Deck 5: The Statement of Cash Flows

Question 1

The Statement of Cash Flows is not a required financial statement in the same sense as the income statement and balance sheet.

Answer 1

False

Question 2

Sale of an asset and issuance of long-term debt will each cause an outflow of cash.

Answer 2

False

Question 3

Sale of an asset for less than its book value results in an inflow of cash.

Answer 3

True

Question 4

A Statement of Cash Flows using the direct method and one using the indirect method will each produce the same amount of net cash flow from operating activities.

Question 5

The write-off of a bad debt (allowance method) during the current period represents an outflow of cash on the Statement of Cash Flows for the current period.

Question 6

Assume cash paid to suppliers for 2012 is $350,000, merchandise inventory increased by $5,000 during the year, and accounts payable decreased by $10,000 during the year. The COGS for 2012 is $335,000.

Question 7

The Statement of Cash Flows is dated at a specific point in time like the balance sheet.

Question 8

Depreciation expense represents a "flow" of cash during the current period.

Question 9

A Statement of Cash Flows is significant in that it presents comprehensive information about the operating, financing, and investing activities of a company.

Question 10

A non-cash exchange is a transaction that involves an exchange of resources without any cash being directly paid or received.

Question 11

A Statement of Cash Flows is designed to help investors, creditors, and others to project a company's future cash flows.

Question 12

Cash equivalents are "short-term, highly liquid investments" that are both: (a) readily convertible to known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

Question 13

Only the indirect method of preparing the Statement of Cash Flows reports the reconciliation of net income and net operating cash flow.

Question 14

In the preparation of the Statement of Cash Flows using the Direct Method, an operating loss would be reported under cash flows from operating activities.

Question 15

Under IFRS, term preferred shares near their maturity date may be classified as cash equivalents for purposes of the Statement of Cash Flows.

Question 16

Under ASPE, dividends paid must be classified as a financing activity.

Question 17

The Statement of Cash Flows can be based on (a) cash only or (b) cash plus cash equivalents.

Question 18

All investments meeting the definition of cash equivalent must be so classified.

Question 19

Depreciation expense is not a source of cash or cash equivalents.

Question 20

The indirect method of computing operating cash flows effectively converts accrual accounting income to cash basis income as its starting point.

Question 21

Examples of cash equivalents are treasury bills, money market funds, and commercial paper.

Question 22

Accrual based net sales plus a decrease in accounts receivable for the year would equal cash from customers.

Question 23

Writing off an uncollectible account against the allowance would increase cash from customers.

Question 24

Depreciation expense in the Statement of Cash Flows is reported under the investing section.

Question 25

Generally, only investments with original maturities (to the investor) of less than three months qualify as a cash equivalent.

Question 26

Under IFRS, interest paid may be classified as operating or financing activities.

Question 27

Cost of goods sold plus an increase in inventory minus an increase in accounts payable would equal cash paid to suppliers.

Question 28

Under IFRS, interest received may be classified as operating or financing activities.

Question 29

When a Statement of Cash Flows is prepared using the indirect method, a decrease in the balance of a prepaid expense during the reporting period is an "add back" adjustment to net income to convert it to cash from operating activities.

Question 30

Under IFRS, dividends received may be classified as operating or financing activities.

Question 31

Sale for cash of a short-term investment at its cost would cause an inflow of cash.

Question 32

A change in the company's policy on defining cash equivalents should be reported as a cumulative effect adjustment.

Question 33

Cash paid to suppliers plus an increase in inventory minus an increase in accounts payable would equal cost of goods sold.

Question 34

Dividends received may be classified as operating or investing activities under IFRS.

Question 35

Under IFRS, dividends paid may be classified as operating or financing activities.

Question 36

Under ASPE, interest received and paid and dividends received must be classified in the operating activities section of the Statement of Cash Flows.

Question 37

Cash paid to suppliers is accrual based cost of goods sold plus the increase in inventory plus the increase in accounts payable for the year.

Question 38

Salary expense plus amortization of deferred compensation expense for the year would equal cash paid for salaries.

Question 39

Cash from customers equals sales plus the increase in accounts receivable for the year.

Question 40

If Harris Company issues both a balance sheet and an income statement with comparative figures from last year, a statement of cash flows should be issued for each period for which an income statement is presented.

Question 41

A corporation paid $4,000 cash for rent. This payment should be reflected on the Statement of Cash Flows as a:

A) cash inflow from operating activities.
B) cash outflow from operating activities.
C) cash outflow from investing activities.
D) cash outflow from financing activities.

Question 42

A corporation reported the following information in its income statement: $$\begin{array} { | l | l | } \hline \text { Sales revenue (none on credit) } & \$ 60,000 \\\hline \text { Cost of goods sold (paid in cash) } & 40,000 \\\hline \text { Gross margin on sales } & 20,000 \\\hline \text { Depreciation expense } & ( 2,000 ) \\\hline \text { Amortiz ation expense } & ( 1,000 ) \\\hline \text { Wage expense (paid in cash) } & ( 2,500 ) \\\hline \text { Income betore taxes } & 14,500 \\\hline \text { Income taxes } ( 20 \% ) \text { (paid in cash) } & ( 2,900 ) \\\hline \text { Net income } & \$ 11,600 \\\hline\end{array}$$ The corporation should report the following amount on its Statement of Cash Flows for net cash from operating activities:

A) $11,600.
B) $13,600.
C) $14,600.
D) $17,100.

Question 43

Under IFRS, interest received may be classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Operating activities or financing activities.
E) Operating activities or investing activities.

Question 44

The following item is found on the income statement of a corporation: Gain from sale of equipment, $5,000. The equipment sold during the year originally cost $20,000, had accumulated depreciation of $16,000 and was sold for cash. The Statement of Cash Flows should show an inflow of cash from investing activities of:

A) $1,000.
B) $4,000.
C) $5,000.
D) $9,000.

Question 45

Which of the following would cause an inflow of cash?

A) Payment of a long-term debt
B) Purchase of inventory for cash
C) Sale of an asset for cash at less than its book value
D) Issuing common stock in payment for legal services already provided

Question 46

Which of the following would cause an inflow of cash?

A) Payment of a long-term bond
B) Sale for cash of a short-term investment at its cost
C) Payment of accounts payable
D) Repurchase of common stock for cash
E) Accrual of a dividend

Question 47

Which of the following is a financing cash flow?

A) Purchase of common shares of another company
B) Dividend payments
C) Rental payments
D) Interest received

Question 48

Which of the following is the operating cash flow?

A) rent payments
B) dividend payments
C) payments for the purchase of a building
D) principal payment on a bank loan

Question 49

Which one of the following statement does not primarily report changes in amounts or accounts?

A) Statement of Cash Flows
B) Balance sheet
C) Income statement
D) Statement of retained earnings

Question 50

Under IFRS, dividends received may be classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Operating activities or financing activities.
E) Operating activities or investing activities.

Question 51

The main purpose of the Statement of Cash Flows is:

A) determine the change in cash during the period.
B) list the cash inflows and outflows by meaningful cash flow category.
C) disclose the quality of earnings.
D) explain why the balance sheet accounts changed during the year.

Question 52

How is depreciation expense treated in the Statement of Cash Flows and related disclosures when the statement is prepared using the indirect format?

A) added to net income
B) subtracted from net income
C) placed into the investing section
D) does not appear because it is not a cash flow

Question 53

In a Statement of Cash Flows:

A) net cash flow from operating activities is always the same as net income.
B) net cash flow from operating activities must be the same as net increase in cash during the period.
C) net cash flow from operating activities is always greater than net income.
D) net cash flow from operating activities is always less than net income.
E) net cash flow from operating activities may be less than or greater than net income.

Question 54

A corporation recorded the following entry: $$\begin{array} { | l | l | l | } \hline \text { nvestment in common shares to be held indefinitely } & 2,000 & \\\hline \text { Cash } & & 2,000 \\\hline\end{array}$$ How would this transaction be shown on a Statement of Cash Flows?

A) Cash outflow for operating activities
B) Cash outflow for investing activities
C) Cash outflow for financing activities
D) Cash inflow for financing activities

Question 55

Which of the following would not be shown in one of the three activity sections of the Statement of Cash Flows prepared using the indirect format?

A) Refinancing a bond issue currently due with a new bond issue
B) A decrease in trade accounts receivable over the period
C) Purchase of a subsidiary corporation
D) A decrease in long-term notes payable over the period

Question 56

Which of the following would cause an outflow of cash?

A) Issuance of long-term debt to finance a construction project
B) Collection on an account receivable
C) Cash purchase of a long-term marketable security
D) Sale of a long-term asset for cash

Question 57

A corporation has paid $20,000 in cash dividends each year on its common shares. Although during year 1 the company had a cash shortage, it declared the dividend. However, it was stipulated that the $20,000 cash dividend would not be paid until year 2. This dividend will affect the year 1 Statement of Cash Flows by:

A) increasing the cash from operating activities.
B) increasing the cash from financing activities.
C) decreasing the cash from financing activities.
D) decreasing the cash from operating activities.
E) will not affect the Statement of Cash Flows.

Question 58

Under IFRS, dividends paid may be classified as:

A) Operating activities.
B) Financing Activities.
C) Investing Activities.
D) Operating activities or financing activities.
E) Operating activities or investing activities.

Question 59

Under IFRS, interest paid may be classified as:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Operating activities or financing activities.
E) Operating activities or investing activities.

Question 60

Which method or format for preparing the Statement of Cash Flows reports the major operating cash flows on an individual line-item basis?

A) Only direct method
B) Only indirect method
C) Both direct and indirect
D) Neither direct nor indirect

Question 61

Under the direct method, cash from customers would be sales plus a(n):

A) Decrease in accounts payable.
B) Increase in accounts payable.
C) Decrease in accounts receivable.
D) Increase in accounts receivable.

Question 62

In a Statement of Cash Flows, the amortization of goodwill for a company with substantial operating profits should be presented as a(n):

A) Inflow from operating activities.
B) Inflow from investing activities.
C) Outflow from investing activities.
D) Adjustment to net income in the reconciliation of net income to cash from operating activities.

Question 63

Cash flows from investing activities would include all of these except:

A) Proceeds from sale of operating assets.
B) Proceeds from sale of long-term investments.
C) Interest paid on notes receivable.
D) Proceeds from sale of securities available for sale.
E) Collection of principal amounts of loans made to other parties.

Question 64

The amortization of patents should be presented in a Statement of Cash Flows as a(n):

A) inflow and outflow of cash.
B) outflow of cash.
C) addition to net income in the adjustments to reconcile net income to cash from operating activities.
D) deduction from net income in the adjustments to reconcile net income to cash from operating activities.

Question 65

When preparing a reconciliation of net income to cash from operations, an increase in the ending inventory over the beginning inventory will result in an adjustment to reported net income because:

A) Cash is increased because inventory is a current asset.
B) Inventory is an expense deducted in computing net earnings, but is not a use of cash.
C) The net increase in inventory is part of the difference between cost of goods sold and cash paid to suppliers.
D) All changes in noncash accounts must be disclosed.

Question 66

Which of the following is not an inflow of cash?

A) Collection of a short-term receivable
B) Sale of a capital asset for cash
C) Cash borrowed on a short-term note
D) Depreciation expense

Question 67

If a company issues both a balance sheet and an income statement with comparative figures from last year, Statement of Cash Flows:

A) Should be issued for the current year only.
B) Should be issued for each period for which an income statement is presented.
C) is no longer necessary; but may be used at the company's option.
D) Should not be issued.

Question 68

Which of the following would not be a cash-paid item using the direct method for reporting operating activities?

A) Depreciation expense
B) Cash paid to suppliers
C) Cash paid for income taxes
D) Cash paid for interest

Question 69

The gain on the sale of a long-term investment should be disclosed separately in a Statement of Cash Flows of a company with substantial operating profits as a(n):

A) Adjustment to net income in the reconciliation of net income to cash from operating activities.
B) Outflow from operating activities.
C) Outflow from investing activities.
D) Inflow from financing activities.

Question 70

Which of the following independent transactions would cause net income to be more than cash from operating activities?

A) A decrease in the accounts receivable account
B) An increase in the merchandise inventory account
C) An increase in the accounts payable account
D) An increase in the accrued wages account

Question 71

Which of the following is not an adjustment to reconcile net income to cash from operating activities?

A) Accrued liability change (increase or decrease)
B) Amortization of premium or discount on bonds payable
C) Cash dividend declared but not yet paid
D) Prepaid expense (increase or decrease)

Question 72

The amortization of bond discount on long-term debt should be presented in a Statement of Cash Flows as a(n):

A) Inflow and outflow of cash.
B) Outflow of cash.
C) Deduction from net income in the adjustments to reconcile net income to cash from operating activities.
D) Addition to net income in the adjustments to reconcile net income to cash from operating activities.

Question 73

What effect does the write-off of an account receivable have on the Statement of Cash Flows?

A) A decrease to operating cash flows under the direct method.
B) A decrease to operating cash flows under the indirect method.
C) A decrease to financing cash flows.
D) There is no effect.

Question 74

Which of the following is a deduction from net income when reconciling to cash flow from operating activities?

A) Amortization of premium on bonds payable
B) Cash dividend declared and paid
C) Collection of an account receivable
D) Bad debt written off (allowance method)

Question 75

When using the direct method for reporting operating activities, which of the following would represent a cash-paid item?

A) Depreciation expense, adjusted for changes in depreciation methods
B) Patent amortization expense, adjusted for changes in estimates
C) Interest expense, adjusted for changes in interest payable and amortization of bond premiums or discounts
D) Loss on sale of plant assets
E) Gain on sale of plant assets

Question 76

Cash paid for income taxes under the direct method would be income tax expense minus:

A) An increase in income taxes payable.
B) A decrease in income taxes payable.
C) Beginning income taxes payable.
D) Ending income taxes payable.

Question 77

On a reconciliation of net income to cash from operations, depreciation is treated as an adjustment to net income because depreciation:

A) is a direct outflow of cash.
B) reduces net income but does not involve an outflow of cash.
C) reduces net income and involves an outflow of cash.
D) is an outflow of cash to a reserve account for replacement of assets.

Question 78

A loss on the sale of machinery in the ordinary course of business should be presented in a Statement of Cash Flows as a(n):

A) Adjustment to net income in the reconciliation of net income to cash from operating activities.
B) Inflow from operating activities.
C) Inflow from investing activities.
D) Outflow from investing activities.

Question 79

Under the direct method, cash paid to suppliers can be computed as cost of goods sold for the period:

A) Plus an increase in inventory and minus an increase in accounts payable.
B) Plus a decrease in inventory and minus an increase in accounts payable.
C) Minus an increase in inventory and plus an increase in accounts payable.
D) Minus a decrease in inventory and plus an increase in accounts payable.

Question 80

Which of the following causes a net change in cash?

A) Write-off of a bad debt
B) Payment of a long-term debt by issuing common shares
C) Declaration of a cash dividend
D) Declaration and issuance of a stock dividend
E) Payment of a cash dividend declared in a previous period