Deck 6: Statement of Cash Flows

Question 1

Using the accrual basis of accounting to measure net income creates the need for a separate financial statement that reports the impact of operations on cash flows.

Answer 1

True

Question 2

Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure.

Answer 2

True

Question 3

Interpreting a statement of cash flows requires an understanding of the economic characteristics of the industries in which a firm conducts its activities, including capital intensity, growth characteristics, and similar factors.

Answer 3

True

Question 4

Under both U.S.GAAP and IFRS, the issue or redemption of debt is a financing activity.

Question 5

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period. As an outcome of correct double-entry recording of all transactions, the net change in cash will equal the net change in all noncash accounts.

Question 6

The acquisition of equipment by assuming a mortgage is a transaction that firms cannot report in their statement of cash flows but must report in a supplemental schedule or note.

Question 7

Many countries around the world require a

A)statement of cash flows.
B)cash reconciliation statement.
C)statement of funds flow.
D)statement of cash created.
E)statement of cash receipts and disbursements.

Question 8

Firms using the direct approach for the statement of cash flows must also present a reconciliation of cash flow from operations to net income.

Question 9

Delaying payments to suppliers and others during the last several days of an accounting period conserves cash and thereby increases cash flow from operations for that period.

Question 10

On the statement of cash flows, the issuance of capital stock for cash to be used for future expansion of a production facility is treated as an investing activity.

Question 11

Cash equivalents represent long-term, highly liquid investments in which a firm has temporarily placed excess cash.

Question 12

Although the guidance in U.S.GAAP and IFRS states a preference that companies present cash flows from operations using the indirect method, most companies present cash flows from operations as a reconciliation of net income to operating cash flow (the direct method).

Question 13

The disposal of equipment for an amount of cash greater than the carrying value of the equipment results in a cash receipt equal to the carrying value of the equipment plus the gain on the disposal, which appears in net income.

Question 14

A profitable firm can never run out of cash.

Question 15

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period, as represented by the Cash Change Equation.

Question 16

IFRS permits firms to classify cash from interest and dividend revenue as operating, investing, or financing activities, provided the classification is consistently applied across periods.

Question 17

The second section of the statement of cash flows shows the amount of cash flow from investing activities.

Question 18

Depreciation charges provide cash to the firm.because the indirect method adds depreciation expense to net income to calculate cash provided by operations.

Question 19

Under U.S.GAAP, the statement of cash flows classifies cash expenditures for interest on debt as an operating activity but classifies cash expenditures for dividends to shareholders as a financing activity.

Question 20

On the statement of cash flows, cash sale of property, plant and equipment used for the last 5 years in the company's operations is treated as an operating activity.

Question 21

Firms receive cash inflows and disburse cash outflows for investing activities such as to

A)pay dividends.
B)build their productive capacity by acquiring property, plant, and equipment.
C)make debt service payments.
D)all of the above.
E)none of the above.

Question 22

Cash equivalents represent _____ in which a firm has temporarily placed excess cash.We use the term cash flows to refer to flows of both cash and cash equivalents.

A)long-term, highly liquid investments
B)short-term, highly liquid investments
C)short-term, highly illiquid investments
D)long-term, highly illiquid investments
E)common stocks and bonds of other companies

Question 23

Which of the following statements is/are true concerning the statement of cash flows?

A)Cash receipts and disbursements equal revenues and expenses.
B)Cash for short-term obligations must come from operations.
C)The net change in cash will equal the net change in all noncash accounts.
D)All of the above are true statements concerning the statement of cash flows.
E)None of the above are true statements concerning the statement of cash flows.

Question 24

In the Statement of Cash Flows, U.S.GAAP views cash received in the form of interest and dividends as coming from _____.

A)investing activities
B)operating activities
C)financing activities
D)exchange activities
E)economic activities

Question 25

U.S.GAAP requires that firms classify cash payments for interest expense as a(n) _____ activity.

A)operating
B)financing
C)investing,
D)operating, investing, or financing
E)None of the above are correct.

Question 26

_____ usually represents a major ongoing use of cash.

A)Borrowing funds
B)Sales of existing noncurrent assets
C)Issuance of common shares
D)Acquisition of noncurrent assets, particularly property, plant, and equipment
E)All of the above are major ongoing uses of cash.

Question 27

Both U.S.GAAP and IFRS permit considerable flexibility with respect to the display of information in the statement of cash flows.Firms must report cash flows from operations, investing, and financing for the _____.

A)current year
B)current year and the prior year
C)current year and the prior two years
D)current year and the prior three years
E)current year and the prior four years

Question 28

The statement of cash flows provides information about

A)the cumulative effects of operations over several years.
B)the balances in shareholders' equity accounts.
C)the relationship between operations and liquidity of a firm.
D)the success of management's cash management strategy.
E)all of the above.

Question 29

The faster a firm grows, the greater is the shortfall in cash and the firm might borrow funds from the bank on a revolving credit arrangement.Why?

A)Most of the cash outflows for expenses occur before the firm receives the cash inflows from a sale.
B)The lag between cash outflows and cash inflows can lead to cash shortfalls.
C)Cash disbursements to employees and suppliers precede cash collections from customers.
D)all of the above
E)none of the above

Question 30

Which is a use of cash?

A)an increase in inventory
B)a decrease in accounts receivable
C)decrease in equipment
D)an increase in accounts payable
E)an increase in bonds payable

Question 31

A firm uses cash to _____ These amounts appear as cash flow from financing activities in the statement of cash flows.

A)pay dividends to shareholders
B)repay borrowing
C)reacquire outstanding common shares
D)reacquire outstanding preferred shares
E)all of the above

Question 32

Net income for a particular period does not equal cash flow from operations because

A)most firms use the accrual basis of accounting to measure operating performance.
B)most firms typically recognize revenue at the time of sale, independent of when they receive the cash from the sale.
C)some firms receive cash before providing services and recognizing revenues.
D)some firms receive cash after they have provided goods and recognized revenues.
E)all of the above

Question 33

U.S.GAAP requires that the statement of cash flows explain the changes in the firm's

A)cash and cash equivalents during the accounting period.
B)resources and obligations during the accounting period.
C)components of income from operations during the accounting period.
D)accounts receivable and accounts payable during the accounting period.
E)All of the above are required.

Question 34

Under U.S.GAAP, the classification of interest expense as an operating activity and dividends paid on common or preferred shares as a financing activity appears inconsistent to some observers as both are payments to suppliers of funds.Authoritative guidance requires the different treatments because

A)interest is an expense in computing net income.
B)dividends represent a distribution of assets generated by net income not an expense reducing net income.
C)interest represent a distribution of assets generated by net income not an expense reducing net income.
D)dividends is an expense in computing net income.
E)both choices a and b are correct.

Question 35

The statement of cash flows

A)helps the reader judge a firm's cash flow needs and how a firm has dealt with them.
B)reflect the cash flows for the period.
C)reports the impact of operations on cash flows.
D)reports the impact of investing activities on cash flows.
E)accomplishes all of the above.

Question 36

IFRS permits firms to classify cash from interest and dividend revenue as _____ activities, provided the classification is consistently applied across periods.

A)operating
B)investing
C)financing
D)operating, investing, or financing
E)None of the above are correct.

Question 37

A firm obtains cash from all of the following except for:

A)short-term borrowing.
B)issuing common shares.
C)issuing preferred shares.
D)paying dividends to shareholders.
E)long-term borrowing.

Question 38

Firms receive cash inflows and disburse cash outflows for financing activities such as to

A)acquire property, plant, and equipment.
B)pay dividends to shareholders.
C)purchase intellectual property.
D)pay interest on borrowings.
E)all of the above.

Question 39

Under U.S.GAAP, the classification of interest expense as a(n) _____ activity and dividends paid on common or preferred shares as a(n) _____ activity appears inconsistent to some observers as both are payments to suppliers of funds.

A)operating; financing
B)investing; financing
C)financing; investing
D)financing; operating
E)investing; operating

Question 40

Which is a source of cash?

A)increase in inventory
B)decrease in bonds payable
C)decrease in accounts payable
D)decrease in accounts receivable
E)increase in prepaid assets

Question 41

U.S.GAAP requires that the statement of cash flows disclose the amount of cash flows arising fromfinancing activities including

A)short-term and long-term borrowing and repaying short-term or long-term borrowing.
B)issuing of common or preferred stock and reacquiring shares of outstanding common or preferred stock.
C)payment of dividends to stockholders.
D)all of the above.
E)none of the above.

Question 42

On the statement of cash flows, cash purchase of land is treated as a/an

A)investing activity.
B)financing activity.
C)outflow of cash from operations.
D)expenditure not requiring the use of cash.
E)none of the above.

Question 43

U.S.GAAP requires that the statement of cash flows disclose the amount of cash flows arising frominvesting activities including

A)interest received on investments in bonds.
B)interest paid on the company's bonds.
C)cash used for the acquisition of non-current assets.
D)cash dividends paid on the company's stock.
E)cash dividends received on investments in other company's stock.

Question 44

The statement of cash flows reports the amount of cash flow from a firm's

A)divestiture, and acquisition activities.
B)operating, divestiture, and acquisition activities.
C)funding and disbursement activities.
D)operating, investing, and financing activities.
E)operating, funding and disbursement activities.

Question 45

Under U.S.GAAP, the statement of cash flows classifies cash expenditures for interest expense as a(n) _____ activity and classifies cash expenditures to redeem debt as a(n) _____ activity.

A)financing; financing
B)financing: operating
C)operating; investing
D)operating; operating
E)operating; financing

Question 46

Both U.S.GAAP and IFRS permit considerable flexibility with respect to the display of information in the statement of cash flows.Firms must report the beginning and ending cash balances, and the change in the cash balance. The change in cash must reconcile to the sum of the cash inflows and outflows from _____ activities.

A)operating
B)investing
C)financing
D)operating, investing, and financing
E)none of the above

Question 47

The statement of cash flows reports the effects of a firm's operating, investing, and financing activities on cash flows.Information in the statement helps in understanding which of the following concept(s)?

A)The effect of operations on the liquidity of a firm.
B)The level of capital expenditures needed to support ongoing and growing levels of activity.
C)The major changes in the financing of a firm.
D)all of the above
E)none of the above

Question 48

On the statement of cash flows, cash sale of property, plant and equipment used for the last 5 years in the company's operations is treated as a/an

A)investing activity.
B)financing activity.
C)operating activity.
D)exchange transaction.
E)funds flow activity.

Question 49

Cash flows from operating activities include

A)selling goods and providing services.
B)acquiring buildings and equipment.
C)payment of dividends.
D)retiring long-term debt.
E)issuing stocks and bonds.

Question 50

On the statement of cash flows, the issuance of capital stock for cash to be used for future expansion of a production facility is treated as a/an

A)investing activity.
B)financing activity.
C)operating activity.
D)exchange transaction.
E)funds flow activity.

Question 51

The amount of cash flow from operations indicates:

A)the extent to which operating activities generate more cash than they use.
B)the extent to which revenues exceed expenses.
C)the extent to which liabilities exceed shareholders' equity.
D)the extent to which more cash is generated from investing activities than financing activities.
E)how much free cash flow a company has.

Question 52

U.S.GAAP classifies all of the following as investing activities on the statement of cash flows except for

A)cash inflows from selling manufacturing equipment.
B)cash outflows from purchasing bonds (intended to be held to maturity) of other entities.
C)cash outflows to lender for interest.
D)cash inflows from selling a (long-term) portfolio of equity securities of other entities.
E)cash outflows from buying manufacturing equipment.

Question 53

Both U.S.GAAP and IFRS permit considerable flexibility with respect to the display of information in the statement of cash flows. Within the investing and financing cash flow categories, the presentation for most items should _____.

A)not net cash inflows against cash outflows
B)net cash inflows against cash outflows
C)net cash inflows against net income
D)net cash inflows against free cash flows
E)net free cash flows against cash outflows

Question 54

Alsup Company Alsup Company had the following transactions during the fiscal year ended December 31, Year 4.
·Accounts receivable decreased from $115,000 on December 31, Year 3, to $100,000
On December 31, Year 4.
·Alsup's Board of Directors declared dividends on December 31, Year 4, of $.05
Per share on the 2.8 million shares outstanding, payable to shareholders of record
On January 31, Year 5.The company did not declare or pay dividends for fiscal year,
Year 3.
·Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
·Paid interest to bondholders of $780,000.
·Cash increased from $106,000 on December 31, Year 3, to $284,000 on December 31, Year 4.
(CMA Dec 95 #2) Refer to the Alsup Company example.Alsup Company uses the direct method to prepare its statement of cash flows at December 31, Year 4.The interest that is paid to bondholders would be reported in the

A)Financing Section, as a use or outflow of cash.
B)Operating Section, as a use or outflow of cash.
C)Investing Section, as a use or outflow of cash.
D)Debt Section, as a use or outflow of cash.
E)Financing Section, as a source or inflow of cash.

Question 55

Examples of nonmonetary transactions is/are:

A)the acquisition of equipment in exchange for shares of common stock.
B)the conversion of a firm's debt into common shares.
C)paying interest.
D)paying dividends.
E)both choices a and b.

Question 56

Under U.S.GAAP, the statement of cash flows classifies changes in accounts payable as a(n) _____ activity and classifies changes in short-term bank borrowing as a(n) _____ activity.

A)operating: financing
B)financing; operating
C)investing; operating
D)operating; operating
E)financing; financing

Question 57

Under U.S.GAAP, the statement of cash flows classifies cash expenditures for interest on debt as a(n) _____ activity and classifies cash expenditures for dividends to shareholders as a(n) _____ activity.

A)operating; operating
B)operating: investing
C)operating; financing
D)financing; operating
E)financing; financing

Question 58

On the statement of cash flows, payment of dividends is treated as a/an

A)investing activity.
B)financing activity.
C)outflow of cash from operations.
D)expenditure not requiring the use of cash.
E)none of the above.

Question 59

Both U.S.GAAP and IFRS permit considerable flexibility with respect to the display of information in the statement of cash flows.If the firm uses the direct method of reporting cash flows from _____ activities rather than the indirect method, it must also provide a separate reconciliation of net income to cash flows from _____

A)operating; operating
B)financing; financing
C)investing; investing
D)operating, investing; and financing; operating, investing; and financing;
E)none of the above

Question 60

The following information is available from JB Corporation's accounting records for the year ended December 31, Year 4: $\begin{array}{ll}\text { Cash received from customers } & \$ 600,000 \\\text { Dividends received from marketable securities } & 80,000 \\\text { Cash paid for purchase of supplies } & 300,000 \\\text { Income taxes paid } & 50,000 \\\text { Cash dividends paid to shareholders } & 30,000\end{array}$ Net cash flow from operating activities for Year 4 totaled

A)$200,000
B)$250,000
C)$300,000
D)$330,000
E)$220,000

Question 61

Which of the following statements is/are not true?

A)The statement of cash flows reports flows, or changes in cash over time.
B)The balance sheet reports changes in the amounts of cash over time.
C)The last few lines of each statement of cash flows report the amount of cash on each firm's balance sheet at the beginning and the end of each period.
D)Both U.S.GAAP and IFRS require that the statement of cash flows explain changes in cash and cash equivalents.
E)All of the above are not true.

Question 62

U.S.GAAP requires the classification of

A)the receipt of cash from interest and dividend revenues as an operating activity and cash related to the purchase and sale of long-term investments in securities as an investing activity.
B)both receipt of cash from interest and dividend revenues and cash related to the purchase and sale of investments in securities as an investing activity.
C)both receipt of cash from interest and dividend revenues and cash related to the purchase and sale of long-term investments in securities as an operating activity.
D)both receipt of cash from interest and dividend revenues and cash related to the purchase and sale of investments in securities as a financing activity.
E)both receipt of cash from interest and dividend revenues and cash related to the purchase and sale of long-term investments in securities as an exchange activity.

Question 63

In a statement of cash flows, proceeds from the issuance of common stock should be classified as cash inflows for

A)operating activities.
B)financing activities.
C)investing activities.
D)lending activities.
E)exchange transactions.

Question 64

The balance sheet reports

A)the shortfall in cash at the beginning of the year.
B)the balance in cash at the end of the year.
C)how cash changed during the period.
D)how a firm obtains and uses cash.
E)both choices a and b.

Question 65

Ignoring income tax effects, which of the following is correct concerning depreciation?

A)Depreciation provides additional cash flow from operating activities than would have been available without the depreciation.
B)Depreciation builds a cash reserve to fund the replacement of plant, property, and equipment.
C)Depreciation reduces net income but does not usually require a cash expenditure during the period.
D)Depreciation is a systematic and rational method for allocating the cost of intangible assets over their useful lives.
E)Depreciation provides less cash flow from operating activities than would have been available without the depreciation.

Question 66

U.S.GAAP classifies all of the following as operating activitieson the statement of cash flows except

A)cash outflows to pay sales employees.
B)cash inflows from the property rental.
C)cash outflows to shareholders for dividends.
D)cash outflows to purchase merchandise for resale.
E)cash inflows from sales to customers.

Question 67

The income statement

A)measures the increase (or decrease) in net assets from selling goods and services for more (or less) than their costs.
B)displays the firm's sources and uses of cash.
C)reports the balance in cash at the beginning and end of the year.
D)helps a reader understand how a firm obtains and uses cash.
E)includes all of the above.

Question 68

In a statement of cash flows, payments to acquire long-term bonds or other debt instruments with maturities greater than one year of other entities should be classified as cash outflows for

A)operating activities.
B)financing activities.
C)investing activities.
D)lending activities.
E)exchange transactions.

Question 69

U.S.GAAP requires the classification of

A)the cash outflow for interest expense as an operating activity and the dividends that a firm pays to its shareholders as a financing activity.
B)the cash outflow for interest expense and the dividends that a firm pays to its shareholders as a financing activity.
C)the cash outflow for interest expense and the dividends that a firm pays to its shareholders as an investing activity.
D)the cash outflow for interest expense and the dividends that a firm pays to its shareholders as an operating activity.
E)the cash inflow for interest expense and the dividends that a firm pays to its shareholders as an operating activity.

Question 70

Barkley Inc.'s record keeping system incorporates the appropriate classification codes into the initial recording of transactions in the Cash account and then prepares the statement of cash flows.One can prepare the statement of cash flows by examining every transaction affecting the cash account, and classifying each as

A)a cash receipts, cash disbursements, or financing activity.
B)an operating, investing, or financing activity.
C)a cash receipts, cash disbursements, or investing activity.
D)a cash receipts, cash disbursements, or operating activity.
E)a cash receipts, cash disbursements, or exchange activity.

Question 71

U.S.GAAP requires the disclosure of the acquisition of a building by assuming a mortgage obligation

A)as both a financing activity and an operating activity.
B)as both an operating activity and an investing activity.
C)as both an investing activity and a financing activity.
D)in a separate schedule or note, but does not appear in the statement of cash flows as an operating activity, investing activity or a financing activity.
E)as both an investing activity and a exchange activity.

Question 72

Alsup Company Alsup Company had the following transactions during the fiscal year ended December 31, Year 4.
·Accounts receivable decreased from $115,000 on December 31, Year 3, to $100,000
On December 31, Year 4.
·Alsup's Board of Directors declared dividends on December 31, Year 4, of $.05
Per share on the 2.8 million shares outstanding, payable to shareholders of record
On January 31, Year 5.The company did not declare or pay dividends for fiscal year,
Year 3.
·Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
·Paid interest to bondholders of $780,000.
·Cash increased from $106,000 on December 31, Year 3, to $284,000 on December 31, Year 4.
(CMA Dec 95 #3) Refer to the Alsup Company example.Alsup Company uses the indirect method to prepare its Year 4 statement of cash flows, and would show a(n)

A)source or inflow of funds of $5,000 from the sale of the truck in the financing section.
B)deduction of $15,000 in the Operating Section, representing the decrease in year-end accounts receivable.
C)source or inflow of funds of $7,000 from the sale of the truck in the financing section.
D)addition of $2,000 in the Operating Section for the $2,000 loss on the sale of the truck.
E)deduction of $2,000 in the Operating Section for the $2,000 loss on the sale of the truck.

Question 73

Alsup Company Alsup Company had the following transactions during the fiscal year ended December 31, Year 4.
·Accounts receivable decreased from $115,000 on December 31, Year 3, to $100,000
On December 31, Year 4.
·Alsup's Board of Directors declared dividends on December 31, Year 4, of $.05
Per share on the 2.8 million shares outstanding, payable to shareholders of record
On January 31, Year 5.The company did not declare or pay dividends for fiscal year,
Year 3.
·Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
·Paid interest to bondholders of $780,000.
·Cash increased from $106,000 on December 31, Year 3, to $284,000 on December 31, Year 4.
(CMA Dec 95 #4) Refer to the Alsup Company example.The total of cash provided (used) by operating activities plus cash provided (used) by investing activities plus cash provided (used) by financing activities is

A)cash provided of $284,000.
B)cash provided of $178,000.
C)cash used of $178,000.
D)cash used of $582,000.
E)cash used of $284,000.

Question 74

In a statement of cash flows, interest payments to lenders should be classified as cash outflows for

A)operating activities.
B)financing activities.
C)investing activities.
D)lending activities.
E)exchange transactions.

Question 75

The _____ displays (lists) cash receipts and disbursements from operating activities.

A)bottom-up method
B)top-down method
C)indirect method
D)direct method
E)cash method

Question 76

Under both U.S.GAAP and IFRS, nonmonetary transactions do not appear in the statement of cash flows as investing or financing activities, because they do not help in explaining the change in cash.Firms must disclose nonmonetary investing and financing activities in _____.

A)the body of the statement of cash flows, only
B)a separate schedule, only
C)a note, only
D)the body of the statement of cash flows, in a separate schedule, or in a note
E)none of the above

Question 77

A mature, stable firm might show what type of cash flow pattern from operating, investing, and financing activities?

A)operating outflow, investing outflow, and financing inflow
B)operating inflow, investing outflow, and financing inflow
C)operating outflow, investing inflow, and financing outflow
D)operating inflow, investing outflow, and financing outflow
E)operating outflow, investing inflow, and financing inflow

Question 78

Financing activities on the cash flow statement do not include

A)issuance of stock.
B)payment of dividends.
C)borrowing from banks.
D)payment of interest expense.
E)acquiring previously issued bonds.

Question 79

U.S.GAAP classifies all of the following as financing activities on the statement of cash flows except

A)cash inflows from issuance of bonds.
B)cash inflows from selling capital stock of the entity.
C)cash outflows to lender for interest.
D)cash outflows to repurchase capital stock of the entity.
E)cash outflows to repurchase bonds of the entity.

Question 80

U.S.GAAP requires the disclosure of the direct exchange (with no cash consideration) of a tract of land for manufacturing equipment to be used in the company's operations

A)as an operating activity.
B)as an investing activity.
C)as a financing activity.
D)as an exchange activity.
E)in a separate schedule or note, but does not appear in the statement of cash flows as an operating activity, investing activity, or a financing activity.