Deck 12: Reporting and Analyzing Cash Flows

Question 1

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

Answer 1

True

Question 2

A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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 5

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

Question 6

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 7

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

Question 8

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 9

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

Question 10

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 11

Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term financial decisions.

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

The statement of cash flows reports the total change in cash in the period.

Question 17

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

Question 18

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 19

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

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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

Question 36

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

Question 37

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 38

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 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

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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 50

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

Question 51

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 52

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 53

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

Question 54

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 55

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

Question 56

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 57

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 58

The statement of cash flows is:

A)Another name for the statement of financial position
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 59

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 60

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

Question 61

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 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

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 64

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 65

Use the cash flow on total assets ratio to determine which of these three companies is using its assets most efficiently.

A)Company A
B)Company B
C)Company C
D)As all the companies have the same net increase in cash,they are all equally efficient in the use of their assets
E)Cannot be determined from the given information

Question 66

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 67

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 68

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 69

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 70

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 71

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 72

Use the cash flow on total assets ratio to determine which of these three companies is most efficiently using its assets.

A)Company A
B)Company B
C)Company C
D)As all the companies have the same cash from operations,they are all equally efficient in the use of their assets
E)Cannot be determined from the given information

Question 73

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 74

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 75

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 76

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 77

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 78

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

Question 79

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 80

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%