noncash expense that is added back to net income in determining cash provided from operating activities under the indirect method.

Question 17

Cash flows from purchases of merchandise are classified as investing activities.

Question 18

To be classified as a cash equivalent,an item must be readily convertible to a known amount of cash and have an original maturity to the investor of three months or more.

Question 19

The investment in stock of another company is considered a significant activity and thus is reported on the statement of cash flows.

Question 20

Issuance of stock results in cash inflows that appear in the Financing section of the statement of cash flows.

Question 21

Under the direct method,depreciation expense is treated as an outflow in the Investing Activities section of the statement of cash flows.

Question 22

The Financial Accounting Standards Board (FASB)has expressed a strong preference for the indirect method,but allows companies to use the direct method in calculating the cash flow from operating activities.

Question 23

A decrease in retained earnings indicates that a cash dividend has been paid.

Question 24

Because the cash received from the sale of long-term assets is reported in the Investing Activities section of the statement of cash flows,any gain or loss is built into the cash received under the direct method.

Question 25

The cash flow adequacy ratio can only be calculated if a company uses the direct method to report cash flows from operating activities.

Question 26

Under the indirect method,the first line in the Operating Activities section of the statement of cash flows is the net income or loss for the period.

Question 27

Determining the cash flows from operating activities generally requires analyzing each item on the income statement as well as the current asset (except cash)and current liability accounts.

Question 28

Under the indirect method,instead of reporting cash receipts and payments,net income is reconciled with net cash from operating activities.

Question 29

All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.

Question 30

Some companies use a work sheet approach,which functions like the T account approach,as a tool to aid in preparing the statement of cash flows.

Question 31

The work sheet used to prepare a statement of cash flows (indirect method to determine cash flows from operating activities)should have a total in the Changes column equal to total assets.

Question 32

The statement of cash flows emphasizes explanations for the change in net income.

Question 33

Many companies report cash flow per common share on the statement of cash flows.

Question 34

Significant noncash transactions are not reported on the statement of cash flows,but either in a separate schedule or in a note to the financial statements.

Question 35

If the December 31,2017,balance of accounts payable is higher than the January 1,2017,balance,then the amount of cash payments will exceed the purchases on account for the year.

Question 36

The basic accounting equation can be restated in terms of cash by the following equation: Cash = current liabilities + long-term liabilities + capital stock - retained earnings - noncash current assets + long-term assets.

Question 37

The cash flow adequacy ratio is defined as:
$\frac{\text {Total Cash Flow - Capital Expenditures }}{\text { Average Debt Maturing over Next Five Years}}$

Question 38

If the December 31,2017,balance of accounts receivable is higher than the January 1,2017,balance,then the amount of cash collections will be less than the sales on account for the year.

Question 39

The issuance of common stock in exchange for a building would appear both as a cash inflow in the Financing Activities section of the cash flow statement and also as a cash outflow in the Investing Activities section.

Question 40

Cash flow per share is computed by dividing cash on the balance sheet by the number of shares outstanding.

Question 41

Cash flows from acquiring and selling products are classified as

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

Question 42

Which of the following statements is false?

A)Cash equivalents are included in cash on the balance sheet and on the statement of cash flows.
B)Investments in cash equivalents and investments in stock have the same economic effect-assets increase and decrease by the same amount.
C)An investment is a cash equivalent if it is convertible into a known amount of cash and has an original maturity of three months or less when purchased.
D)Investments in stock are reported as a financing activity on the statement of cash flows.

Question 43

Which of the following statements regarding the statement of cash flows is true?

A)The statement of cash flows analyzes the changes in consecutive balance sheets in conjunction with the income statement.
B)The statement of cash flows is organized as cash inflows less cash outflows.
C)The statement of cash flows analyzes only the changes in current assets and current liabilities.
D)The statement of cash flows is an optional financial statement.

Question 44

Which of the following statements is false?

A)A balance sheet reports a company's cash balance at a specific date.
B)An income statement reports the amounts of revenue and expense on an accrual basis,not the amount of cash received from revenues or paid for expenses.
C)A statement of retained earnings reports the amount of cash received from operating activities and the amount of cash paid for dividends.
D)A statement of cash flows explains the changes in cash from operating,investing,and financing activities.

Question 45

The statement of cash flows

A)along with the balance sheet and income statement is prepared on the accrual basis.
B)along with the balance sheet and statement of retained earnings is dated as of a specific year-end date.
C)along with the balance sheet is used to analyze liquidity.
D)ties the balance sheet to the statement of retained earnings.

Question 46

Cash flows from issuing and repurchasing stock or issuing and repaying (retiring)debt are classified as

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

Question 47

Which of the following statements is true?

A)If a company reports net income on its income statement,it should report an increase in cash on its statement of cash flows.
B)If a company reports a net loss on its income statement,it should report a decrease in cash on its statement of cash flows.
C)If a company uses the accrual basis of accounting,it will improve its cash position if it reports net income for the same period.
D)If a company uses the accrual basis of accounting,its cash balance can increase even if it reports a net loss.

Question 48

The primary purpose of the statement of cash flows is to provide information about

A)the financial position of the company.
B)the cash inflows and outflows of the company.
C)the investing and financing activities of the company.
D)the profitability of the company.

Question 49

Which of the following is not an operating activity?

A)Cash collections from credit customers
B)Cash payments for operating expenses
C)Cash receipts for interest earned
D)Cash payments for dividends to stockholders

Question 50

Planet & Co.reported net income for the current year.Which of the following business transactions would cause cash from operating activities to be higher than the amount of net income?

A)Cash dividends were paid to stockholders during the year.
B)Depreciation expense was recorded for the year.
C)A bank loan was repaid during the year.
D)Equipment was purchased for cash during the year.

Question 51

Which of the following items is not a cash equivalent?

A)Commercial paper
B)A three-year Treasury note purchased two months before its maturity
C)Money market funds
D)A corporate bond investment that has five years until maturity when it is purchased

Question 52

Which of the following statements is true?

A)Investments in commercial paper or U.S.Treasury bills must be treated as cash equivalents.
B)Investments in stock cannot be treated as cash equivalents because they are not convertible into a known amount of cash.
C)Investments that are convertible into a known amount of cash and mature within three months after the balance sheet date are treated as cash equivalents.
D)Investments in money market accounts cannot be treated as cash equivalents because they do not have a specific maturity date.

Question 53

Cash flows from acquiring and disposing of long-term assets are classified as

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

Question 54

Cash flows from borrowing and paying off a 90-day bank loan are classified as

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

Question 55

A work sheet is an alternative method to help in the preparation of a statement of cash flows.

Question 56

Zack Co.reported a net loss of $50,000 for 2017,yet its cash balance increased during the year.Which financial statement should Zack's management refer to for an explanation of this situation?

A)Balance sheet
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows

Question 57

Which of the following items is treated as a cash equivalent?

A)Commercial paper with a six-month maturity when purchased and four months until maturity at the balance sheet date
B)Investment in corporate stocks that management intends to sell within three months after the balance sheet date
C)Money market funds that can be obtained overnight from a bank or brokerage firm
D)Investments in corporate bonds that have five years until maturity when they are purchased

Question 58

Which of the following is not a current reporting requirement for a statement that reports changes in cash over a period of time?

A)This statement must classify cash flows into three categories: operating,investing,and financing activities.
B)Cash equivalents must be combined with cash in preparing this statement.
C)Working capital may be used as a substitute for cash in preparing this statement.
D)The title for this statement is "Statement of Cash Flows."

Question 59

Nordic Exports Inc.reported net income of $150,000 for 2017,but its cash balance decreased $40,000.Which financial statement should Nordic Exports' management refer to for an explanation of this situation?

A)Balance sheet
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows

Question 60

Which of the following items would be considered a cash equivalent if it was held at the balance sheet date?

A)U.S.Treasury bill purchased when there were 90 days until maturity
B)Commercial paper with a six-month maturity that was purchased at the issue date
C)The common stock of a company traded on the New York Stock Exchange that was purchased 30 days before the balance sheet date
D)U.S.Treasury note that matures two years after it is issued and that was purchased four months before the balance sheet date

Question 61

Which method of preparing the Operating Activities section of a statement of cash flows reports major classes of gross cash receipts and cash payments for revenues and expenses?

A)The direct method
B)The indirect method
C)Both the direct method and indirect methods
D)Neither the direct method nor the indirect method

Question 62

Which method of preparing the Operating Activities section of a statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses?

A)The direct method
B)The indirect method
C)Both the direct and indirect methods
D)Neither the direct method nor the indirect method

Question 63

Below is information for Dakota Corp.for 2017 and 2018: $\begin{array}{lr}\text { Bonds payable, December } 31,2017 & \$ 500,000 \\\text { Bonds payable, December } 31,2018 & 800,000 \\\text { Loss on bond retirement-2018 } & 15,000 \\\text { Interest expense on bonds-2018 } & 45,000\end{array}$ At the end of 2018,Dakota issued bonds at par value for $800,000 cash.The proceeds from these bonds were used to retire the $500,000 bond issue outstanding at the end of 2018 (before their maturity date).All interest expense was paid in cash during 2018.
The following statements describe how Dakota reported the cash flow effects of the items described above on its 2018 statement of cash flows.The indirect method is used to prepare the Operating Activities section.Which of the following has been reported incorrectly by Dakota?

A)Proceeds of $800,000 from the issuance of bonds were reported as a cash inflow in the Financing Activities section.
B)The loss on bond retirement of $15,000 was added to net income in the Operating Activities section.
C)Payments of $500,000 for the bond retirement were reported as a cash outflow in the Investing Activities section.
D)Interest expense of $45,000 was not reported separately because it is included in net income in the Operating Activities section.

Question 64

Which balance sheet accounts are most affected by financing activities?

A)Current assets
B)Current liabilities
C)Long-term assets
D)Long-term liabilities and stockholders' equity

Question 65

Eduardo's Texas Cantina had the following results for December 31,2017 and 2018,respectively: $\begin{array}{lrr}&2017&2018\\\text { Cash } & \$ 42,000 & \$ 49,000 \\\text { Noncash current assets } & 162,000 & 175,000 \\\text { Cash flows from financing activities } & & 313,000 \\\text { Cash flows from operating activities } & & 72,000\end{array}$ What was the amount of cash flows from investing activities for 2018?

A)Cash inflow of $378,000
B)Cash outflow of $378,000
C)Cash outflow of $7,000
D)Cash outflow of $391,000

Question 66

Which balance sheet accounts are most affected by operating activities?

A)Current assets and current liabilities
B)Long-term assets
C)Long-term liabilities
D)Stockholders' equity

Question 67

A review of Jan's Lakeside Resort's statement of cash flows showed the following: $\begin{array}{lr}\text { Cash flows from operating activities } & 35,000 \\\text { Cash flows from investing activities } & 75,000 \\\text { Cash flows from financing activities } & (125,000)\end{array}$ From this information,the most likely explanation is that Jan's is

A)using cash from operations and selling long-term assets to pay back debt
B)using cash from operations and borrowing to purchase long-term assets.
C)using its profits to expand growth.
D)using cash from investors to provide for operations.

Question 68

In 2017,Valencia Company purchased equipment for $363,000 and also sold some special purpose machinery with a book value of $155,000 for $182,000.In its statement of cash flows for 2017,Valencia should report the following with respect to the above transactions:

A)$363,000 cash used by operating activities;$182,000 cash provided by financing activities.
B)$181,000 net cash used by investing activities.
C)$181,000 net cash used by investing activities;$27,000 net cash provided by operating activities.
D)$363,000 net cash used by investing activities.

Question 69

A review of Jerry's Canoe Gallery's statement of cash flows showed the following: $\begin{array}{lc}\text { Cash flows from operating activities } & 75,000 \\\text { Cash flows from investing activities } & (135,000) \\\text { Cash flows from financing activities } & 125,000\end{array}$ From this information,the most likely explanation is that Jerry's is

A)using cash from operations and selling long-term assets to pay back debt.
B)using cash from operations and borrowing to purchase long-term assets.
C)using its profits to expand growth.
D)using cash from investors to provide for operations.

Question 70

A review of Young's Garden's Center statement of cash flows showed the following: $\begin{array}{lr}\text { Cash flows from operating activities } & \$ 15,000 \\\text { Cash flows from investing activities } & 80,000 \\\text { Cash flows from financing activities } & (60,000)\end{array}$ From this information,the most likely explanation is that Young's is

A)using cash from operations and selling long-term assets to pay back debt.
B)using cash from operations and borrowing to purchase long-term assets.
C)using its profits to expand growth.
D)using cash from investors to provide for operations.

Question 71

A mortgage incurred in exchange for an office building would be reported in the statement of cash flows in

A)the cash flows from Financing Activities section.
B)the cash flows from Investing Activities section.
C)a separate schedule.
D)the cash flows from Operating Activities section.

Question 72

Below are several transactions for Louisville Company: $$\begin{array} { l r } \text { Proceeds from issuance of bonds payable } & \$ 635,000 \\\text { Payment to purchase equipment } & 275,000 \\\text { Payment of wages } & 115,000 \\\text { Payment of dividends } & 155,000 \\\text { Payment to pay off notes payable } & 195,000\end{array}$$ Based on these transactions,what is the net cash flow from financing activities?

A)$285,000 net cash provided by financing activities
B)$275,000 net cash used for financing activities
C)$0,because cash inflows equal cash outflows from financing activities
D)$440,000 net cash provided by financing activities

Question 73

Which of the following is not a financing activity?

A)Issuing bonds for cash
B)Selling an investment in IBM stock for cash
C)Purchasing a company's own stock (treasury stock)for cash
D)Making a cash payment to repay a bank loan

Question 74

Which of the following is not an investing activity?

A)Purchase of investments for cash
B)Purchase of equipment for cash
C)Sale of merchandise for cash
D)Sale of land for cash

Question 75

Operating,investing,and financing activities affect certain balance sheet accounts.Which of the following statements is true?

A)Operating activities primarily involve transactions that affect noncurrent assets.
B)Investing activities primarily involve U.S.government securities and long-term productive assets.
C)Financing activities primarily involve transactions that affect current liabilities.
D)Different balance sheet accounts are affected depending on whether the direct or indirect method is used.

Question 76

Carson City Saloon purchased a $25,000 truck for catering from its restaurant.It made a down payment of one-fourth of the price.What combination of amounts would affect the income statement and statement of cash flows for the purchase of the truck?
$\begin{array}{ll}\text { Income Statement }&\text { Cash Flow Statement }\\a.\$ 25,000 & \$ 0 \\b.\$ 0 & \$(25,000) \\c.\$ 25,000 & \$(6,250) \\d.\$ 0 & \$(6,250)\end{array}$

Question 77

Springdale Co.reported net income of $200,000.Cash from operations

A)will be more than $200,000.
B)will be less than $200,000.
C)will be equal to $200,000.
D)cannot be determined without more information.

Question 78

Which balance sheet accounts are most affected by investing activities?

A)Current assets and current liabilities
B)Long-term assets
C)Long-term liabilities
D)Stockholders' equity

Question 79

Francetti Co.purchased $6,000 of napkins for its business.One-fourth of the bill is unpaid.A review of the napkins still on hand showed that 20% were still available.What combination of amounts would affect the income statement and statement of cash flows?
$\begin{array}{ll}\text { Statement of Cash Flow }&\text { Income Statement }\\a.\$(6,000) & \$(6,000) \\b.\$(4,500) & \$(6,000) \\c.\$(4,500) & \$(4,800) \\d.\$(6,000) & \$(4,800)\end{array}$

Question 80

Which of the following should be classified as an investing activity on the statement of cash flows?

A)Interest on notes payable
B)Payment to suppliers for inventory
C)Payment of dividends
D)None of these are correct