Chapter 13 – Statement of Cash Flows
1. The statement of cash flows explains how the cash balance changed during a particular
period of time.
2. Only highly liquid investments with original maturities of less than six months at the date
of purchase qualify as cash equivalents.
3. The payment of interest on a note payable is a cash flow from a financing activity.
Chapter 13 – Statement of Cash Flows
4. Collection of principal on a note receivable is a cash flow from financing activities.
5. Most companies use the direct method for disclosing their cash flows from operating
activities rather than the indirect method.
6. The difference between the indirect and direct methods of cash flow determination only
affects the determination of investing activities cash flows.
Chapter 13 – Statement of Cash Flows
7. Cash collected from customers is a cash flow from operating activities, which is calculated
using the indirect method in preparing the statement of cash flows
8. Cash flows associated with property, plant, and equipment acquisition and disposition are
reported as cash flows from investing activities.
9. Cash flows associated with issuance and retirement of long-term debt and equity are
reported as cash flows from investing activities.
Chapter 13 – Statement of Cash Flows
10. When accrued liabilities increase from the beginning to the end of the year, it means
accrued expenses were greater than cash payment of such expenses so the increase would be
added to net income to convert to cash flow from operating activities under the indirect
method.
Chapter 13 – Statement of Cash Flows
11. Under the indirect method, an increase in accounts receivable during the year will be
added to net income.
12. If sales revenue was $1,800,000 and accounts receivable decreased $40,000 while
unearned revenue increased $10,000 during the year, then cash collected from customers
equals $1,850,000.
13. Under the indirect method, depreciation expense is added to net income, because it
decreases net income but doesn’t consume a cash flow.
Chapter 13 – Statement of Cash Flows
14. Under the indirect method, a decrease in inventory is deducted from net income, because
inventory purchases are less than cost of goods sold.
15. Under the indirect method, an increase in prepaid expenses is deducted from net income,
because the cash prepayments exceed the related expenses.
16. The quality of income ratio can only be interpreted based on knowledge of a company’s
business operations and strategies.
Chapter 13 – Statement of Cash Flows
17. The quality of income ratio increases when depreciation expense is recorded.
18. The quality of income ratio decreases when cash is used to pay accounts payable.
19. A higher quality of income ratio implies that operations tend to be more self-supporting.
Chapter 13 – Statement of Cash Flows
20. The quality of income ratio measures the portion of net income that generated cash flow
from operating activities.
21. When a company purchases equipment using common stock, the equipment purchase is
reported as a financing activity.
22. When a company sells equipment for cash at a loss, cash flows from investing activities
decreases.
Chapter 13 – Statement of Cash Flows
23. Amortization of a patent reduces cash flows from investing activities.
24. Canadian Beer had a capital acquisitions ratio of 7.49, which means its net income
exceeded its cash investment in property, plant and equipment by almost 7.5 times.
25. The capital acquisitions ratio represents the portion of property, plant, and equipment
purchases which could have been financed with cash flow from operations.
Chapter 13 – Statement of Cash Flows
26. Free cash flow measures the sufficiency of cash flow from operating activities to cover
both capital expenditures for property, plant and equipment as well as the payment of
dividends.
27. When a company both borrows $150 million during the year and repays $120 million of
notes, the company can disclose the $30 million net amount as excess of borrowings over
repayments in the financing activities section of the statement of cash flows.
28. Cash flows from financing activities include those cash flows with respect to issuing and
retiring long-term debt and equity.
Chapter 13 – Statement of Cash Flows
29. Cash flows from financing activities include those cash flows with respect to paying
previously declared dividends.
30. Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000
shares of its own common stock, par $10 (current market price $15 share). This transaction
should not be reported on the statement of cash flows because cash was neither paid out nor
received.
Chapter 13 – Statement of Cash Flows
31. Which of the following transactions would not create a cash flow?
32. Which of the following transactions would not create a cash flow from operating
activities?
Chapter 13 – Statement of Cash Flows
33. Which of the following transactions would not be reported as a cash flow from investing
activities?
34. Which of the following transactions would be reported as a cash flow from financing
activities?
Chapter 13 – Statement of Cash Flows
35. Which of the following statements regarding use of the direct and indirect methods of
determining cash flows from operating activities is incorrect?
36. Which of the following would be deducted from net income when determining cash flows
from operating activities under the indirect method?
Chapter 13 – Statement of Cash Flows
37. Which of the following would be added to net income when determining cash flows from
operating activities under the indirect method?
38. Which of the following would be deducted from net income when determining cash flows
from operating activities under the indirect method?
Chapter 13 – Statement of Cash Flows
39. Rice Company, a retailer, has provided the following information pertaining to its recent
year of operation:
• Net income, $100,000;
• Accounts receivable increased $9,000;
• Prepaid insurance decreased $3,000;
• Depreciation expense was $15,000;
• Gain on sale of land, $2,000;
• Wages payable decreased $7,000;
• Unearned revenue increased $11,000.
How much was Rice’s net cash inflow from operating activities?
Chapter 13 – Statement of Cash Flows
40. Darwin Company, a manufacturer, has provided the following information pertaining to
its recent year of operation:
• Net income, $200,000;
• Accounts receivable increased $18,000;
• Prepaid insurance increased $7,000;
• Depreciation expense was $25,000;
• Loss on sale of a building was $22,000;
• Wages payable increased $14,000;
• Unearned revenue decreased $21,000.
How much was Darwin’s net cash inflow from operating activities?
Chapter 13 – Statement of Cash Flows
41. RM Company, a manufacturer, has provided the following information pertaining to its
recent year of operation:
• Net income, $300,000;
• Accounts payable increased $24,000;
• Prepaid rent decreased $10,000;
• Depreciation expense was $35,000;
• Accounts receivable increased $34,000;
• Gain on sale of a building was $11,000;
• Wages payable decreased $21,000;
• Unearned revenue increased $44,000.
How much was RM’s net cash inflow from operating activities?
Chapter 13 – Statement of Cash Flows
42. GJ Company, a manufacturer, has provided the following information pertaining to its
recent year of operation:
• Net income, $500,000;
• Accounts payable decreased $42,000;
• Prepaid assets increased $31,000;
• Depreciation expense was $53,000;
• Accounts receivable decreased $41,000;
• Loss on sale of a depreciable asset was $31,000;
• Wages payable increased $19,000;
• Unearned revenue decreased $31,000;
• Patent amortization expense was $5,000.
How much was GJ’s net cash inflow from operating activities?
Chapter 13 – Statement of Cash Flows
43. DJ Company, a manufacturer, has provided the following information pertaining to its
recent year of operation:
• Cash flow from operating activities, $272,000;
• Accounts payable decreased $21,000;
• Prepaid assets increased $15,000;
• Depreciation expense was $27,000;
• Accounts receivable decreased $21,000;
• Loss on sale of a depreciable asset was $16,000;
• Wages payable increased $10,000;
• Unearned revenue decreased $16,000;
• Patent amortization expense was $10,000.
How much was DJ’s net income?