Deck 13: Statement of Cash Flows

Question 1

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.

Answer 1

True

Question 2

Interest paid is classified as either operating or financing activities.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Depreciation is a non-cash expense.

Question 5

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

Question 6

If accounts receivable decrease during the period, Cash receipts from customers probably exceeds net sales.

Question 7

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

Question 8

Depreciation expense reduces profit for the year but does not reduce the net cash from operating activities.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

Dividends paid belong in the operating section of the 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

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

Question 18

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

Question 19

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 20

Receipts of interest revenue are classified as operating or investing activities.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

When applying the direct method in a statement of cash flows, the amount of depreciation is added to profit for the year

Question 27

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

Question 28

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

Question 29

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

Question 30

Does peak pricing charge:

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 31

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

Question 32

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

Question 33

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 profit for the year.

Question 34

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

Question 35

The indirect method of computing cash flows from operations begins with profit for the year.

Question 36

Free cash flow arises out of:

A) Operating activities
B) Investing activities
C) Financing activities
D) All of the above

Question 37

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

Question 38

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

Question 39

The Stock exchange of Hong Kong requires listed companies in Hong Kong to use the indirect method for the statement of cash flows.

Question 40

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

Question 41

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 42

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

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) None of the above.

Question 43

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 shareholders.
C) Payment of interest to creditors.
D) Short-term borrowing.

Question 44

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 equity securities classified as current assets.

Question 45

Profit for the year differs from net cash 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 profit for the year but classified as investing or financings activities.
D) All of the above will cause a difference between profit for the year and cash flows.

Question 46

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 47

Which of the following is an investing activity?

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

Question 48

All of the following are financing activities except:

A) Borrowing money
B) Lending money
C) Selling ordinary shares
D) Paying dividends

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 supplier.
D) Payment of income taxes.

Question 50

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

A) The cash (including cash equivalents) on the statement of financial position at the end of the period.
B) Net increase or decrease in cash during the period.
C) Profit for the year, computed by the cash basis of accounting.
D) Net cash from operating activities.

Question 51

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) All three decrease cash from operating activities.

Question 52

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 53

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

A) Purchase of equity 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 property, plant, and equipment for cash.

Question 54

All of the following are considered cash equivalents except

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

Question 55

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 56

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

A) Reasons for differences between the amount of profit for the year and net cash 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 57

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 58

A stock dividend is reported on the

A) Financing section of the statement of cash flows
B) Statement of financial position
C) Income statement
D) Operating section of the statement of cash flows

Question 59

Which of the following is a financing activity?

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

Question 60

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 61

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 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 from operating activities begins with profit for the year for the year as shown in the income statement.
D) The IASB permits both the direct and the indirect methods, but has expressed a preference for the direct method.

Question 62

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 63

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

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

Question 64

Which of the following is not true regarding the direct and indirect methods of computing net cash 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 IASB for reporting purposes.
D) Both methods convert accrual-based income statement amounts to cash flow results.

Question 65

Craig Corporation's reported profit for 2013 is less than its net cash from operating activities. One reason for this could be:

A) The sale of machinery at a loss in 2013
B) An increase in inventory levels during 2013
C) The sale of investments at a gain in 2013
D) An error in the preparation of the statement of cash flows; profit for the year should be greater than or equal to net cash from operating activities.

Question 66

Cigna Corporation's 2014 profit for the year is smaller than net cash from operating activities. Which of the following would not be an explanation of why profit for the year is smaller than net cash from operating activities?

A) Cigna paid dividends to shareholders during 2014.
B) Cigna's accounts payable increased during 2014.
C) Cigna recognized depreciation expense in 2014.
D) Cigna sold equipment at a loss in 2014.

Question 67

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 68

When using the indirect method, depreciation expense:

A) Increases net cash from operations.
B) Decreases net cash from operations.
C) Does not affect profit for the year.
D) Does not affect net cash from operations.

Question 69

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 ordinary shares.
C) Selling land in exchange for a note receivable.
D) Transferring cash from a checking account into a money market fund.

Question 70

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.

Question 71

Which of the following indicates cash receipts?

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

Question 72

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

A) The dollar amount of net cash from operating activities for the current year.
B) The trend in net cash 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 73

Which of the following does not create a difference between profit for the year and the net cash 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 74

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 75

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 nor b would be shown.
D) Both a and b would be shown.

Question 76

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 A nor B would be shown.
D) Both A and B would be shown.

Question 77

Which of the following is impossible?

A) Profit for the year is less than cash from operating activities.
B) Profit for the year is greater than cash from operating activities.
C) Profit for the year is equal to cash from operating activities.
D) None of the three above is impossible.

Question 78

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

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 79

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 80

The Nelson Corporation reported profit for the year in excess of its net cash 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.