12-1
Chapter 12 Reporting and Analyzing Cash Flows Answer Key
True / False Questions
1.
The purpose of the statement of cash flows is to report cash receipts (inflows) and cash
payments (outflows) during a period.
2.
The statement of cash flows reports and proves the net change in cash for a reporting
period.
12-2
3.
To be classified as a cash equivalent, the only criterion an item must meet is that it must
be readily convertible to a known amount of cash.
4.
The statement of cash flows explains the difference between the beginning and ending
balances of cash and cash equivalents.
5.
Internal users of the statement of cash flows often use cash flow information to plan day–
to-day operating activities and make long-term investment and financing decisions.
12-3
6.
A cash equivalent must be readily convertible to a known amount of cash, and must be
sufficiently close to its maturity so its market value is unaffected by interest rate changes.
7.
Business activities that generate or use cash are classified as operating, investing, or
financing activities on the statement of cash flows.
12-4
8.
Financing activities include: (a) the purchase and sale of long-term assets, (b) the
purchase and sale of short-term investments, and (c) lending and collecting on loans.
9.
Cash paid for merchandise is an operating activity.
10.
The purchase of stock in another company is classified as a financing activity.
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11.
Receipts of cash dividends and interest earned on loans are classified as investing
activities.
12.
The payment of cash dividends to shareholders is classified as a financing activity.
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13.
The full disclosure principle requires that noncash investing and financing activities be
disclosed in the financial statements.
14.
Conversion of preferred stock to common stock is disclosed in the financing section of the
statement of cash flows.
15.
A purchase of land in exchange for a long-term note payable is reported in the investing
section of the statement of cash flows.
12-7
16.
A noncash investing transaction should be disclosed in either a footnote or at the bottom
of the statement of cash flows.
17.
A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000
note payable. The entire transaction is disclosed to users in the financing section of the
statement of cash flows.
12-8
18.
A purchase of land in exchange for shares of stock is disclosed at the bottom of the
statement of cash flows or in a note to the statement.
19.
Accounting standards require companies to include a statement of cash flows in a
complete set of financial statements.
20.
The statement of cash flows explains how transactions and events impact the end–of–
period cash balance to produce the end-of-period net income.
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21.
Most managers stress the importance of understanding and predicting cash flows for
business decisions.
22.
Managers only use the cash flow statement to evaluate the net cash increase or decrease,
and do not pay much attention to the details of cash flows from operating activities, cash
flows from investing activities, and cash flows from financing activities.
12–10
23.
A cash-based measure to help business decision makers estimate the amount and timing
of cash flows is the cash flow on total assets ratio.
24.
The cash flow on total assets ratio compared to the total assets ratio can be used as an
indicator of earnings quality.
25.
Cash flow amounts and their timing should be considered when planning and analyzing
operating activities.
26.
The cash flow on total assets ratio is computed by dividing cash flows from operations by
average total assets.
27.
The cash flow on total assets ratio is computed by dividing average total assets by
operating income.
28.
The cash flow on total assets ratio reflects actual cash flows and is therefore affected by
income recognition and measurement.
12–12
29.
A cash coverage of growth ratio of less than 1 indicates cash inadequacy to meet asset
growth.
30.
The usual first step in preparing the statement of cash flows is computing the net increase
or net decrease in cash.
12–13
31.
Both the direct and indirect methods yield the identical net cash flow amount provided or
used by operating activities.
32.
The reporting of financing activities in the statement of cash flows is identical under either
the direct or indirect methods.
33.
The FASB recommends that the operating section of the statement of cash flows be
reported using the direct method.
12–14
34.
Since it is recommended by the FASB, the direct method of preparing the statement of
cash flows is most frequently used.
35.
Information to prepare the statement of cash flows usually comes from: (a) comparative
balance sheets, (b) current income statement, and (c) additional information.
12–15
36.
The direct method for computing and reporting net cash flows from operating activities
involves adjusting the net income figure to obtain net cash provided or used by operating
activities.
37.
The indirect method separately lists each major item of operating cash receipts and cash
payments.
38.
Companies have the option of using either the direct or indirect method to prepare the
operating section of the statement of cash flows.
12–16
39.
Cash flows are essentially the same as net income because they are both measured using
accrual accounting principles.
40.
When preparing the operating activities section of the statement of cash flows using the
indirect method, expenses with no cash outflows are added back to net income.
12–17
41.
When preparing the operating activities section of the statement of cash flows using the
indirect method, non-operating gains are added to net income.
42.
When preparing the operating activities section of the statement of cash flows using the
indirect method, a decrease in accounts receivable is subtracted from net income.
43.
When preparing the operating activities section of the statement of cash flows using the
indirect method, an increase in income taxes payable is added to net income.
12–18
44.
When preparing the operating activities section of the statement of cash flows using the
indirect method, depreciation is subtracted from net income.
45.
Financing activities include receiving cash dividends from investments in other companies’
stocks.
12–19
46.
Investing activities include: (a) the purchase and sale of long-term assets, (b) lending and
collecting on notes receivable, and (c) the purchase and sale of short-term investments in
the securities of other entities, other than cash equivalents and trading securities.
47.
Financing activities include receiving cash from issuing debt and receiving cash dividends
from investments in other companies’ stocks.
48.
The payment of cash dividends never changes the balance of retained earnings.
12–20
49.
Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of
$10,000. This implies that $40,000 cash was received from the sale.
50.
A spreadsheet can help organize the information needed to prepare a statement of cash
flows.