Chapter 12 – The Statement of Cash Flows
TRUE/FALSE
1. The statement of cash flows discloses the effect on cash of the purchase and sale of long-term
investments and not of short-term investments.
2. It is unethical, and considered a form of manipulation, to classify a cash flow as an investing or
financing activity, when it really is an operating activity.
3. For purposes of preparing the statement of cash flows, cash is defined as not including cash
equivalents.
4. A U.S. Treasury bill with an original maturity of one year or less is considered a cash equivalent.
5. The statement of cash flows shows the effects on cash of a company’s operating, investing, and
financing activities for an accounting period.
6. The primary purpose of the statement of cash flows is to provide information about a company’s cash
receipts and cash payments during an accounting period.
7. Cash equivalents include money market accounts, commercial paper, and U.S. Treasury bills.
8. The primary purpose of the statement of cash flows is to provide information about a company’s
investing and financing activities during an accounting period.
9. Noncash investing and financing transactions, such as the exchange of a long-term asset for a
long-term liability, represent significant investing and financing activities and are not reflected in the
financial statements.
10. Because noncash investing and financing transactions do not affect cash, they should be excluded from
the statement of cash flows.
11. Cash inflows and outflows are not as subject to manipulation as earnings are.
12. Repayments of accounts payable or accrued liabilities are considered repayments of loans under
financing activities.
13. Interest received would be included in the financing activities category on the statement of cash flows.
14. The statement of cash flows explains the difference between net income as shown on the income
statement and the net cash flows generated from operations.
15. Interest paid would be included in the investing activities category on the statement of cash flows.
16. The acquisition of treasury stock with cash is shown as an investing activity on the statement of cash
flows.
17. The payment of taxes would be included in the investing activities section of the statement of cash
flows.
18. The purchase of trading securities with cash is considered an investing activity.
19. Management never uses the statement of cash flows to determine whether short-term financing is
necessary to pay current liabilities.
20. Cash flows to sales is a measure of free cash flow.
21. Free cash flow is measured in terms of a dollar amount.
22. Cash flows to assets is measured in “times.”
23. Net cash flows from investing activities would be needed to calculate cash flow yield, cash flows to
assets, and cash flows to sales.
24. A negative free cash flow indicates that the company has met all its planned cash commitments and
has cash available to reduce debt or to expand.
25. A cash flow yield of 2.0 times is considered better than one of 2.5 times.
26. Under the indirect method, gains or losses from the sale of equipment used in operations would appear
as adjustments in the cash flows from operating activities section of the statement of cash flows.
27. Amortization expense is added to net income in the cash flows from operating activities section of the
statement of cash flows prepared using the indirect method.
28. Decreases in current assets other than cash have positive effects on cash flows and increases in current
assets have negative effects on cash flows.
29. The income statement indicates a business’s success or failure in earning an income from its operating
activities, it also reflects the inflow and outflow of cash from operating activities.
30. Interest received is one item deducted from net income as per the income statement to arrive at net
cash flows from operating activities.
31. Depreciation expense is one item added to net income as per the income statement to arrive at net cash
flows from operating activities under the indirect method.
32. When preparing a statement of cash flows using the indirect method, an increase in accounts
receivable is deducted from net income.
33. When preparing a statement of cash flows using the indirect method, an increase in accounts payable is
deducted from net income.
34. A decrease in the balance of merchandise inventory is added to net income when calculating net cash
flows from operating activities using the indirect method.
35. Determining net cash flows from operating activities using the indirect method reveals changes in the
accounts receivable account.
36. Purchases and sales of long-term investments for the period should be netted for disclosure in the
investing activities section of the statement of cash flows.
37. Investing activities centers on the long-term assets shown on the balance sheet and does not include
any short-term investments shown under current assets on the balance sheet.
38. When presenting decreases in long-term investments in the investing activities section of the statement
of cash flows, the amount reflected equals the amount of the gain(s) or loss(es) from the transaction(s).
39. A decrease in plant assets shown in the investing activities section of the statement of cash flows
would be presented based on the amount of the resulting gain or loss incurred.
40. Cash inflows and outflows are netted in the investing activities section of the statement of cash flows
in order to simplify the statement.
41. Repayment of bonds payable would be reflected as a cash outflow in the financing activities section of
the statement of cash flows.
42. The net income for the period would appear in the cash flows from financing activities section of a
statement of cash flows prepared using the indirect method.
43. A schedule of noncash investing and financing activities is required if there are noncash investing and
financing transactions.
44. The activity on the balance sheet to be presented in the financing activities section of the statement of
cash flows is based on an analysis of stockholders’ equity only.
45. The financing activities section of the statement of cash flows includes transactions or activities from
the income statement and also takes into account stockholders’ equity.
46. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section
of the statement of cash flows.
47. Dividends paid are reflected in the operating activities section of the statement of cash flows.
MULTIPLE CHOICE
1. Noncash investing and financing transactions
a.
appear as a separate schedule on the statement of cash flows.
b.
appear in either the investing or financing activities section, but not both.
c.
are excluded from the statement of cash flows.
d.
appear in both the investing and financing activities sections.
2. Cash equivalents do not include
a.
U.S. Treasury bills.
b.
money market accounts.
c.
long-term investments.
d.
short term corporate notes.
3. How are cash equivalents treated on a statement of cash flows?
a.
They are disclosed in the operating activities section.
b.
They are combined with the Cash account.
c.
They are disclosed in either the investing or financing activities section.
d.
They are excluded from the statement of cash flows.
4. How are transfers between cash and cash equivalents treated on a statement of cash flows?
a.
They are disclosed as an investing activity.
b.
They are not shown as any type of cash flow.
c.
They are disclosed as a financing activity.
d.
They are disclosed as an operating activity.
5. The primary purpose of the statement of cash flows is to provide information
a.
about a company’s cash receipts and cash payments during an accounting period.
b.
about a company’s investing and financing activities during an accounting period.
c.
regarding a company’s financial position at the end of an accounting period.
d.
regarding the results of operations for a period of time.
6. Management would not use the statement of cash flows to
a.
assess the liquidity of the business.
b.
manage cash flows.
c.
pay its liabilities, dividends, and interest.
d.
determine the financial position of the company.
7. Investors and creditors would find the statement of cash flows least useful in assessing
a.
financial position at a point in time.
b.
ability to manage cash flows.
c.
ability to pay dividends and liabilities.
d.
the company’s dividend policy.
8. Aiken Corporation acquired a land site with a building by issuing a 30-year mortgage payable. In
Aiken’s statement of cash flows, this transaction should be shown
a.
only as a cash flow from operating activity for the purchase of the land and building.
b.
only as a cash flow from financing activity for the issuance of the mortgage payable.
c.
in the schedule of noncash investing and financing transactions.
d.
as both a cash flow from investing activity and a cash flow from financing activity.
9. The most future-directed of the basic financial statements is the
a.
statement of stockholders’ equity.
b.
statement of cash flows.
c.
income statement.
d.
balance sheet.
10. Which of the following is reported as a noncash investing and financing transaction on the statement
of cash flows?
a.
Conversion of bonds payable to stock
b.
Purchase of treasury stock
c.
Payment of long-term debt
d.
Sale of preferred stock
11. Royer Corporation engaged in this transaction:
Declared and issued a stock dividend.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Does not represent a cash flow
d.
Investing activities section
12. Royer Corporation engaged in this transaction:
Collected accounts receivable.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
13. Royer Corporation engaged in this transaction:
Purchased inventory with cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Investing activities section
c.
Operating activities section
d.
Financing activities section
14. Royer Corporation engaged in this transaction:
Retired long-term debt with cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Financing activities section
15. Royer Corporation engaged in this transaction:
Sold long-term investment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Operating activities section
d.
Investing activities section
16. Royer Corporation engaged in this transaction:
Paid interest on note.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
17. Royer Corporation engaged in this transaction:
Issued stock for equipment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Investing activities section
d.
Schedule of noncash investing and financing transactions
18. Royer Corporation engaged in this transaction:
Issued long-term note for plant assets.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Financing activities section
c.
Operating activities section
d.
Investing activities section
19. Royer Corporation engaged in this transaction:
Purchased one-year insurance policy for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Operating activities section
20. Royer Corporation engaged in this transaction:
Abandoned fully depreciated equipment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Investing activities section
b.
Operating activities section
c.
Does not represent a cash flow
d.
Financing activities section
21. Royer Corporation engaged in this transaction:
Received dividends on securities held.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
22. Royer Corporation engaged in this transaction:
Paid income taxes.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Investing activities section
c.
Operating activities section
d.
Financing activities section
23. Royer Corporation engaged in this transaction:
Issued common stock for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Financing activities section
24. Bamberg Corporation repaid a 90-day note payable. Indicate which section, if any, this transaction
would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Operating activities section
d.
Investing activities section
25. Bamberg Corporation repaid a ten-year note payable. Indicate which section, if any, this transaction
would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
26. Bamberg Corporation paid employee wages. Indicate which section, if any, this transaction would
appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Investing activities section
c.
Does not represent a cash flow
d.
Operating activities section
27. Bamberg Corporation purchased land for cash. Indicate which section, if any, this transaction would
appear in, or relate to, on a statement of cash flows.
a.
Operating activities section
b.
Investing activities section
c.
Financing activities section
d.
Does not represent a cash flow
28. Bamberg Corporation transferred cash to a money market account. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Does not appear on cash flow statement
b.
Operating activities section
c.
Investing activities section
d.
Financing activities section
29. Bamberg Corporation purchased land and building with a mortgage. Indicate which section, if any,
this transaction would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Investing activities section
d.
Schedule of noncash investing and financing transactions
30. Bamberg Corporation received interest on an investment in a long-term note. Indicate which section,
if any, this transaction would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Does not appear on cash flow statement
c.
Operating activities section
d.
Investing activities section
31. Bamberg Corporation converted loans payable to stock. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
32. Bamberg Corporation acquired a long-term investment by issuance of long-term debt. Indicate which
section, if any, this transaction would appear in, or relate to, on a statement of cash flows.
a.
Investing activities section
b.
Operating activities section
c.
Schedule of noncash investing and financing transactions
d.
Financing activities section
33. Bamberg Corporation purchased a 30-day U.S. Treasury bill. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Does not appear on cash flow statement
b.
Operating activities section
c.
Investing activities section
d.
Financing activities section
34. Bamberg Corporation purchased a 60-day commercial paper. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Does not appear on cash flow statement
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
35. Bamberg Corporation purchased treasury stock with cash. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Financing activities section
b.
Investing activities section
c.
Does not appear on cash flow statement
d.
Operating activities section
36. Bamberg Corporation sold buildings and equipment for cash. Indicate which section, if any, this
transaction would appear in, or relate to, on a statement of cash flows.
a.
Operating activities section
b.
Investing activities section
c.
Financing activities section
d.
Does not appear on cash flow statement
37. Use this information to answer the following question.
Oconee Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $18,000 cash.
2. Purchased a building for $160,000 cash.
3. Issued $140,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $200,000 worth of stock.
5. Declared and paid a $20,000 cash dividend.
Transaction 1 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
noncash investing and financing transactions section.
d.
cash flows from investing activities section.
38. Use this information to answer the following question.
Oconee Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $18,000 cash.
2. Purchased a building for $160,000 cash.
3. Issued $140,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $200,000 worth of stock.
5. Declared and paid a $20,000 cash dividend.
Transaction 2 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
cash flows from investing activities section.
d.
noncash investing and financing transactions section.
39. Use this information to answer the following question.
Oconee Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $18,000 cash.
2. Purchased a building for $160,000 cash.
3. Issued $140,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $200,000 worth of stock.
5. Declared and paid a $20,000 cash dividend.
Transaction 3 would be found on the statement of cash flows in the
a.
cash flows from operating activities section.
b.
cash flows from financing activities section.
c.
noncash investing and financing transactions section.
d.
cash flows from investing activities section.
40. Use this information to answer the following question.
Oconee Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $18,000 cash.
2. Purchased a building for $160,000 cash.
3. Issued $140,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $200,000 worth of stock.
5. Declared and paid a $20,000 cash dividend.
Transaction 4 would be found on the statement of cash flows in the
a.
cash flows from investing activities section.
b.
cash flows from operating activities section.
c.
cash flows from financing activities section.
d.
noncash investing and financing transactions section.
41. Use this information to answer the following question.
Oconee Corporation is preparing a statement of cash flows. The following transactions occurred
during the year:
1. Sold machinery for $18,000 cash.
2. Purchased a building for $160,000 cash.
3. Issued $140,000 worth of stock to acquire an airplane.
4. Converted long-term bonds by issuing $200,000 worth of stock.
5. Declared and paid a $20,000 cash dividend.
Transaction 5 would be found on the statement of cash flows in the
a.
noncash investing and financing transactions section.
b.
cash flows from financing activities section.
c.
cash flows from operating activities section.
d.
cash flows from investing activities section.
42. The calculation of free cash flow could include all of the following except
a.
cash purchases of plant assets.
b.
net cash flows from operating activities.
c.
net income.
d.
dividends paid.
43. Cash flows to assets is measured in terms of
a.
a percentage.
b.
times.
c.
days.
d.
dollars.
44. If net cash flows from operating activities were $374,000, net income were $100,000, and net sales
were $1,200,000, the cash flow yield would equal (Round amounts to one decimal place)
a.
3.2 times.
b.
26.7%
c.
3.7 times.
d.
31.2%
45. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales
were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place)
a.
10.0%.
b.
$116,000.
c.
15.8%.
d.
0.6 times.
46. During the year, Heckart Corporation had net sales of $250,000, net income of $25,000, average total
assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $37,500,
purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flow yield equals
(Round amounts to one decimal place)
a.
2.1 times.
b.
1.5 times.
c.
3.0 times.
d.
1.9 times.
47. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average
total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of
$86,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Cash flows to sales
equals (Round amounts to one decimal place)
a.
12.3 percent.
b.
14.3 percent.
c.
21.5 percent.
d.
17.2 percent.
48. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average
total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of
$52,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Cash flows to
assets equals (Round amounts to one decimal place)
a.
13.0 percent.
b.
10.4 percent.
c.
8.7 percent.
d.
7.4 percent.
49. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average
total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of
$70,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Free cash flow
equals
a.
$35,000.
b.
$85,000.
c.
$20,000.
d.
$50,000.
50. If the indirect method is used to prepare a statement of cash flows, which of the following would be
deducted from net income to arrive at net cash flows from operating activities?
a.
Increase in accounts payable
b.
Increase in income taxes payable
c.
Increase in accounts receivable
d.
Decrease in prepaid rent
51. If the indirect method is used to prepare a statement of cash flows, which of the following would be
added to net income to arrive at net cash flows from operating activities?
a.
Decrease in accrued liabilities
b.
Gain on sale of investments
c.
Decrease in prepaid expenses
d.
Increase in accounts receivable
52. The direct method of preparing a statement of cash flows
a.
is the overwhelming choice of most companies.
b.
begins with net income in the operating activities section.
c.
is more difficult to understand than the indirect method for the average reader.
d.
will produce the same net figure as the indirect method.
53. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Accounts Receivable—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities