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Chapter 16
REPORTING THE STATEMENT OF CASH FLOWS
1. The primary purpose of the statement of cash flows is to report all major 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.
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.
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.
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.
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.
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.
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 on the statement of cash flows and/or
in the notes to the financial statements.
18. A purchase of land in exchange for shares of stock is disclosed on 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.
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.
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 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
the accounting constraints of recognition and measurement for net income.
29. A cash coverage 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.
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.
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.
36. The direct method for preparing and reporting the statement of cash flows reports net
income and then adjusts it for items necessary to calculate 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.
39. 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.
40. When preparing the operating activities section of the statement of cash flows using the
indirect method, non-operating gains are added to net income.
41. 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.
42. 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.
43. Financing activities include receiving cash dividends from investments in other
companies' stocks.
44. 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.
45. Financing activities include receiving cash from issuing debt and receiving cash dividends
from investments in other companies' stocks.
46. The payment of cash dividends never changes the balance of retained earnings.
47. 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.
48. A spreadsheet can help organize the information needed to prepare a statement of cash
flows.
49. On a spreadsheet used to prepare the operating activities section of the statement of cash
flows, depreciation expense does not require an entry in the Analysis of Changes columns
because it is a noncash item.
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50. When using a spreadsheet to prepare the statement of cash flows, a decrease in accounts
payable is entered in the Analysis of Changes columns with a debit in the statement of cash
flows section and a credit in the balance sheet section.
51. Depreciation expense is not reported on a statement of cash flows prepared under the
direct method.
52. The FASB requires a reconciliation of net income to net cash provided or used by
operating activities when the direct method is used (which can be reported in the notes).
53. The gain or loss from retirement of debt is reported under cash flows from operating
activities on the statement of cash flows using the direct method.
54. The statement of cash flows reports:
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A. Assets, liabilities, and equity.
B. Revenues, gains, expenses, and losses.
C. Cash inflows and cash outflows for an accounting period.
D. Equity, net income, and dividends.
E. Changes in equity.
55. The statement of cash flows reports:
A. Cash flows from operating activities.
B. Cash flows from financing activities.
C. Cash flows from investing activities.
D. Significant noncash financing and investing activities.
E. All of the choices are reported on a statement of cash flows.
56. The statement of cash flows is:
A. Another name for the statement of financial position.
B. A financial statement that presents information about changes in equity during a period.
C. A financial statement that reports the cash inflows and cash outflows for an accounting
period, and that classifies those cash flows as operating activities, investing activities, or
financing activities.
D. A financial statement that lists the types and amounts of assets, liabilities, and equity of a
business on a specific date.
E. A financial statement that lists the types and amounts of the revenues and expenses of a
business for an accounting period.
57. A cash equivalent is an investment that:
A. Is readily convertible to a known amount of cash.
B. Is sufficiently close to its maturity date so its market value is unaffected by interest rate
changes.
C. Generally is within 3 months of its maturity date.
D. Is highly liquid.
E. All of the choices are correct.
58. An investment that is readily convertible to a known amount of cash and that is
sufficiently close to its maturity date so that its market value is relatively insensitive to
interest rate changes is a(n):
A. Short-term marketable equity security.
B. Operating activity.
C. Common stock.
D. Cash equivalent.
E. Financing activity.
59. Activities that involve the production or purchase of merchandise and the sale of goods
and services to customers, including expenditures related to administering the business, are
classified as:
A. Financing activities.
B. Investing activities.
C. Operating activities.
D. Direct activities.
E. Indirect activities.
60. The appropriate section in the statement of cash flows for reporting the purchase of
equipment for cash is:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Schedule of noncash investing or financing activity.
E. None of these. This is not reported on the statement of cash flows.
61. Which of the following items is reported on the statement of cash flows under financing
activities?
A. Declaration of a cash dividend.
B. Payment of a cash dividend.
C. Declaration of a stock dividend.
D. Payment of a stock dividend.
E. Stock split.
62. Investing activities include the:
A. Purchase of plant assets.
B. Lending and collecting on notes receivable.
C. Sale of short-term investments other than cash equivalents.
D. Sale of plant assets.
E. All of the choices are investing activities.
63. The appropriate section in the statement of cash flows for reporting the cash payment of
wages is:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Schedule of noncash investing or financing activity.
E. None of these. This is not reported on the statement of cash flows.
64. The appropriate section in the statement of cash flows for reporting the issuance of
common stock for cash is:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Schedule of noncash investing or financing activity.
E. None of these. This is not reported on the statement of cash flows.
65. A company's transactions with its creditors to borrow money and/or to repay the principal
amounts of both short- and long-term debt are reported as cash flows from:
A. Operating activities.
B. Investing activities.
C. Financing activities.
D. Direct activities.
E. Indirect activities.
66. The appropriate section in the statement of cash flows for reporting the receipt of cash
dividends from investments in securities is:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Schedule of noncash investing or financing activity.
E. None of these. This is not reported on the statement of cash flows.
67. Which one of the following is representative of typical cash flows from operating
activities?
A. Proceeds from collecting the principal amounts of loans.
B. Repayment of principals on loans.
C. Proceeds from the issuance of bonds and notes payable.
D. Payments by a merchandiser to acquire equity securities of other companies.
E. Receipts of cash sales.
68. Typical cash flows from investing activities include each of the following except:
A. Payments to purchase property, plant and equipment or other productive assets (excluding
inventory).
B. Proceeds from collecting the principal amount of notes receivable arising from customer
sales.
C. Proceeds from collecting the principal amount of notes receivable arising from
intercompany transactions.
D. Payments to acquire held-to maturity securities of other entities, except cash equivalents.
E. Proceeds from the sale of equipment.
