Chapter 11 – Internal control of cash, statement of cash flows and other issues
TRUE/FALSE
1. Investing all cash to maximise returns to the business is a more effective management of cash than
ensuring cash is available to pay debts as they fall due.
2. Instead of paying cash for the purchase of land and buildings, an entity issued shares in exchange.
This transaction would be correctly reflected as an investing activity on the cash flow statement.
3. The most common classification for interest paid and received on a cash flow statement is under
operating activities.
4. When calculating the net cash flows from operating activities, an increase in debtors needs to be
subtracted from the profit figure.
5. An increase in debtors and an increase in inventory will need to be subtracted from operating profit
in the calculation of net cash flows from operating activities.
6. Depreciation is an arbitrary allocation of the cost of an asset and as such it is not a cash item and is
not reported on the cash flow statement, but it still needs to be deducted from operating profit in
the calculation of net cash flows from operating activities.
7. Dividends received are most commonly classified as an operating activity, but dividends paid are
normally classified as a financing activity on the cash flow statement.
8. On a cash flow statement, the payment of taxation is considered an operating activity and the
payment of dividends is normally classified as a financing activity.
9. Where a parent entity is required to prepare consolidated accounts, it can only consolidate those
subsidiaries that it controls.
10. With regard to an economic entity, control is established when one entity has the power to govern
the financial or operating policies of another entity.
11. When preparing consolidated financial statements, it is necessary to eliminate inter–company
income and expense transactions.
12. Eliminating the Investment in Subsidiary account from the books of the parent entity and the
Shareholders’ Equity account in the subsidiaries books allows the net assets of the parent and the
subsidiary to be combined to represent the net assets of the economic entity.
13. A company’s taxable income is the amount of profit determined by the tax commissioner on which
the current income tax liability is determined.
14. Temporary differences occur when an income or expense item enters into the calculations of
accounting profit and taxable income in different periods.
15. Given a situation in which a company depreciates an asset using the straight-line method, but the
tax rules stipulate that the asset should be depreciated using the reducing-balance method, this will,
under normal circumstances, initially give rise to a future tax benefit to the entity.
16. Tax expense is the amount an entity remits to the tax department, and is determined by adjusting
the tax-payable figure for increases/decreases in deferred tax payable.
17. If taxable income is $120,000, accounting profit is $130,000, interest receivable is $10,000,
interest is recognised for tax when received and the tax rate is 40%, then we know that tax payable
is $48,000, tax expense is $52,000 and a deferred tax liability of $4000 will be recorded in the
balance sheet.
18. If taxable income is $220,000, accounting profit is $200,000, interest payable is $20,000, interest is
recognised for tax when paid and the tax rate is 40%, then we know that tax payable is $88,000,
tax expense is $80,000 and a deferred tax asset of $8000 will be recorded in the balance sheet.
19. Accounting for income tax gives rise to temporary differences, which arise when the tax value and
the carrying value of assets and liabilities differ.
20. Income tax is considered to be a direct tax, whereas the goods and services tax is a value-added tax
and as such is an indirect tax.
21. In relation to a goods and services tax, when an entity has higher taxable sales than taxable
acquisitions, then the entity will recognise a liability to the Australian Tax Office.
22. Where a goods and services liability exceeds the goods and services asset, the difference will be
the amount the entity is owed by the Australian Tax Office.
MULTIPLE CHOICE
1. Which of the following would be considered the least effective management of cash?
A.
Protect cash and ensure cash is available to pay debts as they fall due.
B.
Protect cash and enable accurate reporting of cash.
C.
Enable accurate reporting of cash
D.
Ensure cash is available to pay debts as they fall due and allow idle cash to be invested.
2. A cashier is employed at the Square Eyes Movie Theatre Complex in downtown Flatscreen. The
cashier is responsible for the collection of cash in return for issuing a movie ticket, including
acceptance of payment for tickets on credit card and by discount vouchers. While credit sales and
full cash payments are recorded on the computer at the time of sale, the vouchers received need to
be cross-checked with the discounted tickets recorded on the computer at the time of sale. This
procedure is carried out at the end of every week by an employee of the company, but not by the
cashier, who has argued that it would be more efficient for the cross-check to be done at the end of
every day by the cashier who has issued the discounted tickets, as that person would be most
familiar with what tickets had been sold. Based on this information, which of the following
statements is correct regarding the current procedure?
A.
It is an inefficient use of time and staff resources.
B.
It shows a lack of trust of the cashier.
C.
It effectively separates individual responsibilities.
D.
It prevents the cashier from stealing cash.
3. Cash flows from operating activities is a negative amount. From this fact you know that:
A.
the company’s cash balance decreased during this period.
B.
the company’s cash flows from operations are less than its net profit.
C.
the company’s operations used more cash resources than they generated.
D.
the company’s accounts receivable balance is increasing quickly.
4. Activities that obtain funds from investors and creditors to start and sustain a business are called:
A.
reporting activities.
B.
investing activities.
C.
financing activities.
D.
operating activities.
5. The methods an organisation uses to obtain financial resources from financial markets and the
ways in which it manages those resources are:
A.
operating activities.
B.
financing activities.
C.
investing activities.
D.
marketing activities.
6. Which of the following is not one of the items reported on a cash flow statement?
A.
Reporting activities
B.
Operating activities
C.
Financing activities
D.
Investing activities
7. The cash flow statement is designed to fulfil all of the following purposes except:
A.
to predict cash flows.
B.
to evaluate employee performance.
C.
to relate net profit to changes in cash.
D.
to evaluate firm performance.
8. Which of the following best describes the purpose of the cash flow statement?
A.
To identify the cash balance at the end of the year
B.
To report the inflows and outflows of cash.
C.
To balance current period revenues with those of the previous period.
D.
To report assets, liabilities and owners’ equity as of a specific date.
9. Which of the following is a fundamental purpose of the cash flow statement?
To report the To report the
inflows of cash outflows of cash
A.
Yes Yes
B.
Yes No
C.
No Yes
D.
No No
10. The cash flow statement is designed to report:
A.
how the previous period’s statement of comprehensive income relates to the current
period’s statement.
B.
only the sources and uses of cash during the current period.
C.
the cash from operating, financing and investing activities of the firm during the current
period.
D.
the effects of the current period’s statement of comprehensive income on the current
period’s balance sheet.
11. Which financial statements cover a period of time?
A.
Statement of comprehensive income and balance sheet.
B.
Balance sheet and cash flow statement.
C.
Statement of comprehensive income and cash flow statement.
D.
Cash flow statement and statement of assets, liabilities and owners’ equity.
12. Joyce Ltd had cash sales of $80,000 in January. Accounts Receivable decreased by $10,000 during
January and there were no credit sales and no bad debts. How much cash was collected from
customers in January?
A.
$60,000
B.
$70,000
C.
$80,000
D.
$90,000
13. Sales on credit for the year totalled $125,000. The following information is also available:
Accounts Receivable balance
Beginning of year
$25,000
End of year
30,000
Bad debts written off during the year: $10,000
How much cash was collected from customers during the year?
A.
$70,000
B.
$130,000
C.
$110,000
D.
$155,000
14. Car Locks Company reported 20X2 sales of $640,000. The following information is also available:
Accounts Receivable balance
Beginning of year
$80,000
End of year
50,000
Bad debts written off during the year: $40,000
On a cash flow statement (direct format), what amount would be reported for ‘Cash collected from
customers’ for the year?
A.
$510,000
B.
$630,000
C.
$610,000
D.
$720,000
15. Which of the following has a different effect on net profit than it does on cash flow?
A.
Payment for wages
B.
Cash sale to customer
C.
Amortisation of a patent
D.
Payment for rent
16. O’Reilly, Inc., had the following transactions during the month of July:
1. Sold merchandise for $50,000 cash
2. Paid wages of $3000
3. Sold equipment for $10,000
4. Paid $6000 cash for utilities
What was the cash flow from operating activities?
A.
$51,000
B.
$41,000
C.
$47,000
D.
$54,000
17. The following information is given for Ollufsen Co. Ltd for 20X2:
30,000
4000
6000
1000
4000
3500
2000
800
2500
40,000
From this information, what is the net cash inflow from operating activities for 20X2?
A.
$29,800
B.
$35,800
C.
$43,000
D.
$69,000
18. The following information is given for Ollufsen Co. Ltd for 20X2:
30,000
4000
6000
1000
4000
1200
3500
2000
800
2500
40,000
From this information and assuming dividends paid are treated in financing, what is the net cash
inflow from financing activities for 20X2?
A.
$2000
B.
$1800
C.
$1200
D.
$800
19. In 20X8, Price Pty Ltd collected $80,000 from customers, paid wages to employees of $10,000,
and received dividends of $12,000. What was the net cash flow from operating activities for 20X8?
A.
$58,000
B.
$70,000
C.
$80,000
D.
-$12,000
20. The following information is extracted from a set of financial statements:
Opening balance
Closing balance
Cash
$16,000
$20,000
Debtors
10,000
15,000
Creditors
24,000
25,000
Inventory
30,000
35,000
Sales
0
50,000
Cost of goods sold
0
30,000
The net cash flow from operating activities based only on the above information is:
A.
$11,000
B.
$20,000
C.
$29,000
D.
$33,000
21. The Hambone Soup Store reported the following information for its most recent fiscal year:
Accounts payable increased by $39,000; inventory decreased by $27,000; net profit was $66,000;
and depreciation expense was $15,000.
On the cash flow statement, net cash flow from operating activities should be reported at:
A.
$15,000.
B.
$69,000.
C.
$117,000.
D.
$147,000.
22. Which of the following is subtracted from net profit to arrive at cash from operations?
A.
Depreciation
B.
An increase in wages payable
C.
An increase in prepaid rent
D.
A decrease in accounts receivable
23. Use the following information to calculate the cash from operating activities:
Net profit
$3308
Depreciation expense
712
Increase in accounts receivable
500
Decrease in inventory
640
Increase in accounts payable
132
Decrease in wages payable
75
Decrease in income tax payable
140
A.
$2797
B.
$4077
C.
$4243
D.
$5077
24. At the end of April 20X7, the Blue Water Company sent out statements to customers for April
charges totalling $100,000. During April, the company received $85,000 from customers for water
bills incurred during March. Blue’s employees earned $35,000 during April, but by month end
only $30,000 had been paid. Determine the net cash flow from operations and net profit from
operations for the month of April.
Net profit Net cash flow
A.
$65,000 $85,000
B.
$70,000 $55,000
C.
$65,000 $55,000
D.
$50,000 $70,000
25. Which of the following would be considered a cash inflow or outflow from investing activities?
A.
Purchase of shares in another company.
B.
Payment of an overdue creditors account.
C.
Interim dividend declared and paid.
D.
Loan interest paid.
26. You are considering starting a new business. In general, which of the following types of activities
would have to occur before operating activities could begin?
Investing activities Financing activities
A.
Yes Yes
B.
Yes No
C.
No Yes
D.
No No
27. Which of the following statements is correct concerning investing activities?
A.
They involve obtaining and managing financial resources.
B.
They use financial resources to acquire items to sell in the normal course of activities.
C.
They use financial resources to acquire the assets a company needs to produce and sell its
products.
D.
They involve buying and selling a company’s own shares.
28. The receipt of dividends on an investment will be reported in a cash flow statement as:
A.
a cash outflow for financing activities.
B.
a cash inflow for investing activities.
C.
a cash inflow from operating activities.
D.
either B or C
29. Which of the following events is properly classified as an investing activity?
A.
Purchase of equipment.
B.
Borrowing money from creditors.
C.
Selling goods to customers.
D.
Running the factory.
30. Which of the following is a cash flow from an investing activity?
A.
Payment for advertising.
B.
Cash receipt from a customer for a previous credit sale.
C.
Cash received from sale of equipment.
D.
Payment of dividends.
31. Which of the following is an investing activity?
A.
Purchase of a patent.
B.
Payment of cash dividends.
C.
Payment of interest.
D.
Purchase of inventory.
32. Cash received from the sale of long-term assets is reported as:
A.
operating activities.
B.
financing activities.
C.
an adjustment to shareholders’ equity.
D.
investing activities.
33. Activities that involve the production or delivery of goods for sale or the providing of services for
sale should be listed under which classification on a cash flow statement?
A.
Operating activities
B.
Investing activities
C.
Financing activities
D.
Refunding activities
34. Activities that obtain funds from investors and lenders to start and sustain a business are called:
A.
reporting activities.
B.
investing activities.
C.
financing activities.
D.
operating activities.
35. What type of activity is the paying off of a bank loan?
A.
Operating
B.
Financing
C.
Investing
D.
Either A or B
36. Which item would be included in cash flows from financing activities?
A.
Payments to suppliers
B.
Receipts from customers
C.
Repayment of loan
D.
Purchase of a non-current asset
37. Which item would not be included in cash flows from operating activities?
A.
Salaries paid
B.
Cash proceeds from disposal of a non-current asset
C.
Cash sales
D.
Receipts from customers
38. Which of the following would not normally be classified as an operating activity on a cash flow
statement?
A.
Dividends received
B.
Interest received
C.
Dividends paid
D.
Interest paid
39. Payments to employees would be classified on the cash flow statement as a(n):
A.
operating activity.
B.
investing activity.
C.
financing activity.
D.
operating expense.
40. In 20X7, North Lakes Co. Ltd purchased machinery for $20,000, loaned $8000 to another
company, borrowed $4000, and sold investments for $10,000. What was the net cash flow from
investing activities for 20X7?
A.
$(20,000)