Deck 13: Statement of Cash Flows

Question 1

The purchase of equipment for the manufacturing of inventory belongs in the operations section of the statement of cash flows.

Answer 1

False

Question 2

Depreciation is a non-cash expense.

Answer 2

True

Question 3

Collections of interest revenue are classified as operating activities.

Answer 3

True

Question 4

Net cash flows from operating activities will have the same total no matter which method is used, direct or indirect.

Question 5

In the long run, it is more important for a business to generate positive cash flows from investing activities than from operating activities.

Question 6

Both the direct method and the indirect method of computing net cash flow from operating activities convert accrual-based income statement amounts into cash flows.

Question 7

A net decrease in accounts payable to suppliers indicates that cash payments to suppliers were less than purchases made during the period.

Question 8

If accounts receivable decrease during the period, cash received from customers probably exceeds net sales.

Question 9

Dividends paid belong in the operating section of the statement of cash flows.

Question 10

The principal purpose of a statement of cash flows is to measure the profitability of a business that maintains its accounting records on the cash basis.

Question 11

Under the indirect method, when machinery is sold at a gain, the gain is added in the operating section of the statement of cash flows and the cost is added in the investing section.

Question 12

Interest paid belongs in the operating section of the statement of cash flows.

Question 13

Companies that show profits on the income statement will always show positive cash flows from operating activities.

Question 14

Whether one uses the direct or the indirect method of presentation of the statement of cash flows, the totals from each of the three sections (activities) will be the same regardless of the method used.

Question 15

Any "non-cash" investing and financing transactions should be disclosed in a supplementary schedule accompanying a statement of cash flows.

Question 16

All cash receipts and cash payments not classified as investing or financing activities are classified as indirect activities.

Question 17

Depreciation expense reduces net income but does not reduce the net cash flow from operating activities.

Question 18

The FASB permits a company to use the direct method or the indirect method for the statement of cash flows.

Question 19

In a statement of cash flows, the term cash includes both cash and cash equivalents.

Question 20

If cash increased during the year and there was also a net loss for the year, there must be positive cash flows from financing and investing activities.

Question 21

Both FASB and IASB require the cash flow statement to be organized in three categories, operating activities, investing activities, and financing activities.

Question 22

The "worksheet approach" to preparing a statement of cash flows involves analyzing changes in non-cash balance sheet accounts.

Question 23

The SEC requires public companies to use the indirect method for the statement of cash flows.

Question 24

The operating activities section of the cash flow statement includes the cash effects of those transactions reported on the income statement.

Question 25

All of the following are advantages of an increasing cash flow from operations except:

A) A company is likely to pay its current bills with cash from operations not earnings.
B) A company with cash is in a better position to fund growth.
C) Large cash flows eliminate the need for borrowing.
D) Earnings are viewed better if cash flows from operations closely match net income.

Question 26

When a company uses peak pricing, it is charging the highest or "peak" prices the public will be willing to pay during periods of low demand.

Question 27

Free cash flow refers to the excess of cash inflows over cash outflows.

Question 28

For a company to survive in the long-run it must have positive cash flows from investing activities.

Question 29

Large cash flows from operations are more important to financial statement analysts over the long term than cash flows from financing or investing.

Question 30

Free cash flow arises out of:

A) Operating activities.
B) Investing activities.
C) Financing activities.
D) All three types of activities.

Question 31

If accounts receivable increased during the year, deducting the increase from net sales determines the amount of cash received.

Question 32

When preparing a statement of cash flows, money held in cash equivalents is considered the same as cash.

Question 33

The purchase or sale of marketable securities is reported in the statement of cash flows as a financing activity.

Question 34

If a company's accounts payable has increased over a year, it is an indication that the company is buying more goods.

Question 35

When applying the direct method in a statement of cash flows, the amount of depreciation is added to net income.

Question 36

Under the indirect method, depreciation, increase in inventories, and "non-operating" losses are added to net income to arrive at net cash flow from operating activities.

Question 37

To determine cash dividends paid, subtract the increase in dividends payable from the amount of dividends declared.

Question 38

The indirect method of computing cash flows from operations begins with net income.

Question 39

Products that tie in with a company's other products are called complementary products.

Question 40

Peak pricing charges:

A) A higher price when demand is high and a lower price when demand is low.
B) A lower price when demand is high and a higher price when demand is low.
C) A low price when demand is high and a lower price when demand is low.
D) A high price when demand is high and a higher price when demand is low.

Question 41

The "bottom line" in a statement of cash flows shows:

A) The cash (including cash equivalents) on the balance sheet at the end of the period.
B) Net increase or decrease in cash during the period.
C) Net income, computed by the cash basis of accounting.
D) Net cash flow from operating activities.

Question 42

Cash flows from operating activities include all of the following except:

A) Collections from customers for sales of goods.
B) Interest and dividends received.
C) Payments of interest.
D) Payments of dividends.

Question 43

Which of the following is a financing activity?

A) Payment of interest.
B) Payment of dividends.
C) Making sales on account.
D) Paying off accounts payable.

Question 44

In the statement of cash flows, the purchase of supplies is classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) This would not appear on a statement of cash flows.

Question 45

Which of the following would indicate a cash disbursement?

A) Selling equipment at a loss.
B) A decrease in accounts receivable.
C) An increase in prepaid expenses.
D) A decrease in inventory.

Question 46

A statement of cash flows is not intended to assist investors in evaluating:

A) Reasons for differences between the amount of net income and net cash flow from operations.
B) The company's ability to meet its obligations and to pay dividends.
C) Non-cash aspects of investing and financing activities.
D) The profitability of business operations.

Question 47

All of the following are financing activities except:

A) Borrowing money.
B) Lending money.
C) Selling capital stock.
D) Paying dividends.

Question 48

In a statement of cash flows, collections of accounts receivable are classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Revenues and Gains.

Question 49

Which of the following is not classified among the operating activities in a statement of cash flows?

A) Payment of interest on a bank loan.
B) Payment of the principal amount owed on a bank loan.
C) Payment of an account payable to a merchandise supplier.
D) Payment of income taxes.

Question 50

Which of the following does not decrease the cash flow from operating activities?

A) The prepayment of an expense.
B) The purchase of operating equipment.
C) The payment of interest.
D) The prepayment of an expense, the purchase of operating equipment, and the payment of interest all decrease cash from operating activities.

Question 51

In a statement of cash flows, the term cash includes:

A) Only money on deposit in bank accounts.
B) Only bank accounts and cash on hand.
C) Bank accounts, cash on hand, and cash equivalents.
D) Bank accounts, cash on hand, cash equivalents, and marketable securities classified as current assets.

Question 52

A stock dividend is reported on the:

A) Financing section of the statement of cash flows.
B) Balance sheet.
C) Income statement.
D) Operating section of the statement of cash flows.

Question 53

Which of the following is not classified among the financing activities in a statement of cash flows?

A) Long-term borrowing.
B) Payment of dividends to stockholders.
C) Payment of interest to creditors.
D) Short-term borrowing.

Question 54

In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories?

A) Managing activities.
B) Operating activities.
C) Financing activities.
D) Investing activities.

Question 55

Cash flows from investing activities include all of the following except:

A) Cash proceeds from selling investments.
B) Cash proceeds from collections on loans.
C) Cash advanced to borrowers.
D) Cash proceeds from borrowing.

Question 56

Which of the following is an investing activity?

A) Purchase of equipment.
B) Payment of interest.
C) Issuing common stock.
D) Issuing long-term debt.

Question 57

Net income differs from net cash flows from operations because of all the following except:

A) Non-cash expenses such as depreciation.
B) Timing differences between recognizing revenue and expenses and their cash flows.
C) Gains and losses included in net income but classified as investing or financings activities.
D) Non-cash expenses such as depreciation, timing differences between recognizing revenue and expenses and their cash flows, and gains and losses included in net income but classified as investing or financings activities will all will cause a difference between net income and cash flows.

Question 58

Which of the following is not classified among the investing activities in a statement of cash flows?

A) Purchase of marketable securities for cash.
B) Collection of the principal amount of cash loans made to others.
C) Investment of cash made in the business by the owners.
D) Purchase of plant assets for cash.

Question 59

In a statement of cash flows, payments of dividends are classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Costs and Expenses

Question 60

All of the following are considered cash equivalents except:

A) Marketable securities.
B) Money market funds.
C) Commercial paper.
D) Treasury bills.

Question 61

Which of the following would not be presented in the cash from operating activities section of the statement of cash flows when the indirect method is used?

A) Gain on the sale of investments.
B) Depreciation expense.
C) Neither a gain on the sale of investments nor depreciation expense would be shown.
D) Both a gain on the sale of investments and depreciation expense would be shown.

Question 62

Which method will yield higher cash flows from operating activities?

A) The indirect method.
B) The direct method.
C) Both direct and indirect methods will yield the same amount.
D) Depends upon the situation.

Question 63

At the beginning of 2009, Baldwin Corporation bought an automobile for $36,000 by issuing a note payable. The automobile has a six-year life and is depreciated using the straight-line method. To determine net cash flow from operating activities for 2009 using the indirect method, net income should be:

A) Increased by $6,000.
B) Decreased by $6,000.
C) Increased by $42,000.
D) Neither increased nor decreased. No adjustments are necessary since no cash was received or paiD.$36,000/6 = $6,000

Question 64

Which of the following does not create a difference between net income and the net cash flow from operations?

A) Non-operating gains and losses.
B) Depreciation expense.
C) Timing differences between credit sales and collections from customers.
D) Payment of a cash dividend.

Question 65

Which method will yield the higher cash flows from financing activities?

A) The indirect method.
B) The direct method.
C) Both direct and indirect methods will yield the same amount.
D) Depends upon the situation.

Question 66

Craig Corporation's reported net income for 2009 is less than its net cash flow from operating activities. One reason for this could be:

A) The sale of machinery at a loss in 2009.
B) An increase in inventory levels during 2009.
C) The sale of investments at a gain in 2009.
D) An error in the preparation of the statement of cash flows; net income should be greater than or equal to net cash flow from operating activities.

Question 67

Which of the following indicates cash receipts?

A) Debit entries in the Notes Receivable account.
B) Credit entries in the Marketable Securities account.
C) Debit entries in the Notes Payable account.
D) Credit entries in the Accumulated Depreciation account.

Question 68

Cigna Corporation's 2010 net income is smaller than net cash flow from operating activities. Which of the following would not be an explanation of why net income is smaller than net cash flow from operating activities?

A) Cigna paid dividends to shareholders during 2010.
B) Cigna's accounts payable increased during 2010.
C) Cigna recognized depreciation expense in 2010.
D) Cigna sold equipment at a loss in 2010.

Question 69

When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling:

A) Net cash flow from operating activities with net sales.
B) Net income with the net increase or decrease in cash and cash equivalents.
C) Net income with net cash flow from operating activities.
D) Net cash flow from operating activities shown in the statement with that which would result from use of the indirect method.

Question 70

An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is:

A) Recording depreciation expense for the current year.
B) Declaring, but not paying, dividends on common stock.
C) Selling land in exchange for a note receivable.
D) Transferring cash from a checking account into a money market fund.

Question 71

Which of the following is not true regarding the direct and indirect methods of computing net cash flow from operating activities?

A) Both methods result in the same dollar amount of cash flow from operating activities.
B) Both methods involve adjusting entries to the company's books so that the accounting records reflect the figures shown in the statement of cash flows.
C) Both methods are acceptable to the FASB for reporting purposes.
D) Both methods convert accrual-based income statement amounts to cash flow results.

Question 72

The Nelson Corporation reported net income in excess of its net cash flow from operating activities for the current year. An explanation for this may be:

A) A loss on the sale of equipment in the current year.
B) An increase in accounts payable during the year.
C) Depreciation expense recognized for the year.
D) A gain on the sale of investments during the year.

Question 73

When using the indirect method, depreciation expense:

A) Increases net cash flow from operations.
B) Decreases net cash flow from operations.
C) Does not affect net income.
D) Does not affect net cash flow from operations.

Question 74

Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used?

A) Dividends paid.
B) Dividends received.
C) Neither dividends paid nor dividends received would be shown.
D) Both dividends paid and dividends received would be shown.

Question 75

From the viewpoint of stockholders or potential investors, which of the following cash flow measurements would be of least importance?

A) The dollar amount of net cash flow from operating activities for the current year.
B) The trend in net cash flow from operating activities from year to year.
C) The corporation's free cash flow for the current year.
D) The dollar amount of overall increase or decrease in cash for the current year.

Question 76

When equipment is purchased entirely through a loan:

A) The equipment is shown as an increase in the investing activities section.
B) The equipment is shown as a decrease in the investing activities section.
C) The loan is shown as an increase in the financing section.
D) Neither the loan nor the purchase of equipment is shown in the investing or the financing sections.

Question 77

Which of the following sets of data is sufficient to compute the amount of cash paid for merchandise?

A) Cost of goods sold, increase or decrease in inventory, increase or decrease in accounts payable.
B) Increase or decrease in cash, increase or decrease in inventory, increase or decrease in accounts payable.
C) Cost of goods sold, increase or decrease in accounts payable.
D) Cost of goods sold.

Question 78

Which of the following statements regarding the direct and indirect methods of reporting cash flow from operating activities is false?

A) Although both methods result in the same net increase or decrease in cash for the year, net cash flow from operating activities will be different under the two methods.
B) The direct method shows the specific cash inflows and outflows constituting the operating activities of the business.
C) Under the indirect method, the computation of net cash flow from operating activities begins with net income as shown in the income statement.
D) The FASB permits both the direct and the indirect methods, but has expressed a preference for the direct method.

Question 79

When equipment is sold at a loss:

A) The net proceeds are shown in the investing section.
B) The book value of the asset is shown in the investing section.
C) The book value of the asset is shown in the investing section, and the loss is shown in the operating section.
D) The net proceeds are shown in the financing section.

Question 80

Which of the following indicates a cash receipt?

A) A decrease in accrued expenses, such as wages payable.
B) A decrease in accounts receivable.
C) An increase in inventory.
D) A decrease in accounts payable.