Financial Accounting, 5e (Spiceland)
Chapter 11 Statement of Cash Flows
1) A statement of cash flows provides a summary of cash inflows and cash outflows during the
reporting period.
2) The three primary categories of cash flows are cash flows from operating activities, cash flows
from investing activities, and cash flows from financing activities.
3) Financing activities include cash receipts and cash payments for transactions relating to revenue
and expense activities.
4) Investing activities include cash transactions involving the purchase and sale of long-term assets
and current investments.
5) Operating activities are both inflows and outflows of cash resulting from the external financing
of a business.
6) We report interest and dividends received from investments with investing activities.
7) We report interest paid on bonds or notes payable with operating activities rather than financing
activities.
8) We record dividends received as a financing activity.
9) We record dividends paid as a financing activity.
10) Transactions that do not increase or decrease cash, but that result in significant investing and
financing activities, are reported either directly after the cash flow statement or in a separate note
to the financial statements as noncash activities.
11) If no cash was exchanged in the purchase of equipment financed entirely with a note payable,
we represent this as both an investing activity and a financing activity in the statement of cash
flows.
12) The purchase of long-term assets by issuing debt is recorded as both an investing activity and a
financing activity.
13) The total net cash flows from operating activities differ between the direct and indirect
methods.
14) Using the indirect method, we begin with net income and then list adjustments to net income in
order to arrive at operating cash flows.
15) The total of the cash flows from operating, investing, and financing activities equals the net
increase or decrease in cash for the period.
16) Using the direct method, we adjust the items in the income statement to directly show the cash
inflows and outflows from operations.
17) Because depreciation expense reduces net income, companies will add depreciation expense
back to net income as a step in arriving at net cash flows from operating activities under the
indirect method.
18) A loss on the sale of long-term assets is added back to net income to arrive at net cash flows
from operating activities under the indirect method.
19) A gain on the sale of long-term assets is added back to net income to arrive at net cash flows
from operating activities under the indirect method.
20) Under the indirect method, a decrease in accounts receivable is added to net income to arrive at
net cash flows from operating activities.
21) Under the indirect method, an increase in prepaid rent is added to net income to arrive at net
cash flows from operating activities.
22) Under the indirect method, an increase in inventory is added to net income and a decrease in
inventory is subtracted from net income to arrive at net cash flows from operating activities.
23) When preparing a statement of cash flows using the indirect method, a decrease in accounts
payable is subtracted from net income.
24) Under the indirect method, an increase in accounts payable is added to net income to arrive at
net cash flows from operating activities.
25) Under the indirect method, a decrease in accounts payable is added to net income to arrive at
net cash flows from operating activities.
26) The long-term assets section of the balance sheet is the place to look for investing activities.
27) The sale of land is reported in the operating section of the statement of cash flows.
28) We report the purchase of stock in another corporation as a cash outflow from investing
activities.
29) We report the actual amount of cash proceeds received from the sale of land as a cash inflow
from investing activities.
30) We can find most financing activities by examining changes in long-term liabilities and
stockholders’ equity accounts.
31) The inflow of cash received from issuing common stock is reported as an investing activity.
32) The balance in Retained Earnings is increased by net income and is decreased by dividends.
33) We report the cash payment of dividends as a cash outflow from investing activities.
34) We calculate cash return on assets as the change in cash divided by average total assets.
35) Cash return on assets indicates the amount of operating cash flow generated for each dollar
invested in assets.
36) To maximize cash flow from operations, a company strives to increase both cash flows per
dollar of sales and sales per dollar of assets invested.
37) Cash return on assets can be separated to examine two important business strategies: cash flow
to sales and asset turnover.
38) Income statement items that have no cash effect are still reported under the direct method.
39) Using the direct method, we examine each account in the income statement and convert it from
an accrual amount to a cash amount.
40) If accounts receivable decreases, this indicates that revenues exceed cash receipts from
customers.
41) When accounts payable decreases, cash paid to suppliers must have been more than purchases.
42) If there are no current assets or liabilities associated with operating expenses, the amounts we
report for these expenses in the income statement must equal the amount of cash we paid for these
items.
43) Depreciation expense is not reported on the statement of cash flows under the direct method.
44) We add an increase in interest payable to interest expense in arriving at cash paid for interest
under the direct method.
45) We add a decrease in income tax payable to income tax expense to calculate cash paid for
income taxes.
46) The indirect method begins with net income, while the direct method considers each of the
individual accounts that makes up net income.
47) Which financial statement separates business activities into operating, investing, and financing
activities?
A) Statement of Stockholders’ Equity
B) Income Statement
C) Statement of Cash Flows
D) Balance Sheet
48) The purchase of land is classified in the statement of cash flows as a(n):
A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash activity.
49) The cash collection from the sale of a good or service is classified in the statement of cash
flows as a(n):
A) Investing activity.
B) Operating activity.
C) Financing activity.
D) Noncash activity.
50) The payment of salaries is classified in the statement of cash flows as a(n):
A) Investing activity.
B) Operating activity.
C) Financing activity.
D) Noncash activity.
51) The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n):
A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash activity.
52) The purchase of treasury stock is classified in the statement of cash flows as a(n):
A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash activity.
53) Operating cash flows exclude:
A) Interest received.
B) Interest paid.
C) Dividends received.
D) Dividends paid.
54) The statement of cash flows reports cash flows from the activities of:
A) Operating, purchasing, and investing.
B) Borrowing, paying, and investing.
C) Operating, investing, and financing.
D) Using, investing, and financing.
55) Which of the following is correct about the statement of cash flows?
A) A company with a net loss will always have a net cash outflow from operating activities.
B) Collecting interest earned from a note receivable creates a cash inflow from investing activities.
C) Paying dividends to investors creates a cash outflow from financing activities.
D) The repayment of long-term debt is a cash inflow from financing activities.
56) Which of the following is correct about the statement of cash flows?
A) A company with a net loss on the income statement will always have a net cash outflow from
operating activities.
B) A purchase of equipment is classified as a cash inflow from investing activities.
C) Cash dividends received on stock investments are classified as cash flows from operating
activities.
D) Cash dividends paid are classified as cash flows from operating activities.
57) Which of the following is not correct about the statement of cash flows?
A) Paying dividends to investors creates a cash outflow from financing activities.
B) A purchase of equipment is classified as a cash outflow from investing activities.
C) Cash dividends paid are classified as cash flows from operating activities.
D) Cash dividends received on stock investments are classified as cash flows from operating
activities.
58) Which of the following is not correct about the statement of cash flows?
A) Paying dividends to investors creates a cash outflow from financing activities.
B) A purchase of equipment is classified as a cash outflow from investing activities.
C) A company with a net loss on the income statement will always have a net cash outflow from
operating activities.
D) Cash dividends received on stock investments are classified as cash flows from operating
activities.
59) All classifications on the Balance Sheet have a general relationship with sections identified on
the Statement of Cash Flows. Indicate which relationships are correctly identified in the table
below.
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Classification on the
Balance Sheet
Section on Statement
of Cash Flows
I
Bonds Payable
Financing
II
Equipment
Operating
III
Common Stock
Financing
IV
Accounts Payable
Operating
V
Accounts Receivable
Operating
A) IV, V.
B) I, II, III.
C) I, III, IV, V.
D) I, II, III, IV, V.
60) Under what section of the Statement of Cash Flows would you classify dividends paid on
common stock?
A) Operating.
B) Investing.
C) Financing.
D) Noncash activity.
61) Under what section of the Statement of Cash Flows would you classify the purchase of
equipment by issuing a long-term note payable?
A) Operating.
B) Investing.
C) Financing.
D) Noncash activity.
62) Which of the following transactions would not create a cash flow?
A) The company purchased some of its own stock from a stockholder.
B) Payment of a dividend.
C) The company purchased land by issuing common stock.
D) Sale of equipment at book value.
63) Which of the following is an example of a noncash activity?
A) Sale of land for less than its cost.
B) Purchase of land by issuing debt.
C) Sale of land for more than its cost.
D) Purchase of land using cash proceeds from issuance of common stock.