Chapter 12 Statement of Cash Flows Answer Key
True / False Questions
1.
The statement of cash flows explains how the cash balance changed during a particular
period of time.
2.
Only highly liquid investments with original maturities of less than six months at the date of
purchase qualify as cash equivalents.
Topic Area: Cash and cash equivalents-Net change in cash
3.
The payment of interest on a note payable is a cash flow from a financing activity.
4.
Collection of principal on a note receivable is a cash flow from financing activities.
5.
Most companies use the direct method for disclosing their cash flows from operating activities
rather than the indirect method.
6.
The difference between the direct and indirect and methods of cash flow statement
preparation only affects the determination of cash flows from investing activities.
7.
Cash collected from customers is a cash flow from operating activities and is calculated using
the indirect method for preparing the statement of cash flows.
8.
Cash flows associated with property, plant, and equipment acquisition and disposition are
reported as cash flows from investing activities.
9.
Cash flows associated with issuance and retirement of long-term debt and equity are reported
as cash flows from investing activities.
10.
When accrued liabilities increase from the beginning to the end of the year, it means accrued
expenses were greater than cash payments of such expenses, and, under the indirect method,
the increase in accrued liabilities would be added to net income to convert to cash flow from
operating activities.
11.
Under the indirect method, an increase in accounts receivable during the year will be added to
net income.
12.
If sales revenue was $1,800,000 and accounts receivable decreased $40,000 while unearned
revenue increased $10,000 during the year, then cash collected from customers equals
$1,850,000.
13.
Under the indirect method, depreciation expense is added to net income because it decreases
net income but does not affect cash flow.
14.
Under the indirect method, a decrease in inventory is subtracted from net income because
inventory purchases are less than cost of goods sold.
15.
Under the indirect method, an increase in prepaid expenses is subtracted from net income,
because the cash prepayments exceed the related expenses.
16.
The quality of income ratio can only be interpreted based on knowledge of a company’s
business operations and strategies.
17.
The quality of income ratio increases when depreciation expense is recorded.
18.
The quality of income ratio decreases when cash is used to pay accounts payable.
19.
A higher quality of income ratio implies that operations tend to be financed internally without
having to rely on external financing sources.
20.
The quality of income ratio measures the portion of net income that was generated by cash
flow from operating activities.
21.
When a company purchases equipment using common stock, the equipment purchase is
reported as a financing activity.
22.
When a company sells equipment for cash at a loss, cash flows from investing activities
decreases.
23.
Amortization of a patent reduces cash flows from investing activities.
24.
Free cash flow measures the sufficiency of cash flow from operating activities to cover both
capital expenditures for property, plant and equipment as well as the payment of dividends.
25.
Canadian Beer had a capital acquisitions ratio of 7.49, which means its net income exceeded
its cash investment in property, plant and equipment by almost 7.5 times.
26.
The capital acquisitions ratio represents the portion of property, plant, and equipment
purchases which could have been financed with cash flow from operating activities.
27.
When a company borrows $150 million during the year and also repays $120 million of debt,
the company can disclose the $30 million net amount as excess of borrowings over
repayments in the financing activities section of the statement of cash flows.
28.
Cash flows from financing activities include those cash flows with respect to issuing and
retiring long-term debt and equity.
29.
Cash flows from financing activities include those cash flows with respect to paying previously
declared dividends.
30.
Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000
shares of its own common stock, par $10 (current market price $15 share). This transaction
should not be reported within the statement of cash flows because cash was neither received
nor disbursed.
Multiple Choice Questions
31.
Which of the following transactions does not result in either a cash inflow or a cash outflow?
32.
Which of the following transactions would not create a cash flow from operating activities?
activities.
Topic Area: Classify operating activities
33.
Which of the following transactions would be reported in the cash flow statement as a cash
flow from financing activities?
34.
Which of the following statements regarding use of the direct and indirect methods of
determining cash flows from operating activities is incorrect?
35.
Which of the following would not be a cash flow from investing activities?
36.
Which of the following would not be a cash flow from financing activities?
37.
Which of the following would not be considered a cash equivalent?
38.
Which of the following statements about the statement of cash flows is correct?
39.
Which of the following items about the statement of cash flows is correct?