Chapter 11—The Statement of Cash Flows Key
1. The statement of cash flows summarizes the operating, investing, and financing activities of a business for a
period of time.
2. The Statement of Cash Flows is considered to be a good indicator of current cash inflows and outflows.
3. Depreciation is a noncash expense that is subtracted from net income in determining cash provided from
operating activities under the indirect method.
4. In terms of the statement of cash flows, cash includes actual cash items minus certain cash equivalents such
as commercial paper, money market funds, and treasury bills.
5. To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and
have an original maturity to the investor of three months or more.
6. An investment in common stock is not considered to be a cash equivalent.
7. For the statement of cash flows, companies are required to classify their cash activities into three categories:
operating, investing, and financing.
8. Operating activities involve the acquiring and selling of goods and services for cash or on account.
9. Cash flows from selling machinery would be classified as investing activities.
10. Cash flows from purchases, sales, and maturities of investments are classified as financing activities.
11. Issuing stock increases the company’s cash flows from investing activities.
12. Cash flows from operating activities often relate to an increase or decrease in either a current asset or a
current liability.
13. Companies can use two different methods to report the amount of cash flow from their investing and
financing activities.
14. The indirect method of reporting cash flows from operating activities involves reconciling net income and
cash flows from operations.
15. Under the indirect method, the first line in the operating activities section of the statement of cash flows is
the net income or loss for the period.
16. The issuance of common stock in exchange for a building would appear both as a cash inflow in the
financing activities section of the cash flow statement and also as a cash outflow in the investing activities
section.
17. Significant noncash transactions are not reported on the statement of cash flows, but in a separate schedule
shown either at the bottom of the statement of cash flows or in a note to the financial statements.
18. The statement of cash flows helps users understand the reasons for the differences between net income and
related cash receipts and payments.
19. Both the indirect and direct method arrive at an identical amount of net cash provided (used) by operating
activities.
20. Free cash flow is equal to net cash flow from operating activities minus capital expenditures and dividends.
21. Determining the cash flows from operating activities generally requires analyzing each item on the income
statement as well as the current asset (except cash) and current liability accounts.
22. If the December 31, 2014, balance of accounts receivable is lower than the January 1, 2014, balance, then
the amount of cash collections will be more than the sales on account for the year.
23. If the December 31, 2014, balance of accounts payable is lower than the January 1, 2014, balance, then the
amount of cash payments will exceed the purchases on account for the year.
24. Because the cash received from the sale of long-term assets is reported in the investing activities section of
the statement of cash flows, any gain or loss is ignored when reporting the cash flow from operating activities
under the indirect method.
25. An increase in retained earnings indicates that a cash dividend has been paid.
26. Under the indirect method, instead of reporting cash receipts and payments, net income is reconciled with
net cash from operating activities.
27. The cash flow adequacy ratio is defined as Free Cash Flow / Average Amount of Debt Maturing over the
Next Five Years.
28. Unlike the income statement, no financial ratios are reported on the statement of cash flows.
29. Some companies use a work sheet approach as a tool to aid in preparing the statement of cash flows.
30. Many companies use software such as Microsoft PowerPoint to construct their cash flow statements.
31. If the beginning balance in Accounts Receivable is $11,000 and the ending balance is $9,000, then credit
sales must have exceeded collections on account.
32. Increases in Cash = Increases in Liabilities + Increases in Stockholders’ Equity + Decreases in Noncash
Assets.
33. Operating cash flows generally involve income statement items (which are reflected in Retained Earnings)
and balance sheet items (such as changes in current assets and current liabilities).
34. The information in a statement of cash flows helps investors, creditors and others judge a company’s ability
to meet its obligations and pay ____________________.
35. The financial statement that summarizes the operating, investing, and financing activities of a business over
a period of time is the ____________________.
36. Cash ________________ are items readily convertible into a known amount of cash which have an original
maturity to the investor of three months or less.
37. Cash flows from operating activities correspond to the cash effects of items that determine
____________________.
38. The purchase of inventory is an important ____________________ activity for a retailer.
39. The collection of accounts receivable results in a cash ____________________ reported in the operating
activities section of the statement of cash flows using the indirect method.
40. ____________________ activities involve long-term liabilities and stockholders’ equity.
41. If an analysis of the balance sheet shows that Accounts Payable increased during the period, then the
increase would have to be _______________ to net income to convert net income to cash.
42. Under the ____________________ method of preparing a statement of cash flows, the net cash flow from
operating activities is computed by adjusting net income to remove the effect of all deferrals of past operating
43. If Accounts Receivable decreased during the year, then cash collections must have been
____________________ than sales on account for the period.
44. If the balance of wages payable increases during the year, then the ____________________ for the period
will be greater than the actual cash wages paid in the period.
45. If the balance of prepaid insurance was the same on January 1, 2014, and December 31, 2014, then the
insurance expense must have been ____________________ the cash payments made for insurance during the
year.
46. A decrease in retained earnings represents dividends that were ____________________ during the period,
not necessarily those that were paid.
47. The indirect method of preparing a statement of cash flows begins with net income and then adjusts it for
noncash items to produce net cash flow from ____________________.
48. Beginning equipment minus equipment sold and minus ending equipment equals ____________________.
49. A(n) ____________________ occurs when the cash received from selling an item of property, plant, and
equipment is greater than the book value of the asset sold. It is also shown in the operating activities section of
the statement of cash flows prepared using the indirect method.
50. Under the indirect method, a gain from the sale of land is subtracted from ___________ in the operating
activities section of the statement of cash flows.
51. When a company sells its own common stock, it is a(n) ____________________ activity on the statement
of cash flows.
52. ____________________ represents the cash flow that a company is able to generate after considering the
maintenance or expansion of its assets (capital expenditures) and payment of dividends.
53. The use of a ______________ provides a means of systematically analyzing changes in the balance sheet
amounts, along with the information from the income statement and any additional information, to produce the
statement of cash flows.
54. Match these terms with their correct definition.
1. Include cash sales to customers and cash dividends
2. Include cash received from the issuance of stock and
Cash flows from
3. Determines operating cash flow by adjusting each
item on the income statement by the changes in the
Statement of cash
4. Provides information that can be used to judge a
company’s ability to meet its obligations and pay
5. A transaction that represents both an investing and
financing activity but that does not involve the receipt
6. Represents the cash flow that a company is able to
generate after considering the maintenance or
Cash flow
7. Provides several pieces of information needed to
Noncash investing
8. Measures the company’s ability to meet its maturing
Cash flow from
9. Include cash received from the sale of property,
plant, and equipment and cash paid to purchase equity
10. Determines operating cash flow which begins with
Cash flows from
55. Which of the following statements is not true? The information in the statement of cash flows helps
investors, creditors and others:
56. Which of the following statements is false?
57. A company reported net income of $150,000 for 2014, but its cash balance decreased by $40,000. Which
financial statement should management refer to for an explanation of this situation?
58. A company reported a net loss of $30,000 for 2014, yet its cash balance increased during the year. Which
financial statement should management refer to for an explanation of this situation?
59. A company reported net income for the current year. Which of the following business transactions would
cause its cash from operating activities to be higher than its net income?
60. Which of the following statements regarding the statement of cash flows is true?
61. The primary purpose of the statement of cash flows is to provide information about
62. The statement of cash flows
63. Which of the following is not a current reporting requirement for a statement that reports changes in cash
over a period of time?
64. Cash flows from acquiring and selling products are classified as
65. Cash flows from acquiring and disposing of long-term assets are classified as
66. Cash flows from borrowing and paying off a 90-day bank loan are classified as
67. Cash flows from issuing and repurchasing stock or issuing and repaying debt are classified as
68. Which of the following is not an operating activity?
69. Which of the following is not an investing activity?
70. Which of the following is not a financing activity?
71. Which balance sheet accounts are most affected by operating activities?
72. Which balance sheet accounts are most affected by investing activities?
73. Which balance sheet accounts are most affected by financing activities?
74. A company reported net income of $950,000. Cash from operations
75. On December 31, 2014, a restaurant purchased a $19,000 truck to be used for catering. It made a down
payment of one-fourth of the purchase price. What combination of amounts would affect the 2014 income
statement and statement of cash flows for the purchase of the truck?
Statement of Cash Flow Income Statement
76. Upon reviewing Mack’s Truck Stop’s Statement of Cash Flows, the following was noted:
Cash flows from operating activities
$ 15,000
Cash flows from investing activities
70,000
Cash flows from financing activities
(50,000)
From this information, the most likely explanation is that this company is
77. Upon reviewing Myert Company’s Statement of Cash Flows, the following was noted:
Cash flows from operating activities
$ 60,000
Cash flows from investing activities
(125,000)
Cash flows from financing activities
115,000
From this information, the most likely explanation is that this company is
78. Upon review of a statement of cash flows, the following was noted:
Cash flows from operating activities
$ 30,000
Cash flows from investing activities
80,000
Cash flows from financing activities
(130,000)
From this information, it is likely that the company is
79. Mustard Seed Gifts had the following results for December 31, 2013 and 2014, respectively:
2014
2013
Cash
$ 50,000
$ 40,000
Noncash current assets
190,000
160,000
Cash flows from financing activities
210,000
Cash flows from operating activities
90,000
What was the amount of cash flows from investing activities for 2014?
80. Midtown Diner, Inc., purchased $10,000 of paper napkins for its restaurants. At the end of the period, three–
fourths of the bill for the napkins is unpaid while an inventory revealed that 40% of the napkins were still on
hand. What combination of amounts would affect the income statement and statement of cash flows?
Statement of Cash Flow Income Statement
81. Which method of preparing the operating activities section of a statement of cash flows adjusts net income
to remove the effects of deferrals and accruals for revenues and expenses?
82. Which method of preparing the operating activities section of a statement of cash flows reports major
classes of gross cash receipts and cash payments for revenues and expenses?
83. Which of the following statements is most likely to be right?
84. Which of the following statements is false?
85. Presented below is the operating activities section of a statement of cash flows for 2014:
Operating activities:
Net income
$120,000
Add:
Depreciation
10,000
Decrease in accounts receivable
5,000
$135,000
Deduct:
Decrease in accounts payable
15,000
Net cash inflow from operating activities
$120,000
Which method of preparing the operating activities section was used?
86. Presented below is the operating activities section of a statement of cash flows for 2014:
Operating activities:
Cash collected from customers
$ 550,000
Cash payments for merchandise
(150,000)
Cash payments for operating expenses
(275,000)
Net cash inflow from operating activities
$ 125,000
Which method of preparing the operating activities section was used?
87. The following items were reported by Morris Plumbing Company:
Accounts receivable, December 31, 2014
$ 250,000
Accounts receivable, December 31, 2013
225,000
Sales for 2014
1,000,000
What amount would be reported in the operating activities section of the statement of cash flows for Collections from Customers under the direct
method, assuming that all sales are on credit?
88. The following information was reported by a catering company:
Accrued liabilities, December 31, 2014
$ 92,000
Accrued liabilities, December 31, 2013
55,000
Operating expenses for 2014
200,000
What amount would be reported in the operating activities section of the statement of cash flows for Payments for Operating Expenses under the
direct method?
89. The following items were obtained from the financial records:
Accounts receivable, December 31, 2014
$100,000
Accounts receivable, December 31, 2013
144,000
Sales for 2014
945,000
How would the change in accounts receivable be reported in the operating activities section of the statement of cash flows under the indirect
method?
90. The following information was taken from the financial records of Mr. Transmission:
Accounts payable, December 31, 2014
$ 88,000
Accounts payable, December 31, 2013
99,000
Operating expenses for 2014
999,000
How would the change in accounts payable be reported in the operating activities section of the statement of cash flows under the indirect method?
91. During 2013, the accounts receivable balance increased.
92. During 2014, the accounts payable balance decreased.
93. Occasionally, companies engage in important investing and financing activities which do not affect cash. If
the amount of the transaction is significant, how should it be disclosed when financial statements are prepared?
94. A company acquired land by issuing its common stock. How should this transaction be disclosed when a
statement of cash flows is prepared?
95. Which of the following transactions is not a significant noncash investing and financing activity?
96. Each of the following transactions would be classified as an investing activity except:
97. When using the direct method to determine operating cash flows, how is the sale of long-term investments
for cash reported on the Statement of Cash Flows?
98. When using the indirect method to determine operating cash flows, where is the gain from selling a long–
term investment recognized? (The proceeds from selling the investment are considered separately.)
99. A company reported the following information:
2014
2013
Land
$350,000
$100,000
Common stock
450,000
200,000
An analysis of records indicated that there were no cash flow effects resulting from the changes in the two accounts presented above. How should the
changes in these accounts be reported on a statement of cash flows?
100. Metz Vets
The company’s accountant prepared this reminder for his intern:
Cash = CL + LTL + CS + RE – NCCA – LTA
where:
CL = Current liabilities
LTL = Long-term liabilities
CS = Common stock
RE = Retained earnings
NCCA = Noncash current assets
LTA = Long-term assets
Refer to Metz Vets. Which of the following activities results in a cash outflow?
101. Metz Vets
The company’s accountant prepared this reminder for his intern:
Cash = CL + LTL + CS + RE – NCCA – LTA
where:
CL = Current liabilities
LTL = Long-term liabilities
CS = Common stock
RE = Retained earnings
NCCA = Noncash current assets
LTA = Long-term assets
Refer to Metz Vets. Which of the following activities results in a cash inflow?
102. Which of the following financing activities results in a cash inflow?
103. Which of the following operating activities results in a cash outflow?
104. Which of the following activities is most likely to have a cash flow effect?
105. A company reported the following information:
Accounts receivable, December 31, 2014
$122,000
Accounts receivable, December 31, 2013
113,000
Sales (all on credit) for 2014
850,000
How much cash was collected from customers during 2014?
106. A used car dealer reported the following information:
Accounts payable, December 31, 2014
$ 95,000
Accounts payable, December 31, 2013
50,000
Cost of goods sold for 2014
560,000
Assuming there was no change in inventory during the period, how much cash was paid for merchandise purchases during 2014?
107. A company reported the following information:
Prepaid insurance, December 31, 2014
$14,000
Prepaid insurance, December 31, 2013
11,500
Insurance expense for 2014
25,200
How much cash was paid for insurance during 2014?