Chapter 14 – The Statement of Cash Flows
TRUE/FALSE
1. The purchase of trading securities with cash is considered an investing activity.
2. Because noncash investing and financing transactions do not affect cash, they should be excluded from
the statement of cash flows.
3. The payment of taxes would be included in the operating activities section of the statement of cash
flows.
4. The statement of cash flows discloses the effect on cash of the purchase and sale of both short– and
long-term investments.
5. The acquisition of treasury stock with cash is shown as an investing activity on the statement of cash
flows.
6. Cash inflows and outflows are easier to manipulate than earnings.
7. It is unethical, and considered a form of manipulation, to classify a cash flow as an investing or
financing activity, when it really is an operating activity.
8. For purposes of preparing the statement of cash flows, cash is defined as including both cash and cash
equivalents.
9. A U.S. Treasury bill with an original maturity of one year or less is considered a cash equivalent.
10. The statement of cash flows shows the effects on net income of a company’s operating, investing, and
financing activities for an accounting period.
11. Cash equivalents include money market accounts, commercial paper, U.S. Treasury bills, and other
short-term investments or marketable securities.
12. The primary purpose of the statement of cash flows is to provide information about a company’s cash
receipts and cash payments during an accounting period.
13. The primary purpose of the statement of cash flows is to provide information about a company’s
investing and financing activities during an accounting period.
14. Management could use the statement of cash flows to determine whether short-term financing is
necessary to pay current liabilities.
15. The statement of cash flows explains the difference between net income as shown on the income
statement and the net cash flows generated from operations.
16. Interest paid would be included in the operating activities category on the statement of cash flows.
17. Interest received would be included in the investing activities category on the statement of cash flows.
18. Repayments of accounts payable or accrued liabilities are considered repayments of loans under
financing activities.
19. Noncash investing and financing transactions, such as the exchange of a long-term asset for a
long-term liability, represent significant investing and financing activities and are reflected in a
separate schedule as part of the statement of cash flows.
20. Cash flows to sales is a measure of free cash flow.
21. A cash flow yield of 2.5 times is considered better than one of 2.0 times.
22. Free cash flow is measured in terms of a percentage.
23. Cash flows to assets is measured in “times.”
24. Net cash flows from operating activities would be needed to calculate cash flow yield, cash flows to
assets, and cash flows to sales.
25. A negative free cash flow indicates that the company has met all its planned cash commitments and
has cash available to reduce debt or to expand.
26. The income statement indicates a business’s success or failure in earning an income from its operating
activities, but it does not reflect the inflow and outflow of cash from operating activities.
27. Under the indirect method, gains or losses from the sale of equipment used in operations would appear
as adjustments in the cash flows from operating activities section of the statement of cash flows.
28. Amortization expense is deducted from net income in the cash flows from operating activities section
of the statement of cash flows.
29. Interest received is one item deducted from net income as per the income statement to arrive at net
cash flows from operating activities.
30. Interest expense is one item added to net income as per the income statement to arrive at net cash
flows from operating activities.
31. When preparing a statement of cash flows using the indirect method, an increase in accounts
receivable is deducted from net income.
32. Decreases in current assets other than cash have positive effects on cash flows and increases in current
assets have negative effects on cash flows.
33. When preparing a statement of cash flows using the indirect method, an increase in accounts payable is
added to net income.
34. A decrease in the balance of merchandise inventory is added to net income when calculating net cash
flows from operating activities using the indirect method.
35. Determining net cash flows from operating activities using the indirect method reveals cash collected
from customers.
36. Purchases and sales of long-term investments for the period should be netted for disclosure in the
investing activities section of the statement of cash flows.
37. When presenting decreases in long-term investments in the investing activities section of the statement
of cash flows, the amount reflected equals the amount of the gain(s) or loss(es) from the transaction(s).
38. Even though investing activities center on the long-term assets shown on the balance sheet, they also
include any short-term investments shown under current assets on the balance sheet.
39. A decrease in plant assets shown in the investing activities section of the statement of cash flows
would be presented based on the amount of the resulting gain or loss incurred.
40. Cash inflows and outflows are not netted in the investing activities section of the statement of cash
flows but are separately disclosed to give the reader full information.
41. Repayment of bonds payable would be reflected as a cash outflow in the investing activities section of
the statement of cash flows.
42. The activity on the balance sheet to be presented in the financing activities section of the statement of
cash flows is based on an analysis of stockholders’ equity only.
43. The financing activities section of the statement of cash flows does not include any transactions or
activities from the income statement but does take into account stockholders’ equity.
44. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section
of the statement of cash flows.
45. Dividends paid are reflected in the financing activities section of the statement of cash flows.
46. The net income for the period would appear in the cash flows from financing activities section of a
statement of cash flows prepared using the indirect method.
47. A schedule of noncash investing and financing activities is not required when a statement of cash
flows is prepared using the indirect method.
MULTIPLE CHOICE
1. Noncash investing and financing transactions
a.
appear as a separate schedule on the statement of cash flows.
b.
appear in either the investing or financing activities section, but not both.
c.
are excluded from the statement of cash flows.
d.
appear in both the investing and financing activities sections.
2. Cash equivalents do not include
a.
U.S. Treasury bills.
b.
money market accounts.
c.
marketable securities.
d.
commercial paper.
3. The most future-directed of the basic financial statements is the
a.
statement of stockholders’ equity.
b.
statement of cash flows.
c.
income statement.
d.
balance sheet.
4. How are cash equivalents treated on a statement of cash flows?
a.
They are disclosed in the operating activities section.
b.
They are combined with the Cash account.
c.
They are disclosed in the investing activities section.
d.
They are disclosed in the financing activities section.
5. How are transfers between cash and cash equivalents treated on a statement of cash flows?
a.
They are disclosed as an investing activity.
b.
They are not shown as any type of cash flow.
c.
They are disclosed as a financing activity.
d.
They are disclosed as an operating activity.
6. The primary purpose of the statement of cash flows is to provide information
a.
about a company’s cash receipts and cash payments during an accounting period.
b.
about a company’s investing and financing activities during an accounting period.
c.
regarding a company’s financial position at the end of an accounting period.
d.
regarding the results of operations for a period of time.
7. Management would not use the statement of cash flows to
a.
assess the liquidity of the business.
b.
determine dividend policy.
c.
evaluate the effects of major policy decisions involving investments and financing.
d.
determine the financial position of the company.
8. Investors and creditors would find the statement of cash flows least useful in assessing
a.
financial position at a point in time.
b.
need for additional financing.
c.
ability to pay dividends and liabilities.
d.
ability to generate positive future cash flows.
9. Elkwood Corporation acquired a land site with a building by issuing a 30-year mortgage payable. In
Elkwood’s statement of cash flows, this transaction should be shown
a.
only as a cash flow from investing activity for the purchase of the land and building.
b.
only as a cash flow from financing activity for the issuance of the mortgage payable.
c.
in the schedule of noncash investing and financing transactions.
d.
as both a cash flow from investing activity and a cash flow from financing activity.
10. Which of the following is reported as a noncash investing and financing transaction on the statement
of cash flows?
a.
Conversion of bonds payable to stock
b.
Purchase of treasury stock
c.
Payment of long-term debt
d.
Sale of preferred stock
11. Royer Corporation engaged in this transaction:
Declared and issued a stock dividend.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Does not represent a cash flow
d.
Investing activities section
12. Royer Corporation engaged in this transaction:
Collected accounts receivable.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
13. Royer Corporation engaged in this transaction:
Purchased inventory with cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Investing activities section
c.
Operating activities section
d.
Financing activities section
14. Royer Corporation engaged in this transaction:
Retired long-term debt with cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Financing activities section
15. Royer Corporation engaged in this transaction:
Sold long-term investment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Operating activities section
d.
Investing activities section
16. Royer Corporation engaged in this transaction:
Paid interest on note.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
17. Royer Corporation engaged in this transaction:
Issued stock for equipment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Investing activities section
d.
Schedule of noncash investing and financing transactions
18. Royer Corporation engaged in this transaction:
Issued long-term note for plant assets.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Financing activities section
c.
Operating activities section
d.
Investing activities section
19. Royer Corporation engaged in this transaction:
Purchased one-year insurance policy for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Operating activities section
20. Royer Corporation engaged in this transaction:
Abandoned fully depreciated equipment.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Investing activities section
b.
Operating activities section
c.
Does not represent a cash flow
d.
Financing activities section
21. Royer Corporation engaged in this transaction:
Received dividends on securities held.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
22. Royer Corporation engaged in this transaction:
Paid income taxes.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Investing activities section
c.
Operating activities section
d.
Financing activities section
23. Royer Corporation engaged in this transaction:
Issued common stock for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Does not represent a cash flow
c.
Investing activities section
d.
Financing activities section
24. Royer Corporation engaged in this transaction:
Repaid 90-day note payable.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Operating activities section
d.
Investing activities section
25. Royer Corporation engaged in this transaction:
Repaid ten-year note payable.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
26. Royer Corporation engaged in this transaction:
Paid employee wages.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Investing activities section
c.
Does not represent a cash flow
d.
Operating activities section
27. Royer Corporation engaged in this transaction:
Purchased land for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Investing activities section
c.
Financing activities section
d.
Does not represent a cash flow
28. Royer Corporation engaged in this transaction:
Transferred cash to money market account.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Operating activities section
c.
Investing activities section
d.
Financing activities section
29. Royer Corporation engaged in this transaction:
Purchased land and building with a mortgage.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Investing activities section
d.
Schedule of noncash investing and financing transactions
30. Royer Corporation engaged in this transaction:
Received interest on an investment in a long-term note.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Does not represent a cash flow
c.
Operating activities section
d.
Investing activities section
31. Royer Corporation engaged in this transaction:
Converted loans payable to stock.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Schedule of noncash investing and financing transactions
c.
Investing activities section
d.
Operating activities section
32. Royer Corporation engaged in this transaction:
Acquired long-term investment by issuance of long-term debt.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Investing activities section
b.
Operating activities section
c.
Schedule of noncash investing and financing transactions
d.
Financing activities section
33. Royer Corporation engaged in this transaction:
Purchased 30-day U.S. Treasury bill.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Operating activities section
c.
Investing activities section
d.
Financing activities section
34. Royer Corporation engaged in this transaction:
Purchased 60-day commercial paper.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Does not represent a cash flow
b.
Operating activities section
c.
Financing activities section
d.
Investing activities section
35. Royer Corporation engaged in this transaction:
Purchased treasury stock with cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Investing activities section
c.
Does not represent a cash flow
d.
Operating activities section
36. Royer Corporation engaged in this transaction:
Sold buildings and equipment for cash.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Operating activities section
b.
Investing activities section
c.
Financing activities section
d.
Does not represent a cash flow
37. Royer Corporation engaged in this transaction:
Amortization of a patent. Assume use of the indirect approach.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Schedule of noncash investing and financing transactions
b.
Financing activities section
c.
Investing activities section
d.
Operating activities section
38. Royer Corporation engaged in this transaction:
Depreciation on equipment. Assume use of the indirect approach.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of
cash flows.
a.
Financing activities section
b.
Operating activities section
c.
Schedule of noncash investing and financing transactions
d.
Investing activities section
39. If net cash flows from operating activities were $187,000, net income were $50,000, and net sales
were $600,000, the cash flow yield would equal (Round amounts to one decimal place)
a.
$137,000.
b.
$237,000.
c.
3.7 times.
d.
$413,000
40. If net cash flows from operating activities were $316,000, net income were $200,000, and sales were
$2,000,000, cash flows to sales would equal (Round amounts to one decimal place)
a.
10.0 percent.
b.
$116,000.
c.
15.8 percent.
d.
0.6 times.
41. The calculation of free cash flow could include all of the following except
a.
cash purchases of plant assets.
b.
net cash flows from operating activities.
c.
net income.
d.
dividends paid.
42. Cash flows to assets is measured in terms of
a.
a percentage.
b.
times.
c.
days.
d.
dollars.
43. During 2010, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets
of $350,000, dividend payments of $17,500, net cash flows from operating activities of $37,500,
purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flow yield equals
(Round amounts to one decimal place)
a.
2.1 times.
b.
1.5 times.
c.
3.0 times.
d.
1.9 times.
44. During 2010, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets
of $350,000, dividend payments of $17,500, net cash flows from operating activities of $43,000,
purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flows to sales equals
(Round amounts to one decimal place)
a.
12.3 percent.
b.
14.3 percent.
c.
21.5 percent.
d.
17.2 percent.
45. During 2010, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets
of $350,000, dividend payments of $17,500, net cash flows from operating activities of $26,000,
purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flows to assets equals
(Round amounts to one decimal place)
a.
13.0 percent.
b.
10.4 percent.
c.
8.7 percent.
d.
7.4 percent.
46. During 2010, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets
of $350,000, dividend payments of $17,500, net cash flows from operating activities of $35,000,
purchases of plant assets of $37,500, and sales of plant assets of $45,000. Free cash flow equals
a.
$17,500.
b.
$42,500.
c.
$10,000.
d.
$25,000.
47. If the indirect method is used to prepare a statement of cash flows, which of the following would be
deducted from net income to arrive at net cash flows from operating activities?
a.
Increase in accrued liabilities
b.
Increase in income taxes payable
c.
Increase in accounts receivable
d.
Decrease in prepaid expenses
48. If the indirect method is used to prepare a statement of cash flows, which of the following would be
added to net income to arrive at net cash flows from operating activities?
a.
Decrease in accounts payable
b.
Increase in inventory
c.
Decrease in prepaid expenses
d.
Increase in accounts receivable
49. The direct method of preparing a statement of cash flows
a.
is the overwhelming choice of most companies.
b.
begins with net income in the operating activities section.
c.
is more difficult to understand than the indirect method for the average reader.
d.
will produce the same net figure as the indirect method.
50. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Accounts Receivable—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
51. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Interest Income (assume that cash received is equal to
amount reported)—indicate the effect on net income in arriving at net cash flows from operating
activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
52. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Dividend Income (assume that cash received is equal to
amount reported)—indicate the effect on net income in arriving at net cash flows from operating
activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
53. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Inventory—indicate the effect on net income in
arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
54. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Decrease in Prepaid Expenses—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
55. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Decrease in Accounts Payable—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
56. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Accrued Liabilities—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
57. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Interest Expense (assume that cash payments are equal to
amount reported)—indicate the effect on net income in arriving at net cash flows from operating
activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
58. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Increase in Income Taxes Payable—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
59. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Depreciation Expense—indicate the effect on net income in
arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities
c.
Not used to adjust net income to calculate net cash flows from operating activities
60. Assume the indirect method is used to compute net cash flows from operating activities. For this item
extracted from the financial statements—Loss on Sale of Investment—indicate the effect on net
income in arriving at net cash flows from operating activities by choosing one of the following:
a.
Add to net income to arrive at net cash flows from operating activities
b.
Subtract from net income to arrive at net cash flows from operating activities