Chapter 13—STATEMENT OF CASH FLOWS
TRUE/FALSE
1. The statement of cash flows superseded the previously required sources and uses of funds
statement.
2. In the statement of changes in financial position, sources of resources are defined as transaction
debits.
3. The cash flow statement is the statement of financial position with funds defined as cash.
4. In the sources section of the statement of changes in financial position, transactions are
subclassified into those affecting liquid assets and those affecting other accounts.
5. The statement of changes in financial position reported on changes in assets, liabilities, and
owners’ equity account balances.
6. Most firms elected to define funds in the statement of changes in financial position as cash.
7. The funds flow statement included only transactions affecting fund accounts.
8. With SFAS No. 95 defining funds as cash, the FASB has moved from a position of rigid
uniformity to a flexibility orientation.
9. Inclusion of a cash flow statement is mandatory.
10. The statement of financial position is a special case of the more general cash flow statement.
11. According to IAS 7, interest and dividends received or paid must be classified as financing cash
flows.
Chapter 13—STATEMENT OF CASH FLOWS
12. Only transactions having a direct effect on fund accounts were included in the statement of
changes in financial position.
13. The balance sheet gives insight into the cash-generating potential of the operations of a firm.
14. An exit-price accounting system provides an estimate of the cash conversion value of a firm’s
resources.
15. For capital leases, the interest portion is classified as an operating activity, whereas the reduction
of principal portion is a financing activity.
16. In the cash flow statement, cash is defined as literal cash on hand or on demand deposit plus cash
equivalents.
17. SFAS No. 95 requires that all non-cash investing and financing transactions be reported in the
body of the cash flow statement.
18. Use of the direct method on the cash flow statement frequently results in non-articulation.
19. The direct method requires a schedule reconciling net operating cash flow with net income.
20. Interest expense and long-term notes payable both appear in the financing section of the cash
flow statement.
21. On the statement of cash flows, the proceeds from the sale of equipment would be classified as a
financing activity.
22. On the statement of cash flows, the direct method reports literal cash flows related to income
statement classifications.
Chapter 13—STATEMENT OF CASH FLOWS
23. On the statement of cash flows, the direct method starts with accrual income and adjusts it for the
non-cash items it contains.
24. With SFAS No. 95, the FASB chose to follow the entity model rather than the traditional income
statement (proprietary) approach.
25. Research is supportive of the contention that cash and funds flow data are informative above and
beyond accrual data.
MULTIPLE CHOICE
1. Which of the following is not a true statement?
a. The cash flow statement superceded the previously required statement of changes in financial
position.
b. The cash flow statement is the statement of financial position with funds defined as cash.
c. The statement of financial position is a special case of the more general cash flow statement.
d. Inclusion of a cash flow statement is mandatory.
2. In the statement of changes in financial position, uses of resources are defined as:
a. transaction debits.
b. fund increases.
c. transaction credits.
d. fund decreases.
3. In the statement of changes in financial position, sources of resources are defined as:
a. transaction debits.
b. fund increases.
c. transaction credits.
d. fund decreases.
4. Which of the following directly preceded the statement of changes in financial position?
a. The statement of cash flows
b. The funds flow statement
c. The sources and uses of funds statement
d. The sources and uses of resources statement
Chapter 13—STATEMENT OF CASH FLOWS
5. Which of the following directly preceded the statement of cash flows?
a. The funds flow statement
b. The sources and uses of funds statement
c. The statement of changes in financial position
d. The sources and uses of resources statement
6. In the sources section of the statement of changes in financial position, transactions are
subclassified into those affecting:
a. the fund balance and other accounts.
b. cash and other accounts.
c. current assets or liabilities and other accounts.
d. liquid assets and other accounts.
7. In the uses section of the statement of changes in financial position, transactions are subclassified
into those affecting:
a. the fund balance and other accounts.
b. cash and other accounts.
c. current assets or liabilities and other accounts.
d. liquid assets and other accounts.
8. The statement of changes in financial position reported on:
a. changes in current assets and current liabilities.
b. changes in assets.
c. changes in assets, liabilities, and owners’ equity account balances
d. changes in working capital
9. Most firms elected to define funds in the statement of changes in financial position as:
a. cash.
b. working capital.
c. current assets.
d. owners’ equity.
10. With SFAS No. 95 defining funds as cash, the FASB has:
a. moved from a flexibility orientation to a position of rigid uniformity.
b. moved from a position of rigid uniformity to one of finite uniformity.
c. moved from a position of rigid uniformity to a flexibility orientation.
d. moved from a flexibility orientation to a position of finite unity.
Chapter 13—STATEMENT OF CASH FLOWS
11. The funds flow statement included:
a. all sources and uses of resources.
b. only cash transactions.
c. only transactions affecting current assets.
d. only transactions affecting fund accounts.
12. APB Opinion No. 19 permitted fund balance accounts in the statement of changes in financial
position to include which of the following?
a. Quick assets only
b. Cash and near cash only
c. Working capital only
d. Cash, cash and near cash, quick assets, or working capital
13. Which of the following is not a function of financial statements as stated in the text?
a. Assessing managerial performance
b. Valuing the company
c. Providing accurate information to taxing agencies
d. Making credit decisions
14. For capital budgeting purposes, an investment is acceptable if:
a. the present value of the expected net cash flows is positive.
b. net present value is positive.
c. the intrinsic value is greater than the current market price.
d. all of the above.
15. A FASB discussion memorandum suggested that cash flow data are a useful supplemental
disclosure for all of the following reasons except:
a. they provide information about the quality of income.
b. they aid in assessing flexibility and liquidity.
c. they help to identify the relationship between accounting income and cash flows.
d. they are a better predictor of future earnings than is accounting income.
16. Which of the following is a true statement?
a. Liquidity is the ability of the firm to adapt to new situations and opportunities.
b. Cash flow measurement is more uniform than income measurement.
c. The current–non-current classification system in the balance sheet is a good guide to
liquidity.
d. The balance sheet gives insight into the cash-generating potential of operations.
Chapter 13—STATEMENT OF CASH FLOWS
17. Which of the following is a true statement regarding an exit-price accounting system?
a. It measures flexibility of the firm in terms of the amount of cash that would be realized from
a forced liquidation of assets.
b. It provides an excellent indicator of liquidity.
c. It provides an estimate of the speed of conversion of a firm’s resources.
d. It provides an estimate of the cash conversion value of a firm’s resources.
18. Which of the following is true for intrinsic values?
a. It is the present value of future expected cash flows.
b. It is unaffected by changes in interest rates.
c. It must be below current market price for a stock purchase to be acceptable.
d. It is the undiscounted value of the cash that can be taken out of a business during its
remaining life.
19. In the cash flow statement, cash is defined as:
a. quick assets.
b. literal cash on hand or on demand deposit, plus cash equivalents.
c. literal cash on hand or on demand deposit, plus marketable securities.
d. all of the above.
20. Which of the following is a true statement regarding SFAS No. 95?
a. It requires all non-cash investing and financing transactions be reported in the body of the
cash flow statement.
b. It requires all non-cash investing and financing transactions be reported as a supplement to
the cash flow statement, either in a schedule or in a narrative format.
c. Only cash transactions are reported on the cash flow statement.
d. Only operating transactions are reported on the cash flow statement.
21. On the statement of cash flows, the proceeds from the sale of equipment would be classified as:
a. an investing activity.
b. an operating activity.
c. a financing activity.
d. either an investing, operating, or financing activity.
22. Which of the following methods reports literal cash flows related to income statement
classifications?
a. The indirect method
b. The direct method
c. Both a and b.
d. None of the above
Chapter 13—STATEMENT OF CASH FLOWS
23. Which of the following methods starts with accrual income and adjusts it for the non-cash items
it contains?
a. The indirect method
b. The direct method
c. Both a and b
d. None of the above
24. Which of the following methods requires a separate schedule reconciling net operating cash flow
with net income?
a. The indirect method
b. The direct method
c. Both a and b
d. None of the above
25. Which of the following is true about the Statement of Cash Flows (SCF)?
a. The SCF is more subject to manipulation than the income statement.
b. Cash flow from financing activities is considered to be the most important part of the SCF.
c. Classification rules prevent manipulation of cash flows from operating activities on the SCF.
d. Flexibility in applying classification rules on the SCF allows companies in the same industry
to give vastly different perspectives.
26. Which of the following is not true regarding free cash flows (FCFs)
a. Investors can estimate the intrinsic value of a firm by discounting forecasted FCFs.
b. Spending FCFs will not affect the firm’s ability to generate more.
c. FCFs can be obtained directly from the Statement of Cash Flows.
d. Unlike Cash From Operating Activities, FCFs do not include interest expense.
27. Which of the following is a true statement?
a. Research is supportive of the contention that cash and funds flow data are informative above
and beyond accrual data.
b. Use of the direct method in the cash flow statement frequently results in non-articulation.
c. Interest expense and long-term notes payable both appear in the financing section of the cash
flow statement.
d. With SFAS No. 95, the FASB chose to follow the entity model rather than the traditional
income statement (proprietary) approach.
Chapter 13—STATEMENT OF CASH FLOWS
ESSAY
1. Identify and describe the two balancing sections of the statement of changes in financial position.
2. Compare and contrast the two methods that may be used to present operating cash flows in the
statement of cash flows. Which method is preferred by firms and by outsiders?
3. How does the statement of cash flows sometimes cause a non-articulation problem?
Chapter 13—STATEMENT OF CASH FLOWS
4. Identify and describe the three categories of cash flows reported on the statement of cash flows.
What problems have been noted related to this classification system?
5. Discuss reasons why the FASB replaced the more general funds flow concept with a cash flow
statement.
6. Discuss how Ingram and Lee used the cash flow statement in conjunction with the income
statement for analytical purposes.
Chapter 13—STATEMENT OF CASH FLOWS
7. Discuss arguments supporting the need for improving the Statement of Cash Flows (SCF). What
suggestions do Broom and the authors of the text make regarding improvement?