Finance Chapter 12 The statement of cash flows summarizes the operating, investing, and financing activities of a business for a period of time.

Chapter 12: The Statement of Cash Flows

1. The statement of cash flows summarizes the operating, investing, and financing activities of a business for a period of

time.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Remembering

2. The accrual-based income statement is considered to be a good indicator of current cash inflows and outflows.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Remembering

3. Depreciation is a noncash expense that is added back to net income in determining cash provided from operating

activities under the indirect method.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Remembering

4. Most experts now agree that there has been a tendency to rely far too heavily on net income and its companion,

earnings per share, and in many cases to ignore a company’s cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Remembering

5. In terms of the statement of cash flows, cash includes actual cash items plus certain cash equivalents such as

commercial paper, money market funds, and Treasury bills.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

6. 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.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

7. Under certain conditions, an investment in common stock can be considered a cash equivalent.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

8. Cash equivalents are reported in the Operating Activities section of the statement of cash flows.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

9. It is not possible for Cash to decrease from Yr. 1 to Yr. 2 if income rises over this period.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

10. The investment in stock of another company is considered a significant activity and thus is reported on the statement

of cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Remembering

11. The repurchase of a company’s own stock should be reported on the statement of cash flows as an investing activity.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

12. For the statement of cash flows, companies are required to classify their cash activities into three categories: operating,

investing, and borrowing.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

13. Operating activities involve the acquiring and selling of goods and services for cash or on account.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

14. Cash flows from purchases of merchandise are classified as investing activities.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

15. Issuance of stock results in cash inflows that appear in the financing section of the statement of cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

16. Cash flows from operating activities usually relate to an increase or decrease in either a current asset or a current

liability.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Remembering

17. A building with a cost of $163,000 and accumulated depreciation of $32,000 was sold for a $11,000 gain. When using

the indirect method, the cash generated from this investing activity was $131,000.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Analyzing

18. Net income was $61,000 for the year. The accumulated depreciation balance increased by $14,000 over the year.

There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash

flow from operations is $47,000.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Analyzing

19. Companies can use two different methods to report the amount of cash flow from their investing and financing

activities.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

20. The direct method of reporting cash flows from operating activities involves reconciling net income and cash flow

from operations.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

21. 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.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

22. 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.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

23. Significant noncash transactions are not reported on the statement of cash flows, but either in a separate schedule or in

a note to the financial statements.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

24. The statement of cash flows emphasizes explanations for the change in net income.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

25. The Financial Accounting Standards Board (FASB) has expressed a strong preference for the indirect method, but

allows companies to use the direct method in calculating the cash flow from operating activities.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Remembering

26. The basic accounting equation can be restated in terms of cash by the following equation: Cash = current liabilities +

long-term liabilities + capital stock – retained earnings – noncash current assets + long-term assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

27. 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.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

28. If the December 31, 2016, balance of accounts receivable is higher than the January 1, 2016, balance, then the amount

of cash collections will be less than the sales on account for the year.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

29. If the December 31, 2016, balance of accounts payable is higher than the January 1, 2016, balance, then the amount of

cash payments will exceed the purchases on account for the year.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

30. 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 built into the cash received under the direct method.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

31. A decrease in retained earnings indicates that a cash dividend has been paid.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

32. Under the direct method, depreciation expense is treated as an outflow in the Investing Activities section of the

statement of cash flows.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-05 – LO: 12-05

KEYWORDS:

Bloom’s: Remembering

33. Under the indirect method, instead of reporting cash receipts and payments, net income is reconciled with net cash

from operating activities.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-06 – LO: 12-06

KEYWORDS:

Bloom’s: Remembering

34. The cash flow adequacy ratio is defined as:

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-07 – LO: 12-07

KEYWORDS:

Bloom’s: Remembering

35. Many companies report cash flow per common share on the statement of cash flows.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-07 – LO: 12-07

KEYWORDS:

Bloom’s: Remembering

36. All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-07 – LO: 12-07

KEYWORDS:

Bloom’s: Remembering

37. The cash flow adequacy ratio can only be calculated if a company uses the direct method to report cash flows from

operating activities.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-07 – LO: 12-07

KEYWORDS:

Bloom’s: Remembering

38. Cash flow per share is computed by dividing cash on the balance sheet by the number of shares outstanding.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-07 – LO: 12-07

KEYWORDS:

Bloom’s: Remembering

39. Some companies use a work sheet approach, which functions like the T account approach, as a tool to aid in preparing

the statement of cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-08 – LO: 12-08

KEYWORDS:

Bloom’s: Remembering

40. The work sheet used to prepare a statement of cash flows (indirect method to determine cash flows from operating

activities) should have a total in the Changes column equal to total assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-08 – LO: 12-08

KEYWORDS:

Bloom’s: Remembering

41. A work sheet is an alternative to T accounts to help in the preparation of a statement of cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-08 – LO: 12-08

KEYWORDS:

Bloom’s: Remembering

42. Which of the following statements is true?

a.

If a company reports net income on its income statement, it should report an increase in cash on its statement

of cash flows.

b.

If a company reports a net loss on its income statement, it should report a decrease in cash on its statement of

cash flows.

c.

If a company uses the accrual basis of accounting, it will improve its cash position if it reports net income for

the same period.

d.

If a company uses the accrual basis of accounting, its cash balance can increase even if it reports a net loss.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Understanding

43. Which of the following statements is false?

a.

A balance sheet reports a company’s cash balance at a specific date.

b.

An income statement reports the amounts of revenue and expense on an accrual basis, not the amount of cash

received from revenues or paid for expenses.

c.

A statement of retained earnings reports the amount of cash received from operating activities and the amount

of cash paid for dividends.

d.

A statement of cash flows explains the changes in cash from operating, investing, and financing activities.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Understanding

44. Nordic Exports Inc. reported net income of $150,000 for 2016, but its cash balance decreased $40,000. Which

financial statement should Nordic Exports’ management refer to for an explanation of this situation?

a.

Balance Sheet

b.

Income Statement

c.

Statement of Retained Earnings

d.

Statement of Cash Flows

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Applying

45. Zack Co. reported a net loss of $50,000 for 2016, yet its cash balance increased during the year. Which financial

statement should Zack’s management refer to for an explanation of this situation?

a.

Balance sheet

b.

Income statement

c.

Statement of Retained Earnings

d.

Statement of Cash Flows

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Applying

46. Planet & Co. 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.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Applying

47. Which of the following statements regarding the statement of cash flows is true?

a.

The statement of cash flows analyzes the changes in consecutive balance sheets in conjunction with the

income statement.

b.

The statement of cash flows is organized as cash inflows less cash outflows.

c.

The statement of cash flows analyzes only the changes in current assets and current liabilities.

d.

The statement of cash flows is an optional financial statement.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Understanding

48. The primary purpose of the statement of cash flows is to provide information about

a.

the financial position of the company.

b.

the cash inflows and outflows of the company.

c.

the investing and financing activities of the company.

d.

the profitability of the company.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Understanding

49. The statement of cash flows

a.

along with the balance sheet and income statement is prepared on the accrual basis.

b.

along with the balance sheet and statement of retained earnings is dated as of a specific year end date.

c.

along with the balance sheet is used to analyze liquidity.

d.

ties the balance sheet to the statement of retained earnings.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

KEYWORDS:

Bloom’s: Remembering

50. Which of the following is not a current reporting requirement for a statement that reports changes in cash over a

period of time?

a.

This statement must classify cash flows into three categories: operating, investing, and financing activities.

b.

Cash equivalents must be combined with cash in preparing this statement.

c.

Working capital may be used as a substitute for cash in preparing this statement.

d.

The title for this statement is “Statement of Cash Flows.”

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-01 – LO: 12-01

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Understanding

51. Which of the following items would be considered a cash equivalent if it was held at the balance sheet date?

a.

U.S. Treasury bill purchased when there were 90 days until maturity.

b.

Commercial paper with a 6-month maturity which was purchased at the issue date.

c.

The common stock of a company traded on the New York Stock Exchange which was purchased 30 days

before the balance sheet date.

d.

U.S. Treasury note which matures 2 years after it is issued and which was purchased 4 months before the

balance sheet date.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Applying

52. Which of the following statements is true?

a.

Investments in commercial paper or U.S. Treasury bills must be treated as cash equivalents.

b.

Investments in stock cannot be treated as cash equivalents because they are not convertible into a known

amount of cash.

c.

Investments which are convertible into a known amount of cash and mature within three months after the

balance sheet date are treated as cash equivalents.

d.

Investments in money market accounts cannot be treated as cash equivalents because they do not have a

specific maturity date.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Understanding

53. Which of the following items is treated as a cash equivalent?

a.

Commercial paper with a 6-month maturity when purchased and 4 months until maturity at the balance sheet

date.

b.

Investment in corporate stocks which management intends to sell within 3 months after the balance sheet date.

c.

Money market funds which can be obtained overnight from a bank or brokerage firm.

d.

Investments in corporate bonds which have 5 years until maturity when they are purchased.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Applying

54. Which of the following items is not a cash equivalent?

a.

Commercial paper

b.

A three-year Treasury note purchased two months before its maturity

c.

Money market funds

d.

A corporate bond investment which has 5 years until maturity when they are purchased

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

KEYWORDS:

Bloom’s: Applying

55. Which of the following statements is false?

a.

Cash equivalents are included in cash on the balance sheet and on the statement of cash flows.

b.

Investments in cash equivalents and investments in stock have the same economic effect—assets increase and

decrease by the same amount.

c.

An investment is a cash equivalent if it is convertible into a known amount of cash and has an original

maturity of 3 months or less when purchased.

d.

Investments in stock are reported as a financing activity on the statement of cash flows.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-02 – LO: 12-02

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

56. Cash flows from acquiring and selling products are classified as

a.

operating activities.

b.

investing activities.

c.

financing activities.

d.

distribution activities.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Applying

57. Cash flows from acquiring and disposing of long-term assets are classified as

a.

operating activities.

b.

investing activities.

c.

financing activities.

d.

purchasing activities.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Applying

58. Cash flows from borrowing and paying off a 90-day bank loan are classified as

a.

operating activities.

b.

investing activities.

c.

financing activities.

d.

purchasing activities.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Applying

59. Cash flows from issuing and repurchasing stock or issuing and repaying (retiring) debt are classified as

a.

operating activities.

b.

investing activities.

c.

financing activities.

d.

borrowing activities.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Applying

60. Which of the following is not an operating activity?

a.

Cash collections from credit customers.

b.

Cash payments for operating expenses.

c.

Cash receipts for interest earned.

d.

Cash payments for dividends to stockholders.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

61. Which of the following is not an investing activity?

a.

Purchase of investments for cash.

b.

Purchase of equipment for cash.

c.

Sale of merchandise for cash.

d.

Sale of land for cash.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

62. Which of the following is not a financing activity?

a.

Issuing bonds for cash.

b.

Selling an investment in IBM stock for cash.

c.

Purchasing a company’s own stock (treasury stock) for cash.

d.

Making a cash payment to repay a bank loan.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

63. Below is information for Dakota Corp. for 2016 and 2017:

Bonds payable, December 31, 2016

$500,000

Bonds payable, December 31, 2017

800,000

Loss on bond retirement—2017

15,000

Interest expense on bonds—2017

45,000

At the end of 2017, Dakota issued bonds at par value for $800,000 cash. The proceeds from these bonds were used to

retire the $500,000 bond issue outstanding at the end of 2017 (before their maturity date). All interest expense was paid in

cash during 2017.

The following statements describe how Dakota reported the cash flow effects of the items described above on its 2017

statement of cash flows. The indirect method is used to prepare the operating activities section. Which of the following

has been reported incorrectly by Dakota?

a.

Proceeds of $800,000 from the issuance of bonds were reported as a cash inflow in the financing activities

section.

b.

The loss on bond retirement of $15,000 was added to net income in the operating activities section.

c.

Payments of $560,000 were reported as a cash outflow in the investing activities section.

d.

Interest expense of $45,000 was not reported separately because it is included in net income in the operating

activities section.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Applying

64. Which of the following should be classified as an investing activity on the statement of cash flows?

a.

interest on notes payable

b.

payment to suppliers for inventory

c.

payment of dividends

d.

None of these

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

65. In 2016, Valencia Company purchased equipment for $363,000 and also sold some special purpose machinery with a

book value of $155,000 for $182,000. In its statement of cash flows for 2016, Valencia should report the following with

respect to the above transactions:

a.

$363,000 cash used by operating activities; $182,000 cash provided by financing activities.

b.

$181,000 net cash used by investing activities.

c.

$181,000 net cash used by investing activities; $27,000 net cash provided by operating activities.

d.

$363,000 net cash used by investing activities.

ANSWER:

b

RATIONALE:

Investing cash flows: $363,000 used – $182,000 provided = $181,000 used

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

66. Below are the transactions for the Louisville Company:

Proceeds from issuance of bonds payable

$635,000

Payment to purchase equipment

$275,000

Payment of wages

$115,000

Payment of dividends

$155,000

Payment to pay off notes payable

$195,000

Based on these transactions, what is the net cash flow from financing activities?

a.

$285,000 net cash provided by financing activities.

b.

$275,000 net cash used for financing activities.

c.

$0, because cash inflows equal cash outflows from financing activities.

d.

$440,000 net cash provided by financing activities.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

67. Operating, investing, and financing activities affect certain balance sheet accounts. Which of the following statements

is true?

a.

Operating activities primarily involve transactions which affect noncurrent assets.

b.

Investing activities primarily involve U.S. government securities and long-term productive assets.

c.

Financing activities primarily involve transactions which affect current liabilities.

d.

Different balance sheet accounts are affected depending on whether the direct or indirect method is used.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

68. Which balance sheet accounts are most affected by operating activities?

a.

Current assets and current liabilities

b.

Long-term assets

c.

Long-term liabilities

d.

Stockholders’ equity

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

69. Which balance sheet accounts are most affected by investing activities?

a.

Current assets and current liabilities

b.

Long-term assets

c.

Long-term liabilities

d.

Stockholders’ equity

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Understanding

70. Which balance sheet accounts are most affected by financing activities?

a.

Current assets

b.

Current liabilities

c.

Long-term assets

d.

Long-term liabilities and stockholders’ equity

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

71. Springdale Co. reported net income of $200,000. Cash from operations

a.

will be more than $200,000.

b.

will be less than $200,000.

c.

will be equal to $200,000.

d.

cannot be determined without more information.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

72. Carson City Saloon purchased a $25,000 truck for catering from its restaurant. It made a down payment of one-fourth

of the price. What combination of amounts would affect the income statement and statement of cash flows for the

purchase of the truck?

Income Statement Cash Flow Statement

a.

$25,000

$ -0-

b.

$ -0-

($25,000)

c.

$25,000

($6,250)

d.

$ -0-

($6,250)

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

73. Upon review of Young’s Garden Center 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 Young’s 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

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

74. Upon review of Jerry’s Canoe Gallery 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 Jerry 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.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

75. Upon review of Jan’s Lakeside Resort statement of cash flows, the following was noted:

Cash flows from operating activities

$ 35,000

Cash flows from investing activities

75,000

Cash flows from financing activities

(125,000)

From this information, the most likely explanation is that Jan 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.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

76. Eduardo’s Texas Cantina had the following results for December 31, 2016 and 2017, respectively:

2016

2017

Cash

$ 42,000

$ 49,000

Noncash current assets

162,000

175,000

Cash flows from financing activities

313,000

Cash flows from operating activities

72,000

What was the amount of cash flows from investing activities for 2017?

a.

Cash inflow of $378,000

b.

Cash outflow of $378,000

c.

Cash outflow of $7,000

d.

Cash outflow of $391,000

ANSWER:

b

RATIONALE:

($313,000 + 72,000) – ($49,000 – 42,000) = $378,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

KEYWORDS:

Bloom’s: Analyzing

77. Francetti Co. purchased $6,000 of napkins for its business. One-fourth of the bill is unpaid. Upon review of the

napkins still on hand, 20% were still available. What combination of amounts would affect the income statement and

statement of cash flows?

Statement of Cash Flow Income Statement

a.

($6,000)

b.

($4,500)

($6,000)

c.

($4,500)

($4,800)

d.

($6,000)

($4,800)

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.12-03 – LO: 12-03

FACC.PONO.13.12-04 – LO: 12-04

KEYWORDS:

Bloom’s: Applying