Chapter 5
1. A profitable firm can never run out of cash.
2. 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.
3. Cash equivalents represent long-term, highly liquid investments in which a firm has temporarily placed
excess cash.
4. The second section of the statement of cash flows shows the amount of cash flow from investing activities.
5. 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.
6. Under both U.S. GAAP and IFRS, the issue or redemption of debt is a financing activity.
7. 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).
8. A recent AICPA survey of 600 large companies reported in the AICPA’s annual Accounting Trends and
Techniques showed that only six to eight companies, about 1%, use the direct method.
9. Depreciation charges provide cash to the firm. because the indirect method adds depreciation expense to net
income to calculate cash provided by operations.
10. Some analysts focus attention on cash flow from operations, thinking it as important as, or more important
than, net income as a performance measure.
11. 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.
12. 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.
13. 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.
14. Firms using the direct approach for the statement of cash flows must also present a reconciliation of cash
flow from operations to net income .
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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 investing activity.
21. Net income for a particular period does not equal cash flow from operations because
22. 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?
23. The balance sheet reports
24. The income statement
25. The statement of cash flows
26. Firms receive cash inflows and disburse cash outflows for investing activities such as to
27. Firms receive cash inflows and disburse cash outflows for financing activities such as to
28. Which of the following statements is/are not true?
29. 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.
30. Regarding the Statement of Cash Flow, which of the following is not true regarding operations?
31. Firms not experiencing rapid growth can often finance capital expenditures with
32. Rapidly growing firms must often _____ to finance their acquisitions of noncurrent assets.
33. _____ usually represents a major ongoing use of cash.
34. A firm obtains cash from all of the following except for:
35. A firm uses cash to _____ These amounts appear as cash flow from financing activities in the statement of
cash flows.
36. In the Statement of Cash Flows, U.S. GAAP views cash received in the form of interest and dividends as
coming from _____.
37. IFRS permits firms to classify cash from interest and dividend revenue as _____ activities, provided the
classification is consistently applied across periods.
38. U.S. GAAP requires that firms classify cash payments for interest expense as a(n) _____ activity.
39. Firms can use free cash flow to
40. 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.
41. 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
42. 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 _____.
43. 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.
44. 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 _____
45. 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 _____.
46. Examples of nonmonetary transactions is/are:
47. 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 _____.
48. Although the guidance in U.S. GAAP and IFRS states a preference that companies present cash flows from
operations using the _____. , most companies present cash flows from operations as _____.
49. The first section of the statement of cash flows derives cash flow from operations. Both U.S. GAAP and
IFRS permit firms to report cash flow from operations using the __________.
50. The first section of the statement of cash flows derives cash flow from _____. activities. The _____. method
reports the amounts of cash received from customers less cash disbursed to suppliers, employees, lenders, and
taxing authorities.
51. The _____ method begins with net income for a period and then shows adjustments to net income to convert
revenues to cash received from customers and to convert expenses to cash disbursed to various suppliers of
goods and services. Most companies use this method.
52. A recent AICPA survey of 600 large companies reported in the AICPA’s annual Accounting Trends and
Techniques showed that only _____ use the direct method.
53. There are several types of adjustments required to compute cash flow from operations from net
income. One adjustment is an addition to net income each year for _____ because it uses no cash during that
period.
54. The amount of cash a department store received from customers during a period equals the sales for the
period, reduced by the _____ during this period or increased by the _____ during the period.
55. Firms have some choice as to when they disburse cash. Delaying payments to suppliers and others during
the last several days of an accounting period conserves cash and thereby _____ cash flow from operations for
that period, and _____ cash flow from operations during the second period.
56. A growing firm that delays payments at the end of each period reports larger cash flow from operations each
period than if it had not delayed making the cash payments at the end of each period. Which of the following is
true?
57. 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)?
58. 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 be _____ the net change in all noncash accounts.
59. Some firms use the direct approach for the statement of cash flows to present cash flow from _____, listing
all revenues that provide cash and subtracting all expenses that use cash.
60. The statement of cash flows usually presents cash flow from operations in the _____ format, beginning with
net income for the period. The statement then adjusts for revenues not providing cash, for expenses not using
cash, and for changes in working capital accounts.
61. 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.
62. 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.
63. 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.
64. U.S. GAAP requires that the statement of cash flows explain the changes in the firm’s
65. The statement of cash flows provides information about
66. Which of the following statements is true concerning the statement of cash flows?
67. Which method of preparing the statement of cash flows is required by U.S. GAAP?
68. The statement of cash flows reports the amount of cash flow from a firm’s
69. Cash flows from operating activities include
70. U.S. GAAP requires that the statement of cash flows disclose the amount of cash flows arising
frominvesting activities including
71. U.S. GAAP requires that the statement of cash flows disclose the amount of cash flows arising
fromfinancing activities including
72. On the statement of cash flows, payment of dividends is treated as a/an
73. On the statement of cash flows, cash purchase of land is treated as a/an
74. 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
75. 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
76. 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
77. The primary difference between a cash flow statement prepared using the indirect method and one prepared
using the direct method is.
78. U.S. GAAP classifies all of the following as investing activities on the statement of cash flows except for
79. U.S. GAAP classifies all of the following as operating activitieson the statement of cash flows except
80. U.S. GAAP classifies all of the following as financing activities on the statement of cash flows except
81. If the balance sheet shows the same beginning and ending balance for depreciable assets, there
82. Financing activities on the cash flow statement do not include.
83. Why is depreciation expense added back to net income in the operating section of the indirect cash flow
statement?
84. If cash decreases by $10,000 during the year, liabilities decrease by $5,000, and shareholders’ equity
increases by $5,000, what is the total change in noncash assets for the year?
85. Which is a source of cash?.
86. Which is a use of cash?
87. In a statement of cash flows, interest payments to lenders should be classified as cash outflows for
88. 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
89. In a statement of cash flows, proceeds from the issuance of common stock should be classified as cash
inflows for
90. The Smith Company had retained earnings at the beginning of the year totaling $100,000. At the end of the
year retained earnings totaled $200,000. Depreciation was $50,000 for the year and the company paid dividends
of $150,000. What is the amount recorded as Net Income in the operating activities section of the statement of
cash flows prepared using the indirect method?
91. The following information is available from JB Corporation’s accounting records for the year ended
December 31, Year 4:
Cash received from customers
$600,000
Dividends received from marketable securities
80,000
Cash paid for purchase of supplies
300,000
Income taxes paid
50,000
Cash dividends paid to shareholders
30,000
Net cash flow from operating activities for Year 4 totaled
92. Royce Company
Royce 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.
·Royce’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 Royce Company example. Royce 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
93. Royce Company
Royce 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.
·Royce’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 Royce Company example. Royce Company uses the indirect method to prepare
its Year 4 statement of cash flows, and would show a(n)
94. Royce Company
Royce 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.
·Royce’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 Royce 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
95. Ignoring income tax effects, which of the following is correct concerning depreciation?
96. Many countries around the world require a