Deck 16: The Statement of Cash Flows

Question 1

Under AASB 107,dividends paid by a company to its shareholders are classified as:

A) investing outflows
B) financing outflows
C) operating inflows
D) none of the above

Answer 1

B

Question 2

Which transaction would be included in a cash flow statement?

A) Receipts from customers
B) Credit sales
C) Acquisition of assets in exchange for shares
D) All of the above

Answer 2

A

Question 3

Distinguish between the three concepts of funds which can be used to construct a cash flow statement: cash,working capital and total resources.Which concept do you think provides the most useful information for decision making?

Answer 3

Historical and projected statements of cash flows are prepared as a matter of course formanagement to use in monitoring the cash position so that surplus cash can be invested and cashshortages can be avoided or financed.It can be argued that,because cash flow is the life blood ofany business,financial statement users would be as interested in cash flows as management.Working capital was a widely used interpretation of funds,particularly in the US.Working capitalis usually measured as current assets less current liabilities.An increase in working capital (sourceof funds)occurs when there is an increase in total current assets without a corresponding increasein total current liabilities (e.g.an issue of shares for cash)or a decrease in total current liabilitieswithout a corresponding decrease in current assets (e.g.refinancing a short-term loan with a long termloan).A decrease in working capital (application of funds)occurs in the opposite circumstances.In total,the difference between sources and uses of working capital will be equal to the change inworking capital between successive statements of financial position.The total resources concept of funds is based on an interpretation of the statement of financial position as a statement that shows the sources of an entity's resources and how those resources have been used.The obligations side of the statement of financial position is a summaryof the financial resources that have been entrusted to the entity by lenders and shareholders.Theassets side of the statement of financial position shows how these financial resources have beenused.Some financial resources have been used to acquire assets,some have been used to providecredit and some remain as cash.This interpretation of the statement of financial position isconsistent with a stewardship notion of accounting.The statement shows how management hasused the financial resources entrusted to it by outsiders.Any transaction that increases liabilitiesor equity is a source of funds.Conversely,any transaction that reduces liabilities or equity is a useof funds.Any transaction that increases assets is a use of funds,and any transaction that reducesassets is a source of funds that are now 'free' for some new use.Since all transactions affect thestatement of financial position,a total resources funds statement summarises all transactions.

Question 4

The statement concerning a funds statement based on the total resources concept of funds that is incorrect is:

A) It excludes internal transactions such as depreciation
B) The total resources concept of funds is the broadest concept
C) Any transaction which increases liabilities or equity is a source of funds
D) Any transaction which reduces assets is a use of funds

Question 5

Under AASB 107,it is not true that:

A) operating activities generally relate to transactions that are included in the income statement
B) cash flows are classified into operating, investing and financing groupings
C) each item in the externally presented income report that results in a cash flow is required to be disclosed separately in the cash flow statement
D) none of the above is untrue

Question 6

Activities described as relating to the acquisition and/or disposal of non-current assets under AASB 107 are classified as:

A) investing activities
B) financing activities
C) operating activities
D) none of the above

Question 7

Studies such as Bowen,Burgstahler and Daley (1986)and Cheng and Hollie (2008)in the USA and Percy and Stokes (1992),Cotter (1996)and Clinch Sidhu and Sin (2002)in Australia have found:

A) cash flow data appeared to be similar to profit data
B) cash flow data was significantly different from profit data
C) there was no relation between profit and cash flow data
D) none of the above

Question 8

In the cash flow statement,net cash flows from operating activities plus net cash flows from investing activities plus net cash flows from financing activities for the period equal:

A) the cash balances at the beginning of the period
B) net profit
C) the cash balances at the end of the period
D) the total net increase or decrease in cash held for the period

Question 9

Determine an entity's beginning cash balance if the net cash provided by operating activities is $26 600; net cash used by investing activities is $12 800; net cash provided by financing activities is $12 500 when the ending cash balance is $41 900.

A) $41 900
B) $26 300
C) $6 700
D) $15 300

Question 10

The approach to presenting cash flows from operating activities where reported net profit is adjusted for non-cash income statement items and changes in non-cash working capital accounts is known as:

A) the direct approach
B) the adjustment approach
C) the indirect approach
D) none of the above

Question 11

Although various types of financial statements related to cash flows began appearing in the early 20^th century,what year introduced the first accounting standard related to this issue?

A) 1971
B) 1972
C) 1960
D) 1963

Question 12

All of these are possible definitions of 'funds' except:

A) working capital
B) investment
C) total resources
D) cash

Question 13

All of these are classified as operating items under AASB 107 'Cash Flow Statements',except:

A) cash received from sales
B) cash received from the sale of surplus machinery
C) cash dividends received
D) cash payment of expenses

Question 14

What is a rationale for preparing a statement of cash flows,according to AASB 107?

A) Assessing the ability of an entity to generate cash and cash equivalents
B) Needs of the entity to utilise cash flows
C) Both A and B are rationales for preparing a statement of cash flows
D) Neither A nor B is considered a rationale related to the statement of cash flows

Question 15

Which statement concerning a funds statement based on the working capital definition of funds is not correct?

A) It includes transactions that have no effect on the components of working capital, e.g., the purchase of inventory
B) It omits many transactions that could be important to users for decision making
C) The difference between sources and uses of working capital will be equal to the change in working capital between two successive balance sheets
D) None of the above, i.e., all of the statements are correct

Question 16

Which components of an entity structure are highlighted in AASB 107?

A) Liquidity
B) Solvency
C) Earnings management
D) A and B are both highlighted by the standard

Question 17

Discuss how an entity that reports an after tax profit may be unable to generate positive cash flows from operating activities.

Question 18

Which transaction can be viewed as either an operating transaction or a financing transaction?

A) Receipt of cash from customers
B) Payment of dividends
C) Sale of equipment
D) Payment of interest to a lender

Question 19

The cash flow statement provides information that enables users to evaluate changes in an entity's:

A) liquidity
B) solvency
C) ability to generate cash from core operating activities
D) all of the above

Question 20

Which of the following is considered an investing activity?

A) Payment of dividends to shareholders
B) Payment to a supplier for inventory
C) Interest payments to a lender
D) Cash payments from swap contracts

Question 21

All of these are classified as financing items under AASB 107 'Cash Flow Statements'-2 except:

A) in the cash flow statement of the lender cash repayments by borrowers
B) cash paid to buyback the company's shares
C) proceeds from the issue of debentures
D) none of the above, i.e., all are classified as financing items

Question 22

A criticism of the indirect approach to presenting cash flows from operating activities is:

A) adding back expenses such as depreciation may suggest that these items are sources of cash
B) it is unnecessarily complicated
C) it requires cash inflows to be netted against cash outflows
D) A and B

Question 23

Income tax paid,proceeds from long-term borrowing and loans made to directors would be presented in a statement of cash flows,as:

A) financing outflow: financing inflow; financing outflow
B) operating outflow: investing inflow; investing outflow
C) operating outflow: financing inflow; investing outflow
D) none of the above

Question 24

Discuss the arguments for and against the presentation of the cash flow statement using the indirect approach rather than the direct approach.

Question 25

Which of the following is an example of a net cash flow that may be reported on the statement of cash flows?

A) Depreciation
B) Cash advances
C) Long-term notes payable
D) Payment of dividends