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Chapter 16 Reporting the Statement of Cash Flows
MULTIPLE CHOICE QUESTIONS
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.
A)
True
B)
False
2)
The statement of cash flows reports and proves the net change in cash for a reporting period.
A)
True
B)
False
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.
A)
True
B)
False
4)
The statement of cash flows explains the difference between the beginning and ending balances of
cash and cash equivalents.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
7)
Business activities that generate or use cash are classified as operating, investing, or financing
activities on the statement of cash flows.
A)
True
B)
False
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.
A)
True
B)
False
9)
Investing 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.
A)
True
B)
False
10)
Cash paid for merchandise is an operating activity.
A)
True
B)
False
11)
The purchase of stock in another company is classified as a financing activity.
A)
True
B)
False
12)
The purchase of stock in another company is classified as an investing activity.
A)
True
B)
False
13)
Receipts of cash dividends and interest earned on loans are classified as investing activities.
A)
True
B)
False
14)
The payment of cash dividends to shareholders is classified as a financing activity.
A)
True
B)
False
15)
The full disclosure principle requires that noncash investing and financing activities be disclosed in
the financial statements.
A)
True
B)
False
16)
Conversion of preferred stock to common stock is disclosed in the financing section of the
statement of cash flows.
A)
True
B)
False
17)
A purchase of land in exchange for a long-term note payable is reported in the investing section of
the statement of cash flows.
A)
True
B)
False
18)
A purchase of land in exchange for a long-term note payable must be disclosed as a noncash
investing and financing activity.
A)
True
B)
False
19)
A noncash investing transaction should be disclosed in either a footnote or at the bottom of the
statement of cash flows.
A)
True
B)
False
20)
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.
A)
True
B)
False
21)
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.
A)
True
B)
False
22)
Accounting standards require companies to include a statement of cash flows in a complete set of
financial statements.
A)
True
B)
False
23)
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.
A)
True
B)
False
24)
Most managers stress the importance of understanding and predicting cash flows for business
decisions.
A)
True
B)
False
25)
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.
A)
True
B)
False
26)
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.
A)
True
B)
False
27)
The cash flow on total assets ratio compared to the total assets ratio can be used as an indicator of
earnings quality.
A)
True
B)
False
28)
Cash flow amounts and their timing should be considered when planning and analyzing operating
activities.
A)
True
B)
False
29)
The cash flow on total assets ratio is computed by dividing cash flows from operations by average
total assets.
A)
True
B)
False
30)
The cash flow on total assets ratio is computed by dividing average total assets by operating
income.
A)
True
B)
False
31)
The cash flow on total assets ratio reflects actual cash flows and is therefore affected by income
recognition and measurement.
A)
True
B)
False
32)
A cash coverage of growth ratio of less than 1 indicates cash inadequacy to meet asset growth.
A)
True
B)
False
33)
The cash flows from operating activities section of an indirect method of cash flows begins with
net income or loss.
A)
True
B)
False
34)
Both the direct and indirect methods yield the identical net cash flow amount provided or used by
operating activities.
A)
True
B)
False
35)
The reporting of financing activities in the statement of cash flows is identical under either the
direct or indirect methods.
A)
True
B)
False
36)
The reporting of investing activities in the statement of cash flows is identical under either the
direct or indirect methods.
A)
True
B)
False
37)
The FASB recommends that the operating section of the statement of cash flows be reported using
the direct method.
A)
True
B)
False
38)
Since it is recommended by the FASB, the direct method of preparing the statement of cash flows
is most frequently used.
A)
True
B)
False
39)
Information to prepare the statement of cash flows usually comes from (a) comparative balance
sheets, (b) current income statement, and (c) additional information.
A)
True
B)
False
40)
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.
A)
True
B)
False
41)
The indirect method separately lists each major item of operating cash receipts and cash payments.
A)
True
B)
False
42)
The indirect 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.
A)
True
B)
False
43)
The direct method separately lists each major item of operating cash receipts and cash payments.
A)
True
B)
False
44)
Companies have the option of using either the direct or indirect method to prepare the operating
section of the statement of cash flows.
A)
True
B)
False
45)
Cash flows are essentially the same as net income because they are both measured using accrual
accounting principles.
A)
True
B)
False
46)
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.
A)
True
B)
False
47)
When preparing the operating activities section of the statement of cash flows using the indirect
method, non-operating gains are added to net income.
A)
True
B)
False
48)
When preparing the operating activities section of the statement of cash flows using the indirect
method, non-operating losses are added to net income.
A)
True
B)
False
49)
When preparing the operating activities section of the statement of cash flows using the direct
method, non-operating gains are added to net income.
A)
True
B)
False
50)
When preparing the operating activities section of the statement of cash flows using the direct
method, non-operating losses are added to net income.
A)
True
B)
False
51)
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.
A)
True
B)
False
52)
When preparing the operating activities section of the statement of cash flows using the indirect
method, decreases in current operating assets are subtracted from net income.
A)
True
B)
False
53)
When preparing the operating activities section of the statement of cash flows using the indirect
method, decreases in current operating assets are added to net income.
A)
True
B)
False
54)
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.
A)
True
B)
False
55)
When preparing the operating activities section of the statement of cash flows using the indirect
method, decreases in current operating liabilities are added to net income.
A)
True
B)
False
56)
When preparing the operating activities section of the statement of cash flows using the indirect
method, decreases in current operating liabilities are subtracted from net income.
A)
True
B)
False
57)
When preparing the operating activities section of the statement of cash flows using the indirect
method, depreciation is subtracted from net income.
A)
True
B)
False
58)
When preparing the operating activities section of the statement of cash flows using the indirect
method, depreciation is added to net income.
A)
True
B)
False
59)
The gain or loss from retirement of debt is reported under cash flows from operating activities on
the statement of cash flows using the indirect method.
A)
True
B)
False
60)
Financing activities include receiving cash dividends from investments in other companies' stocks.
A)
True
B)
False
