Deck 3: Income Flows Versus Cash Flows: Key Relationships in the Dynamics of a Business

Question 1

An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is

A) depreciation expense.
B) compensation expense related to stock option plans.
C) income from an investment accounted for using the equity method.
D) unrealized losses on trading investments

Answer 1

C

Question 2

Outback Corp. recorded sales of $1,300,000 in 2006, in addition the company's accounts receivable balance grew from $120,000 at the beginning of 2006 to $165,000 at the end of 2006. How much cash did Outback collect from customers in 2006?

A) $1,300,000
B) $1,345,000
C) $1,255,000
D) $1,135,000

Answer 2

C

Question 3

A company in the growth phase of its product life cycle will normally have the following pattern of cash flows

A) Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing.
B) Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.
C) Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing.
D) Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing.

Answer 3

B

Question 4

When preparing the statement of cash flows using the indirect method an increase in inventories would appear as

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section

Question 5

Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers, for this reason

A) their cash flow from operations will be much greater than their working capital from operations.
B) their cash flow from operations will not differ much from their working capital from operations.
C) their cash flow from operations will be much less than their working capital from operations.
D) there will be no relation between their cash flow from operations and working capital from operations.

Question 6

Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 7

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be

A) greater than net income
B) less than net income
C) greater than the change in working capital from operations
D) greater than the change in cash

Question 8

Normally, cash flows from operations will peak during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 9

Normally, cash flows from financing will start using cash during which phase of the product life cycle?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 10

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from

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

Question 11

When preparing the statement of cash flows using the indirect method the payment of dividends would appear as

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the financing activities section
D) a source of cash in the financing activities section

Question 12

Which of the following is the correct formula for calculating cash collections from customers?

A) sales for the period plus accounts receivable at the beginning of the period
B) sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period
C) sales for the period plus accounts receivable at the end of the period
D) sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period

Question 13

One rationale for the statement of cash flows is to

A) ensure that the cash account balances at year-end.
B) reconcile differences between net income and cash receipts and disbursements.
C) calculate the company's free cash flow.
D) examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles.

Question 14

Toro Company recognized $655,000 of cost of goods sold in 2006, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2006. How much cash did Toro spend for inventory in 2006?

A) $655,000
B) $980,000
C) $560,000
D) $620,000

Question 15

Which of the following is not an expense excluded when calculating EBITDA?

A) depreciation expense
B) administrative expense
C) interest expense
D) tax expense

Question 16

When preparing the statement of cash flows using the indirect method the purchase of equipment would appear as

A) a use of cash in the investing activities section
B) a source of cash in the investing activities section
C) a use of cash in the financing activities section
D) a source of cash in the financing activities section

Question 17

When preparing the statement of cash flows using the indirect method an increase in accounts payable would appear as

A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section

Question 18

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?

A) non-cash items, such as depreciation and amortization
B) changes in working capital accounts
C) gains and losses related to the sale of plant, property and equipment
D) sale or repurchase of capital stock

Question 19

Free cash flows to all debt and common equity shareholders represents the excess of cash flows from

A) operating activities over cash flows for financing activities
B) investing over cash flows for operating activities
C) investing over cash flows for financing activities
D) operating activities over cash flows for investing activities

Question 20

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method

A) Subtract depreciation expense
B) add depreciation expense
C) add an increase in accounts receivable
D) add a decrease in accounts payable

Question 21

An increase in accounts receivable during a period indicates that a firm did not collect as much ____________________ as the amount of revenues included in net income.

Question 22

Which of the following companies would you expect to report significant amounts of cash provided by financing activities?

A) A yet to be profitable biotechnology company.
B) A mature company operating in the oil refinery industry.
C) A profitable established company in the retail industry.
D) A large multinational pharmaceutical company.

Question 23

Cash flows from ____________________ activities will normally be negative during all of the introduction and growth phase of the product life cycle.

Question 24

The length of the operating cycle is another factor that may cause cash flow from operations to differ from __________________________________________________.

Question 25

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

A) A sale of equipment is a investing activity, the transaction will not affect the operating activities section.
B) The gain is added back to net income in the operating activities section.
C) The gain is subtracted from net income in the operating activities section.
D) The entire sales price is subtracted from net income in the operating activities section.

Question 26

The expense incurred by issuing stock options should be

A) classified as a financing activity.
B) added back to net income in the operating activities section.
C) subtracted from net income in the operating activities section.
D) does not appear in the statement of cash flows.

Question 27

Under the _________________________, firms begin with net income to calculate cash flow from operations for the period.

Question 28

____________________ activities relate to the acquisition and sale of noncurrent assets, particularly property, plant and equipment.

Question 29

The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.

Question 30

____________________ activities relate to transactions between the firm and its creditors and owners.

Question 31

____________________ activities relate to the normal operations of the firm, selling goods and providing services.

Question 32

One factor that may cause cash flow from operations to differ from net income is the length of the ______________________________.

Question 33

Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.

Question 34

Lagos Corp. recorded sales of $345,000 in 2006, in addition its accounts receivable and accounts payable balances at the beginning and end of 2006 were as follows: How much cash did Lagos collect from customers in 2006?

A) $345,000
B) $320,000
C) $324,000
D) $316,000

Question 35

Cash flows from ____________________ activities will normally be positive during the introduction and growth phases of the product life cycle.

Question 36

Under the ______________________________ of preparing the statement of cash flow's operating activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to providers of goods and services.

Question 37

The payment of dividends would be classified as ____________________ activities in the statement of cash flows.

Question 38

The period in which a firm commences the manufacture of its product to the time it receives cash is called the ______________________________.

Question 39

The acquisition of new investments would be classified as ____________________ activities in the statement of cash flows.

Question 40

Free cash flows to all debt and common equity shareholders represents the excess of cash flow from operations over cash flows from ___________________________________.

Question 41

Discuss operating, investing and financing cash flows in relation to the various stages of the product life cycle.

Question 42

What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different?

Question 43

The calculation of cash flow from operations under the indirect method involves two types of adjustments. Discuss each type of adjustment and provide an example of each type of adjustment.

Question 44

Selected financial statement information for Filmco appears below:
Calculate the amount of cash collected from customers and the amount of cash spent on inventory for 2006 by Filmco.

Question 45

Olive Corporation manufactures food processing equipment. Use Olive Corporation's two most recent balance sheets and most recent income statement to prepare a statement of cash flows for 2006. The company paid dividends of $6,250 during 2006.

Question 46

The receipt of cash when employees exercise stock options is a (an) ____________________ activity.

Question 47

EBITDA not only ignores four expenses but also ignores changes in __________________________________________________ accounts.

Question 48

Many analysts use ____________________ as a crude measure of a firm's ability to pay down debt.

Question 49

Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the ____________________ method

Question 50

Listed below is a list of cash inflows and cash outflows for Toggle Inc.
1. Cash received from issuing debt
2. Cash received from interest earned on a bond investment
3. Cash used to purchase property
4. Cash used to repay debt
5. Cash received from collections of loans
6. Cash paid for retiring common stock
7. Cash paid to employees for salaries
8. Cash from the sale of marketable securities
9. Cash used to pay dividends
10. Cash from the sale of services to customers
11. Cash paid to government agencies for taxes
12. Cash received from the sale of equipment
For each item indicate where it should appear on Toggle's statement of cash flows. Select from:
a. Cash inflows from operating activities
b. Cash outflows from operating activities
c. Cash inflows from investing activities
d. Cash outflows from investing activities
e. Cash inflows from financing activities
f. Cash outflows from financing activities

Question 51

Discuss the correlations that have been found between net income, net income plus or minus Type 1 adjustments ( adjustments to net income for revenues, expenses, gains and losses that are recognized in income and are associated with changes in noncurrent assets, noncurrent liabilities, and shareholders' equity, but do not affect cash by the same amounts for the period), and cash flow from operations.

Question 52

J. Jill is a women's clothing retailer. The company started as a mail order company and has expanded into mall department stores. The company now receives approximately half of its revenues from mail order and half from retail outlets. Over the time period 2002 to 2004 sales increased approximately 25%. Discuss the relationship between net income, working capital from operations and cash flow from operations and between cash flows from operating, investing and financing activities over the three year period.

Question 53

For the following types of companies discuss whether you think their cash flows from operations, investing and financing will be positive (the activity provides cash) or negative (the activity uses cash). Provide support for your answer.

Question 54

The issuance of debt would be classified as a (an) ____________________ activity in the statement of cash flows.

Question 55

Cash flow from operations should include none of the cash flows associated with marketable securities if such transactions are viewed as ___________________________________.