Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 15—Statement of Cash Flows
TRUE/FALSE
1. A statement of cash flows indicates the sources and uses of a firm's cash during a period.
2. All SEC-registered firms must issue a statement of cash flows, in addition to the income statement and
balance sheet.
3. The amount for "net cash from operating activities" will be different depending on if the direct method
or the indirect method is used to construct the statement of cash flows.
4. Transactions that involve the acquisition or sale of long-term assets are generally classified as
investing activities on the statement of cash flows.
5. Noncash investing and financing transactions, such as the exchange of common stock to purchase
assets, represent significant investing and financing activities and are disclosed in a supplementary
schedule that is attached to the statement of cash flows.
6. Cash received on the sale of equipment would be considered a financing activity on a statement of
cash flows.
7. Companies can use two different methods to report the amount of cash flow from their operating
activities on the statement of cash flows.
8. The indirect method of reporting the cash flows from operating activities on the statement of cash
flows is the method most widely used in practice.
9. Investments in stock are reported as an investing activity on the statement of cash flows.
10. On the statement of cash flows, the indirect method adjusts net income to determine the net cash flows
from operating activities.
11. For a statement of cash flows, firms are required to classify their cash activities into three categories:
operating, investing, and borrowing.
12. The sale of land for cash would be classified as a cash inflow from a financing activity.
13. Cash inflows that enter into the determination of net income are classified as financing activities on a
statement of cash flows.
14. Cash flow activities that include the cash effect of transactions that create revenues and expenses and
thus enter into the determination of net income are classified as operating activities on the statement of
cash flows.
15. 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.
16. The activity from 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.
17. Under the indirect method of determining the net cash from operating activities on the statement of
cash flows, increases in current assets such as accounts receivable are added to net income.
18. Under the indirect method of determining the net cash from operating activities on the statement of
cash flows, depreciation is subtracted from the net income for the period.
19. A decrease in accounts payable is added to net income in the operating activities section of the
statement of cash flows prepared under the indirect method.
20. Determining the cash flows from operating activities generally requires analyzing each item on the
income statement as well as the current asset and current liability accounts.
21. A loss on the sale of equipment is subtracted from net income in determining net cash from operating
activities under the indirect method.
22. Under the indirect method, the net cash flow from operating activities is computed by adjusting net
income to remove the effect of all deferrals of past operating cash receipts and payments, and all
accruals of future operating cash receipts or payments.
23. If a firm uses the direct method for reporting operating activities on the statement of cash flows, it
must present a separate schedule which reconciles net income to net cash from operating activities.
24. The direct method of reporting cash flows from operating activities involves reporting major classes of
cash receipts and cash payments.
25. An advantage to using a worksheet to organize the information of preparation of the statement of cash
flows is that it uses a spreadsheet format allowing the preparer to use a PC and spreadsheet software.
MATCHING
Use the following major cash flow activities to classify the activities listed below:
a.
Operating Activity, Source of Cash
b.
Operating Activity, Use of Cash
c.
Investing Activity, Source of Cash
d.
Investing Activity, Use of Cash
e.
Financing Activity, Source of Cash
f.
Financing Activity, Use of Cash
g.
Non-cash Investing & Financing Activity
1. Land is exchanged for common stock
2. Reported profitable operations (Net Income)
3. Issued long-term debt
4. Payment of cash dividends
5. Sold equipment used in the business for cash
6. Payment of Operating Expenses
7. Collection of Sales Revenue
8. Purchased land for cash
9. Issued Common Stock for cash
10. Paid off long-term debt
For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the indirect method.
a.
Added to net income
b.
Deducted from net income
c.
Cash outflow--investing activity
d.
Cash inflow--investing activity
e.
Cash outflow--financing activity
f.
Cash inflow--financing activity
g.
significant noncash investing and financing activity
11. Decrease in accounts payable during a period.
12. Declaration and payment of a cash dividend.
13. Loss on sale of land.
14. Decrease in accounts receivable during a period.
15. Redemption of bonds for cash.
16. Proceeds from sale of equipment at book value.
17. Issuance of common stock for cash.
18. Purchase of a building for cash.
19. Acquisition of land in exchange for common stock.
20. Increase in merchandise inventory during a period.
COMPLETION
1. All firms that are registered with the ______________________ must issue a statement of cash flows.
2. Highly liquid investments such as Treasury bills, money market funds, and commercial paper are
examples of ___________________.
3. Activities that increase cash are sources of cash and are referred to as ___________.
4. Activities that decrease cash are uses of cash and are referred to as ___________.
5. The format that should be followed in preparing the statement of cash flows is known as the
______________.
6. The indirect method and the direct method differ only on how the cash flows from ________________
are calculated.
7. The ______________ computes operating cash flow by adjusting net income for items that do not
affect cash flows.
8. The __________________ computes operating cash flows by adjusting each line on the income
statement to reflect cash flows.
9. The _____________________ provides information regarding the sources and uses of a firm’s cash.
10. ________________ are the ongoing, day-to-day, revenue-generating activities of an organization.
11. Acquiring new equipment, selling long-term investments, and purchasing land are all examples of
_______________.
12. Issuing shares of common stock, paying dividends and paying off debt are all examples of
_______________.
13. When an investing or financing activity takes place without affecting cash it is referred to as
_________________________.
14. The two approaches to calculating operating cash flows are the _______________ and the
_____________.
15. Income statements are prepared on a (n) ______________.
16. Preparation of the statement of cash flows relies on the beginning and ending ____________.
17. In the ________________, each line on the income statement is adjusted to produce a cash flow
income statement.
18. Some individuals prefer to show operating cash flows as the difference between ___________ and
____________.
19. As transactions increase in number and complexity, a ____________ becomes a useful aid in
preparing the statement of cash flows.
20. Worksheets offer increased ____________ in form and the added convenience of spreadsheet software
packages.
MULTIPLE CHOICE
1. The primary purpose of the statement of cash flows is to
a.
provide information about the investing and financing activities during the period.
b.
prove that revenues exceed expenses if there is a net income.
c.
provide information about the sources and uses of cash during a period.
d.
facilitate banking relationships.
2. The statement of cash flows does not report the
a.
sources of cash in the current period.
b.
uses of cash in the current period.
c.
amount of checks outstanding at the end of the period.
d.
change in the cash balance for the current period.
3. The acquisition of land by issuing common stock is
a.
only reported if the statement of cash flows is prepared using the direct method.
b.
a cash transaction that is reported in the investing section in the body of the statement of
cash flows.
c.
a noncash transaction that is reported in the operating section in the body of the statement
of cash flows.
d.
a noncash transaction that is disclosed in a supplementary schedule attached to the
statement of cash flows.
4. The order of presentation of activities on the statement of cash flows is
a.
operating, investing, financing.
b.
operating, financing, investing.
c.
financing, operating, investing.
d.
financing, investing, operating.
5. Financing activities involve
a.
purchasing patent.
b.
receipt of dividends.
c.
selling of investments.
d.
issuance of stock.
6. Which of the following transactions does not affect cash during a period?
a.
increase in amortization expense
b.
payment of an accounts payable
c.
issuance of bonds
d.
purchase of a long-term investment
7. Cash flows from operating activities, as reported on the statement of cash flows, would include
a.
depreciation.
b.
gain on sale of equipment
c.
increase in accounts receivable.
d.
All of these.
8. Which one of the following affects cash during a period?
a.
payment of an account payable
b.
declaration of a cash dividend
c.
write-off of an uncollectible account receivable
d.
recording depreciation expense
9. In developing the cash flows from operating activities, most companies in the United States
a.
use the indirect method.
b.
use the direct method.
c.
present both the indirect and direct methods in their financial reports.
d.
prepare the operating activities section on the accrual basis.
10. The indirect and direct methods of preparing the statement of cash flows are identical except for the
a.
financing activities section.
b.
investing activities section.
c.
operating activities section.
d.
significant noncash activities section.
11. Cash flows from acquiring and selling equipment are classified as
a.
operating activities.
b.
investing activities.
c.
financing activities.
d.
distribution activities.
12. Cash flows from acquiring and retiring long-term debt are classified as
a.
operating activities.
b.
investing activities.
c.
financing activities.
d.
purchasing activities.
13. Which balance sheet accounts are affected by financing activities?
a.
current assets and current liabilities.
b.
long-term assets.
c.
long-term liabilities.
d.
intangible assets.
14. Which balance sheet accounts are affected by operating activities?
a.
current assets and current liabilities.
b.
current assets and long-term assets.
c.
long-term assets and current liabilities.
d.
long-term liabilities and stockholders' equity.
15. Which of the following investing activities results in a cash inflow?
a.
selling treasury stock.
b.
retirement of bonds.
c.
disposal of a building.
d.
paying cash dividends.
16. Which of the following financing activities results in a cash outflow?
a.
purchase of long-term investments.
b.
collecting accounts receivable.
c.
payment of dividends.
d.
issuance of bonds.
17. Tracy Company reported the following information at the end of 2013 and 2014:
2013
2014
Land
$ 35,000
$ 90,000
Common Stock
200,000
255,000
An analysis of the company's records indicated that there were no cash flow effects resulting from the
changes in the two accounts presented above. How should Tracy report the changes in these accounts
on a statement of cash flows?
a.
The company should report $55,000 for the acquisition of land as an investing activity and
$55,000 for the issuance of stock as a financing activity.
b.
The company should report $55,000 as a noncash investing and financing activity for the
acquisition of land by issuing common stock.
c.
The company should report the issuance of common stock to acquire land in the financing
activity section with a net cash flow effect of zero.
d.
The company should report the acquisition of land by issuing common stock in the
investing activity section with a net cash flow effect of zero.
18. The decision whether to use the direct or indirect method on the statement of cash flows is relevant
with respect to
a.
operating activities only.
b.
investing activities only.
c.
financial activities only.
d.
All activities.
19. Which one of the following items is not necessary in preparing a statement of cash flows?
a.
Determine the change in cash.
b.
Determine the cash provided by operating activities.
c.
Determine cash from financing and investing activities.
d.
Determine the cash in all bank accounts.
20. Which one of the following affects cash during a period?
a.
recording amortization expense
b.
declaration of a stock dividend
c.
write-off of an uncollectible account receivable
d.
receipt of an accounts receivable
21. If a company has both an inflow and an outflow of cash related to property, plant, and equipment,
a.
the two cash effects can be netted and presented as one item in the investing activities
section of the statement of cash flows.
b.
the cash inflow and the cash outflow should be reported separately in the investing
activities section of the statement of cash flows.
c.
the two cash effects can be netted and presented as one item in the financing activities
section of the statement of cash flows.
d.
the cash inflow and the cash outflow should be reported in the financing activities section
of the statement of cash flows.
22. In calculating cash flows from operating activities using the indirect method, an increase in accounts
payable is
a.
added to net income.
b.
deducted from net income.
c.
ignored because it does not affect cash.
d.
not reported on a statement of cash flows.
23. In calculating cash flows from operating activities using the indirect method, an increase in inventories
is
a.
added to net income.
b.
deducted from net income.
c.
ignored because it does not affect cash.
d.
not reported on a statement of cash flows.
24. Starting with net income and adjusting it for items that affected reported net income but which did not
affect cash is called the
a.
direct method.
b.
indirect method.
c.
cost-benefit method.
d.
working capital method.
25. In calculating net cash from operating activities using the indirect method, depreciation expense is
a.
deducted from net income.
b.
added to net income.
c.
ignored because it does not affect income.
d.
ignored because it is included in the investing section.
26. Using the indirect method, patent amortization expense for the period
a.
is deducted from net income.
b.
has no impact on cash flows.
c.
causes cash to decrease.
d.
is added to net income.
27. Which of the following would be added to net income using the indirect method?
a.
loss on sale of equipment
b.
gain on sale of a long-term investment
c.
an increase in accounts receivable
d.
proceeds from the sale of a patent
28. Which of the following would be subtracted from net income using the indirect method?
a.
an increase in inventories.
b.
loss on sale of investments.
c.
depreciation expense.
d.
a decrease in accounts payable.
29. Which of the following would not be an adjustment to net income using the indirect method?
a.
depreciation expense
b.
an increase in prepaid expenses
c.
amortization expense
d.
an increase in land
30. In calculating cash flows from operating activities using the indirect method, a loss on the sale of
equipment will appear as a(n)
a.
subtraction from net income.
b.
addition to net income.
c.
addition to cash flow from investing activities.
d.
subtraction from cash flow from investing activities.
31. Using the indirect method, if equipment is sold at a gain, the
a.
sale proceeds received are deducted in the operating activities section.
b.
sale proceeds received are added in the operating activities section.
c.
amount of the gain is added in the operating activities section.
d.
amount of the gain is deducted in the operating activities section.
32. In preparing the statement of cash flows, determining the net increase or decrease to cash requires the
use of
a.
the adjusted trial balance.
b.
the current period's retained earnings statement.
c.
a comparative balance sheet.
d.
a comparative income statement.
33. Which of the following would not be needed to determine net cash provided by operating activities?
a.
depreciation expense
b.
change in accounts receivable
c.
payment of cash dividends
d.
change in prepaid expenses
34. Smith and Company reported net income for the current year. Which of the following business
transactions would cause cash from operating activities to be higher than the amount of net income?
a.
Cash dividends were paid to stockholders during the year.
b.
Depreciation expense was recorded for the year.
c.
A bank loan was repaid during the year.
d.
Equipment was purchased for cash during the year.
35. Which method of preparing the operating activities section of the statement of cash flows adjusts net
income to remove the effects of deferrals and accruals for revenues and expenses?
a.
the direct method
b.
the indirect method
c.
both direct and indirect methods
d.
neither the direct method nor the indirect method
36. The following items were reported on the balance sheets and income statement for Collin Inc.:
Accounts Receivable, December 31, 2013
$ 85,000
Accounts Receivable, December 31, 2014
78,000
Sales, 2014
750,000
How would the change in accounts receivable be reported in the operating activities section of the
statement of cash flows using the indirect method?
a.
as an addition to sales
b.
as a deduction from sales
c.
as an addition to net income
d.
as a deduction from net income
37. The following items were reported on the balance sheets and income statements of Marshall Company:
Accounts payable, December 31, 2013
$ 42,000
Accounts payable, December 31, 2014
48,000
Operating expenses
286,000
How would the change in accounts payable be reported in the operating activities section of the
statement of cash flows under the indirect method?
a.
as an addition to operating expenses
b.
as a deduction from operating expenses
c.
as an addition to net income
d.
as a deduction from net income
38. The Star City reported net loss of $50,000. Cash from operating activities
a.
will be more than $50,000.
b.
will be less than $50,000.
c.
will be equal to $50,000.
d.
cannot be determined without more information.
39. Upon review of Johnson's Statement of Cash Flows, the following was noted:
Cash flows from operating activities
$15,000
Cash flows from investing activities
80,000
Cash flows from financing activities
(60,000)
From this information, the most likely explanation is that Johnson is
a.
using cash from operations and selling long-term assets to pay back debt.
b.
using cash from operations and borrowing to purchase long-term assets.
c.
using its profits to expand growth.
d.
using cash from investors to provide for operations.
40. Upon review of Susan's Statement of Cash Flows, the following was noted:
Cash flows from operating activities
$ 75,000
Cash flows from investing activities
(135,000)
Cash flows from financing activities
125,000
From this information, the most likely explanation is that Susan is
a.
using cash from operations and selling long-term assets to pay back debt.
b.
using cash from operations and borrowing to purchase long-term assets.
c.
using its profits to expand growth.
d.
using cash from investors to provide for operations.
41. Moore Company's net income last year was $56,000 and cash dividends declared and paid to the
company stockholders was $31,000. Changes in selected balance sheet accounts for the year appear
below:
Increases
(Decreases)
Debit balances:
Accounts receivable
$ (8,000)
Inventory
(6,000)
Prepaid expenses
12,000
