Chapter 016 Reporting the Statement of Cash Flows
Chapter 016 Reporting the Statement of Cash Flows
Summary of Questions by Difficulty Level (DL) and Learning
Objective (LO)
True/False
ItemDLLOItemDLLOItemDLLO
1. EasyC120. EasyC438. MedP1
2. EasyC121. EasyA139. MedP2
3. MedC122. MedA140. HardP2
4. MedC123. EasyA241. HardP2
5. MedC124. EasyA242. HardP2
6. HardC125. EasyA243. EasyP3
7. EasyC226. MedA244. MedP3
8. MedC227. MedA245. MedP3
9. MedC228. HardA246. HardP3
10. MedC229. HardA247. HardP3
11. HardC230. EasyP148. EasyP4
12. HardC231. EasyP149. MedP4
13. MedC332. EasyP150. HardP4
14. MedC333. MedP151. MedP5
15. MedC334. MedP152. HardP5
16. MedC335. MedP153. HardP5
17. HardC336. MedP1
18. HardC337. MedP1
19. EasyC4
Multiple Choice
ItemDLLOItemDLLOItemDLLO
54. EasyC176. Med C398. Hard P2
55. EasyC177.HardC399. HardP2
56. EasyC178. Med C4100. HardP2
57. MedC179. MedA1101. HardP2
58. MedC180. MedA1102. HardP2
59. EasyC281. MedA2103. EasyP3
60. MedC282. MedA2104. MedP3
61. MedC283. MedA2105. Med P3
62. MedC284. MedA2106. Hard P3
63. MedC285. EasyP1107. Hard P3
64. MedC286. EasyP1108. Hard P3
65. MedC287. EasyP1109. Hard P3
66. MedC288. MedP1110. Hard P3
67. MedC289. Med P1111. HardP3
68. MedC290. MedP1112. HardP3
69. MedC291. MedP1113. MedP4
70. HardC292. MedP2 114. MedP4
71. HardC293. MedP2 115. MedP4
72. HardC294. MedP2 116. EasyP5
73. EasyC395. MedP2 117.HardP5
74. MedC396. HardP2
75. MedC397. HardP2
Matching
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118. MedC1,P1119. MedC2,C3120. MedC2,C3
Short Essay
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121. MedC1125. HardA1129. HardP2
122. MedC2126. HardA1130. MedP3
123. MedC3127. MedA2131. HardP4
124. MedC4128. MedP1132.HardP5
Problems
ItemDLLOItemDLLOItemDLLO
133. MedC3141. MedP3149. MedP5
134. MedP2142. MedP4150. EasyA2
135. MedP2143. MedP5151. MedA2
136. MedP2144. MedP5152. MedA2
137. HardP2145. MedP5153. HardA2
138. HardP2,P3146. MedP5,C3154. HardA2
139. HardP2,P3147. HardP5155. HardA2
140. MedP3 148. MedP5
Completion Problems
ItemDLLOItemDLLOItemDLLO
156. EasyC1161. MedC3166. HardP1
157. MedC1162. EasyC4167. MedP2
158. EasyC2163. HardA1168. EasyP3
159, MedC2164. MedA2 169. MedP4
160. MedC2165. MedP1 170. HardP5
True / False Questions
1.The primary purpose of the statement of cash flows is to
report all major cash receipts (inflows) and cash payments
(outflows) during a period.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: C12.The statement of
cash flows reports the total change in cash.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: C13.To be classified
as a cash equivalent an investment must be readily convertible to
an unknown amount of cash, because the market value may be affected
by interest rate changes.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C14.The statement
of cash flows explains the difference between the beginning and
ending balances of cash and cash equivalents.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C1
5.Internal users of the statement of cash flows often use cash
flow information to plan day-to-day operating activities and make
long-term investment and financing decisions.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C16.A cash
equivalent must be readily convertible to a known amount of cash,
and must be sufficiently close to its maturity so its market value
is unaffected by interest rate changes.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: C17.Business
activities that generate or use cash are classified as operating,
investing, or financing activities on the statement of cash
flows.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: C28.Financing
activities include (a) the purchase and sale of long-term assets,
(b) the purchase and sale of short-term investments, and (c)
lending and collecting on loans.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2
9.Cash paid for merchandise is an operating activity.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C210.The purchase
of stock in another company is classified as a financing
activity.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C211.Cash
dividends received and interest received are investing
inflows.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: C212.The payment of
cash dividends to shareholders is classified as a financing
activity.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: C2
13.The full disclosure principle requires that noncash investing
and financing activities be disclosed as part of the statement of
cash flows.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: MediumLearning Objective: C314.Conversion of
preferred stock to common stock is disclosed in the financing
section of the statement of cash flows.FALSE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: MediumLearning Objective: C315.A purchase of
land in exchange for a long-term note payable is reported in the
investing section of the statement of cash flows.FALSE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: MediumLearning Objective: C316.A noncash
investing transaction should be disclosed as either a footnote or
small schedule attached to the statement of cash flows.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: MediumLearning Objective: C3
17.A company purchased equipment for $150,000 by paying $50,000
and signing a $100,000 note payable. The entire transaction is
disclosed to users on the statement of cash flows and/or in its
notes.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: HardLearning Objective: C318.A purchase of
land in exchange for shares of stock is disclosed on the statement
of cash flows or in a note to the statement.TRUE
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: C319.Accounting
standards require companies to include a statement of cash flows in
a complete set of financial statements.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: EasyLearning Objective: C420.The statement of
cash flows explains how transactions and events impact the
end-of-period cash balance to produce the end-of-period net income
balance.FALSE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: EasyLearning Objective: C4
21.Most managers stress the importance of understanding and
predicting cash flows for business decisions.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: EasyLearning Objective: A122.Managers only use
the cash flow statement to evaluate the net cash increase or
decrease, and do not pay much attention to the details of cash
flows from operating activities, cash flows from investing
activities, and cash flows from financing activities.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: A123.A cash-based
measure to help business decision makers estimate the amount and
timing of cash flows is the cash flow on total assets
ratio.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: EasyLearning Objective: A224.The cash flow on
total assets ratio can be used as an indicator of earnings
quality.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: EasyLearning Objective: A2
25.Cash flow amounts and their timing should be considered when
planning and analyzing operating activities.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: EasyLearning Objective: A226.The cash flow on
total assets ratio is defined as cash flows from operations divided
by average total assets.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: A227.The cash flow on
total assets ratio is defined as average total assets divided by
operating income.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: A228.The cash flow on
total assets ratio reflects actual cash flows and is therefore
affected by the accounting constraints of recognition and
measurement for net income.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: HardLearning Objective: A2
29.A cash coverage ratio of less than 1 indicates cash
inadequacy to meet asset growth.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: HardLearning Objective: A230.The usual first step
in preparing the statement of cash flows is computing the net
increase or net decrease in cash.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: P131.Both the direct
and indirect methods yield the identical net cash flow amount
provided or used by operating activities.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: EasyLearning Objective: P132.The reporting of
financing activities is identical under either the direct and
indirect methods for preparing the statement of cash flows.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: EasyLearning Objective: P133.The FASB
recommends that the operating section of the statement of cash
flows be reported using the direct method.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P134.Since it is recommended by the FASB,
the direct method of preparing the statement of cash flows is most
frequently used.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P135.Information to prepare the statement
of cash flows usually comes from (a) comparative balance sheets,
(b) current income statement, and (c) additional
information.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P136.The direct method for preparing and
reporting the statement of cash flows reports net income and then
adjusts it for items necessary to calculate net cash provided or
used by operating activities.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P1
37.The indirect method reports individual operating cash
outflows and cash inflows by activity.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P138.Companies have the option of using
either the direct or indirect method to prepare the operating
section of the statement of cash flows.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty:
MediumLearning Objective: P139.When preparing the operating section
of the statement of cash flows using the indirect method, noncash
operating expenses are added back to net income.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P240.When preparing
the operating section of the statement of cash flows using the
indirect method, nonoperating gains are added to net
income.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P2
41.When preparing the operating section of the statement of cash
flows using the indirect method, a decrease in accounts receivable
is subtracted from net income.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P242.When preparing
the operating section of the statement of cash flows using the
indirect method, an increase in income taxes payable is added to
net income.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P243.Financing
activities include receiving cash dividends from investments in
other companies' stocks.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: P344.Investing
activities include: (a) the purchase and sale of long-term assets,
(b) lending and collecting on notes receivable, (c) the purchase
and sale of short-term investments other than cash
equivalents.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P3
45.Financing activities include receiving cash from issuing debt
and receiving cash dividends from investments in other companies'
stocks.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P346.The payment
of cash dividends never changes the balance of retained
earnings.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P347.Equipment
costing $100,000 with accumulated depreciation of $40,000 is sold
at a loss of $10,000. This implies that $40,000 cash was received
from the sale.FALSE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
48.A spreadsheet can help organize the information needed to
prepare a statement of cash flows.TRUE
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: EasyLearning Objective: P449.On a
spreadsheet used to prepare the operating section of the statement
of cash flows, depreciation expense does not require an entry in
the Analysis of Changes columns because it is a noncash
item.FALSE
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: MediumLearning Objective:
P450.When using a spreadsheet to prepare the statement of cash
flows, a decrease in accounts payable is entered in the Analysis of
Changes columns with a debit in the statement of cash flows section
and a credit in the balance sheet section.FALSE
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: HardLearning Objective:
P451.Depreciation expense is not reported on the statement of cash
flows when prepared using the direct method.TRUE
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P5
52.The FASB requires a reconciliation of net income to net cash
provided or used by operating activities when the direct method is
used.TRUE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: HardLearning Objective: P553.The gain or loss
from retirement of debt is reported under cash flows from
operations on the statement of cash flows using the direct
method.FALSE
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: HardLearning Objective: P5
Multiple Choice Questions
54.The statement of cash flows reports:A.Assets, liabilities,
and equity.B.Revenues, gains, expenses, and losses.C.Cash inflows
and cash outflows for an accounting period.D.Equity, net income,
and dividends.E.Changes in equity.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C1
55.The statement of cash flows reports:A.Cash flows from
operating activities.B.Cash flows from financing activities.C.Cash
flows from investing activities.D.Significant noncash financing and
investing activities.E.All of these.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C156.The statement of
cash flows is:A.Another name for the statement of financial
position.B.A financial statement that presents information about
changes in equity during a period.C.A financial statement that
reports the cash inflows and cash outflows for an accounting
period, and that classifies those cash flows as operating
activities, investing activities, or financing activities.D.A
financial statement that lists the types and amounts of assets,
liabilities, and equity of a business on a specific date.E.A
financial statement that lists the types and amounts of the
revenues and expenses of a business for an accounting period.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C1
57.A cash equivalent is an investment that:A.Is readily
convertible to a known amount of cash.B.Is sufficiently close to
its maturity date so its market value is unaffected by interest
rate changes.C.Generally is within 3 months of its maturity
date.D.Is highly liquid.E.All of these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C158.An investment
that is readily convertible to a known amount of cash and that is
sufficiently close to its maturity date so that its market value is
relatively insensitive to interest rate changes is
a(n):A.Short-term marketable equity security.B.Operating
activity.C.Common stock.D.Cash equivalent.E.Financing activity.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C1
59.Activities that involve the production or purchase of
merchandise and the sale of goods and services to customers,
including expenditures related to administering the business, are
classified as:A.Financing activities.B.Investing
activities.C.Operating activities.D.Direct activities.E.Indirect
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C260.The appropriate
section in the statement of cash flows for reporting the purchase
of equipment for cash is:A.Operating activities.B.Financing
activities.C.Investing activities.D.Schedule of noncash investing
or financing activity.E.None of these. This is not reported on the
statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C261.Which of the
following items is reported on the statement of cash flows under
financing activities?A.Declaration of a cash dividend.B.Payment of
a cash dividend.C.Declaration of a stock dividend.D.Payment of a
stock dividend.E.Stock split.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2
62.Investing activities include the:A.Purchase of plant
assets.B.Lending and collecting on notes receivable.C.Sale of
short-term investments other than cash equivalents.D.Sale of plant
assets.E.All of these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C263.The
appropriate section in the statement of cash flows for reporting
the cash payment of wages is:A.Operating activities.B.Financing
activities.C.Investing activities.D.Schedule of noncash investing
or financing activity.E.None of these. This is not reported on the
statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C264.The appropriate
section in the statement of cash flows for reporting the issuance
of common stock for cash is:A.Operating activities.B.Financing
activities.C.Investing activities.D.Schedule of noncash investing
or financing activity.E.None of these. This is not reported on the
statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C2
65.A company's transactions with its creditors to borrow money
and/or to repay the principal amounts of loans are reported as cash
flows from:A.Operating activities.B.Investing
activities.C.Financing activities.D.Direct activities.E.Indirect
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C266.The appropriate
section in the statement of cash flows for reporting the receipt of
cash dividends from investments in securities is:A.Operating
activities.B.Financing activities.C.Investing activities.D.Schedule
of noncash investing or financing activity.E.None of these. This is
not reported on the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C267.Which one of
the following is representative of typical cash flows from
operating activities?A.Proceeds from collecting the principal
amount of loans.B.Repayment of principal on loans.C.Proceeds from
the issuance of bonds and notes payable.D.Payments by a
merchandiser to acquire equity securities of other
companies.E.Receipts of cash sales.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C2
68.Typical cash flows from investing activities
include:A.Payments to purchase property, plant and equipment or
other productive assets (excluding inventory).B.Proceeds from the
sale (discounting) of notes receivable made by the
company.C.Proceeds from collecting the principal amount of notes
receivable.D.Payments to acquire held-to maturity securities of
other entities, except cash equivalents.E.All of these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C269.If a company
borrows money from a bank, the interest paid on this loan should be
reported on the statement of cash flows as a(n):A.Operating
activity.B.Investing activity.C.Financing activity.D.Noncash
investing and financing activity.E.None of these. This is not
reported in the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C270.Cash flows from
selling trading securities are usually reported in the statement of
cash flows as part of:A.Operating activities.B.Financing
activities.C.Investing activities.D.Noncash activities.E.None of
these. This is not reported in the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: C2
71.Which of the following is included in the cash flows from
financing activities section of the statement of cash
flows?A.Interest revenue.B.Sale of equipment.C.Interest
expense.D.Purchase of treasury stock.E.Purchase of stock in another
company.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: C272.Cash flows from
interest received are reported in the statement of cash flows as
part of:A.Operating activities.B.Financing activities.C.Investing
activities.D.Noncash activities.E.None of these. This is not
reported in the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: C273.The accounting
principle that requires significant noncash financing and investing
activities be reported on the statement of cash flows is
the:A.Historical cost principle.B.Materiality principle.C.Full
disclosure principle.D.Going concern principle.E.Business entity
principle.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C3
74.The appropriate section in the statement of cash flows for
reporting the purchase of land in exchange for common stock
is:A.Operating activities.B.Financing activities.C.Investing
activities.D.Schedule of noncash investing or financing
activity.E.None of these. This is not reported on the statement of
cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C375.The purchase of
long-term assets by issuing a note payable for the entire amount is
reported on the statement of cash flows in the:A.Operating
activities.B.Financing activities.C.Investing activities.D.Schedule
of noncash financing and investing activities.E.None of these. This
is not reported on the statement of cash flows.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C376.An example of a
transaction that must be disclosed as a noncash investing and
financing activity includes:A.The retirement of debt by issuance of
equity.B.The purchase of long-term assets financed by a cash down
payment and a note payable to the seller for the balance.C.The
leasing of assets in a transaction that qualifies as a capital
lease.D.The purchase of noncash assets in exchange for equity or
debt securities.E.All of these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C3
77.Noncash investing and financing activities may be disclosed
in:A.A note to the statement of cash flows.B.A separate schedule
attached to the statement of cash flows.C.The investing activities
section of the statement of cash flows.D.The financing activities
section of the statement of cash flows.E.Both a and b.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: C378.Accounting
standards:A.Allow companies to omit the statement of cash flows
from a complete set of financial statements if cash is an
insignificant asset.B.Require that companies omit the statement of
cash flows from a complete set of financial statements if the
company has no investing activities.C.Require that companies
include a statement of cash flows in a complete set of financial
statements.D.Allow companies to include the statement of cash flows
in a complete set of financial statements if the cash balance makes
up more than 50% of the current assets.E.Allow companies to omit
the statement of cash flows from a complete set of financial
statements if the company has no financing activities.
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
ReportingDifficulty: MediumLearning Objective: C4
79.The statement of cash flows helps analysts evaluate
the:A.Source of cash for debt repayments.B.Source of cash for plant
expansion.C.Differences between net income and net operating cash
flow.D.Means used to finance investing activities.E.All of
these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: A180.The statement of
cash flows helps address questions such asA.How is the increase in
investments financed?B.What is the source of cash for new plant
assets?C.How much cash is generated from or used in
operations?D.Why is cash flow from operations different from
income?E.All of these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: A181.The cash flow on
total assets ratio:A.Is the same as return on assets.B.Is the same
as profit margin.C.Can be an indicator of earnings quality.D.Is
highly affected by accounting principles of income recognition and
measurement.E.Is average net assets divided by cash flows from
operations.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2
82.The cash flow on total assets ratio is calculated
by:A.Dividing cash flows from operations by average total
assets.B.Dividing total cash flows by average total
assets.C.Dividing average total assets by cash flows from investing
activities.D.Dividing average total assets by total cash
flows.E.Total cash flows divided by average total assets times
365.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A283.A company had
net cash flows from operations of $120,000, total cash flows of
$500,000, and average total assets of $2,500,000. The cash flow on
total assets ratio
equals:A.4.8%.B.5.0%.C.20.0%.D.20.8%.E.24.0%.
$120,000/$2,500,000 = 4.8%
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2
84.A company had total assets of $1,760,000, total cash flows of
$1,320,000, and cash flows from operations of $205,000. This
implies its cash flow on total assets ratio
equals:A.1.33%.B.8.58%.C.11.65%.D.15.5%.E.75%.
$205,000/$1,760,000 = 11.65%
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A285.Preparation
of the statement of cash flows involves:A.Computing the net
increase or decrease in cash.B.Computing and reporting net cash
provided or used by operations.C.Computing and reporting net cash
provided or used by investing activities.D.Computing and reporting
net cash provided or used by financing activities.E.All of
these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: P1
86.The reporting of net cash provided or used by operating
activities that lists the major items of operating cash receipts,
such as receipts from customers, and subtracts the major items of
operating cash disbursements, such as cash paid for merchandise, is
referred to as the:A.Direct method of reporting net cash provided
or used by operating activities.B.Cash basis of
accounting.C.Classified statement of cash flows.D.Indirect method
of reporting net cash provided or used by operating
activities.E.Net method of reporting cash flows from operating
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: P187.A statement of
cash flows should reconcile the differences between the beginning
and ending balances of:A.Net income.B.Equity.C.Cash and cash
equivalents.D.Working capital.E.Cash, cash equivalents, and
short-term investments.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: P1
88.The direct method for the preparation of the operating
activities section of the statement of cash flows:A.Separately
lists each major item of operating cash receipts and cash
payments.B.Reports adjustments to reconcile net income to net cash
provided or used by operating activities in the statement.C.Reports
a different amount of cash flows from operations than if the
indirect method is used.D.Is required if the company is a
merchandiser.E.Is required by the FASB.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P189.The indirect
method for the preparation of the operating activities section of
the statement of cash flows:A.Separately lists each major item of
operating cash receipts.B.Separately lists each major item of
operating cash payments.C.Reports net income and then adjusts it
for items necessary to determine net cash provided or used by
operating activities.D.Is required if the company is a
merchandiser.E.Must not be used in all circumstances.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P1
90.The direct method of reporting operating cash flows:A.Is
recommended but not required by the FASB.B.Must be used by all
companies.C.Is used by most companies.D.Is considered supplementary
disclosure.E.Is not recommended by the FASB, but is commonly
used.
AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P191.Of the
following, which one affects cash during a period?A.The declaration
of a stock dividend.B.Writing off an uncollectible account
receivable.C.The declaration of a cash dividend.D.An adjusting
entry recognizing the expiration of prepaid insurance.E.The payment
of interest expense accrued in a previous accounting period.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P192.When using
the indirect method to calculate and report the net cash provided
or used by operating activities, net income is adjusted for:A.Gains
and losses from nonoperating items.B.Revenues and expenses that did
not provide or use cash.C.Changes in noncash current assets and
current liabilities related to operating activities.D.Changes in
current liabilities related to operating activities.E.All of
these.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2
93.When using the indirect method to calculate and report net
cash provided or used by operating activities, which of the
following is subtracted from net income?A.Decrease in income taxes
payable.B.Depreciation expense.C.Amortization of intangible
assets.D.Bad debts expense.E.Decrease in merchandise inventory.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P294.The first
line item in the operating activities section of a spreadsheet for
a statement of cash flows prepared using the indirect method
is:A.Cash.B.Cash received from customers.C.Increase (decrease) in
accounts receivable.D.Net income.E.Adjustments to net income.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P295.When preparing
a statement of cash flows on the indirect method, each of the
following should be classified as an operating activity cash flow
except:A.An increase in accounts receivable.B.A decrease in
accounts payable.C.A gain from disposal of a long-term assetD.An
increase in prepaid expenses.E.A decrease in accrued expenses
payable.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2
96.A company's Inventory balance at 12/31/09 was $200,000 and
was $188,000 at 12/31/08. Its Accounts Payable balance at 12/31/09
was $80,000 and was $84,000 at 12/31/08, and its cost of goods sold
for 2010 was $720,000. The company's total amount of cash payments
for merchandise in 2010
equals:A.$704,000.B.$712,000.C.$720,000.D.$728,000.E.$736,000.
Decrease in merchandise = $200,000 - $188,000 = $12,000Purchases
= $720,000 - $12,000 = $708,000Increase in Accounts Payable =
$84,000 - $80,000 = $4,000Cash paid for merchandise = $708,000 -
$4,000 = $704,000
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P297.Use the
following information to calculate cash paid for wages and
salaries:
A.$157,400.B.$163,800.C.$168,000.D.$172,200.E.$174,400.
Increase in Salaries Payable = $10,600 - $6,400 = $4,200Cash
paid for salaries = $168,000 - $4,200 = $163,800
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
98.Use the following information about the current year's
operations of a company to calculate the cash paid for
merchandise.
A.$218,000.B.$223,200.C.$220,000.D.$228,800.E.$234,000.
Increase in inventory = $57,400 - $54,800 = $2,600Purchases =
$226,000 + $2,600 = $228,600Increase in Accounts payable = $59,800
- $54,400 = $5,400Cash paid for Merchandise = $228,600 - $5,400 =
$223,200
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P299.When preparing
a statement of cash flows on the indirect method, which of the
following is correct?A.Proceeds from the sale of equipment should
be added to net income in the operating activities section.B.A loss
on the sale of land should be added to net income in the operating
activities section.C.The declaration of a cash dividend should be a
use of cash in the financing activities section.D.The issuance of a
stock dividend should be a use of cash in the financing activities
section.E.The purchase of land and a building by issuing a
long-term note payable should be a source of cash in the financing
activities section.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
100.A company's income statement showed the following: net
income, $124,000; depreciation expense, $30,000; and gain on sale
of plant assets, $14,000. An examination of the company's current
assets and current liabilities showed the following changes as a
result of operating activities: accounts receivable decreased
$9,400; merchandise inventory increased $18,000; prepaid expenses
decreased $6,200; accounts payable increased $3,400. Calculate the
net cash provided or used by operating
activities.A.$139,000.B.$141,000.C.$145,800.D.$155,000.E.$167,000.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
101.Use the following information and the indirect method to
calculate the net cash provided or used by operating
activities:
A.$12,700.B.$13,900.C.$20,900.D.$28,400.E.$35,900.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
102.In preparing a company's statement of cash flows for the
most recent year on the indirect method, the following information
is available:
Net cash provided by operating activities
was:A.$120,000.B.$44,000.C.$70,000.D.$84,000.E.$30,000.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
103.A machine with a cost of $130,000 and accumulated
depreciation of $85,000 is sold for $50,000 cash. The amount that
should be reported as a source of cash under cash flows from
investing activities is:A.$50,000.B.$5,000.C.$45,000.D.Zero. This
is an operating activity.E.Zero. This is a financing activity.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: P3104.A company
reported that its bonds with a par value of $50,000 and a carrying
value of $57,000 are retired for $60,000 cash, resulting in a loss
of $3,000. The amount to be reported under cash flows from
financing activities is:A.$ (3,000).B.$(60,000).C.$(57,000).D.Zero.
This is an operating activity.E.Zero. This is an investing
activity.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P3
105.Becker Corporation paid cash dividends totaling $75,000
during its most recent fiscal year. How should this information be
reported on Becker's statement of cash flows?A.In operating
activities as a source of funds.B.In investing activities as a
source of funds.C.In investing activities as a use of funds.D.In
financing activities as a source of funds.E.In financing activities
as a use of funds.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P3106.Use the
following information to calculate cash received from
dividends:
A.$26,400.B.$29,000.C.$29,800.D.$30,600.E.$32,400.
Increase in Dividends Receivable = $3,400 - $2,600 = $800Cash
received from dividends = $29,800 - $800 = $29,000
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
107.Analysis reveals that a company had a net decrease in cash
of $4,000 for the current year. Net cash provided by operating
activities was $18,000; net cash used in investing activities was
$10,000 and net cash used in financing activities was $12,000. If
the year-end cash balance is $21,000, the beginning cash balance
was:A.$ 3,000.B.$ 7,000.C.$17,000.D.$25,000.E.$39,000.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3108.Stojko
Corporation had a net decrease in cash of $10,000 for the current
year. Net cash used in investing activities was $52,000 and net
cash used in financing activities was $38,000. What amount of cash
was provided (used) in operating activities?A.$ 100,000
provided.B.$(100,000) used.C.$ 80,000 provided.D.$ (80,000)
used.E.$ (10,000) used.
$10,000 - $52,000 - $38,000 = $80,000
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
109.The accountant for Robinson Company is preparing the
company's statement of cash flows for the fiscal year just ended.
The following information is available:
What is the ending balance for retained
earnings?A.$276,000.B.$202,000.C.$254,000.D.$248,000.E.$174,000.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
110.The accountant for Robinson Company is preparing the
company's statement of cash flows for the fiscal year just ended.
The following information is available:
The amount of cash dividends paid during the year would
be:A.$70,000.B.$46,000.C.$22,000.D.$39,000.E.$24,000.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
111.In preparing a company's statement of cash flows for the
most recent year, the following information is available:
Net cash flows from investing activities for the year
were:A.$134,000 of net cash used by investing activities.B.$134,000
of net cash provided by investing activities.C.$120,000 of net cash
used by investing activities.D.$252,000 of net cash used by
investing activities.E.$221,000 of net cash provided by investing
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
112.In preparing a company's statement of cash flows for the
year just ended, the following information is available:
Net cash flows from financing activities for the year
were:A.$130,000 of net cash used by financing activities.B.$165,000
of net cash used by financing activities.C.$222,000 of net cash
used by financing activities.D.$88,000 of net cash used by
financing activities.E.$206,000 of net cash used by financing
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P3
113.When analyzing the changes on a spreadsheet used to prepare
a statement of cash flows, the cash flows from operating activities
generally affect:A.Net income, current assets, and current
liabilities.B.Noncurrent assets.C.Noncurrent liability and the
equity accounts.D.Both noncurrent assets and noncurrent
liabilities.E.Equity accounts only.
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: MediumLearning Objective:
P4114.When analyzing the changes on a spreadsheet used to prepare a
statement of cash flows, the cash flows from investing activities
generally affect:A.Net income, current assets, and current
liabilities.B.Noncurrent assets.C.Noncurrent liability and the
equity accounts.D.Both noncurrent assets and noncurrent
liabilities.E.Equity accounts only.
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: MediumLearning Objective:
P4115.When analyzing the changes on a spreadsheet used to prepare a
statement of cash flows, the cash flows from financing activities
generally affectA.Net income, current assets, and current
liabilities.B.Noncurrent assets.C.Noncurrent liability and the
equity accounts.D.Both noncurrent assets and noncurrent
liabilities.E.Equity accounts only.
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: MediumLearning Objective: P4
116.Which of the following transactions or events should be
reported as a source of cash from operating activities when using
the direct method?A.Credit sales.B.Cash collections from
customers.C.Depreciation expense.D.Cash received from the sale of a
building.E.Cash received from the sale of treasury stock.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: P5117.When the
operating activities section of the statement of cash flows is
reported using the direct method, the FASB requires:A.The
preparation of the statement of cash flows under the indirect
method be completed and reported with the statement of cash flows
prepared using the direct method.B.A reconciliation of net income
to net cash provided or used by operating activities.C.Footnotes to
the financial statements disclosing the difference between net
income and the cash provided or used by financing activities.D.The
income statement to be prepared under the cash basis of
accounting.E.Noncash investing and financing activities be included
in the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P5
Matching Questions
118.Match each of the following items with the appropriate
definitions.
1.Indirect methodA calculation that reports net income and then
adjusts the net income amount by adding and subtracting items that
are necessary to yield net cash provided (used) by operating
activities.1
2.Statement of cash flowsActivities that involve the production
or purchase of merchandise and the sale of goods or services to
customers, including expenditures related to administering the
business.5
3.Direct methodA financial statement that reports the cash
inflows and cash outflows for an accounting period, and classifies
those cash flows as operating, investing, or financing
activities.2
4.Investing activitiesTransactions with a company's owners and
creditors that include obtaining cash from issuing debt and
repaying the amounts borrowed, and obtaining cash from or
distributing cash to owners.6
5.Operating activitiesA calculation of the net cash provided
(used) by operating activities that lists the major items of
operating cash receipts, and then subtracts the major items of
operating cash payments.3
6.Financing activitiesTransactions that include making and
collecting notes receivable or purchasing and selling plant assets,
or investments in other than cash equivalents and trading
securities.4
AACSB: CommunicationsAICPA BB: IndustryAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C1Learning
Objective: P1
119.For each of the following items, indicate whether it would
be classified as an (O) operating activity, an (I) investing
activity, a (F) financing activity, or a significant (N) noncash
financing and investing activity.
1.Issued bonds payable for cash.O8
2.Purchases of land for cash.O3
3.Collected accounts receivable from customers.F1
4.Paid wages to employees.O4
5.Purchased land in exchange for a note payable.F7
6.Paid cash dividends.I9
7.Issued stock for cash.N5
8.Received cash dividends from investments in trading
securities.F6
9.Sold equipment for cash.O10
10.Received interest from investments in trading
securities.I2
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2Learning
Objective: C3120.For each of the following items, indicate whether
it would be classified as either an (O) operating activity, an (I)
investing activity, a (F) financial activity, or a significant (N)
noncash financing and investing activity.
1.Signed a note payable in exchange for cash.O9
2.Paid cash to settle an account payable.I5
3.Reissued its own treasury stock.F1
4.Purchased supplies for cash.O4
5.Sale of land for cash.O2
6.Purchased a warehouse in exchange for shares of its
stock.N6
7.Purchased equipment in exchange for a 6-month note
payable.O10
8.Purchased equipment for cash.F3
9.Cash sales of merchandise.I8
10.Paid interest on a note payable.N7
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2Learning
Objective: C3
Short Answer Questions
121.Explain the purpose and format of the statement of cash
flows. Also describe its relevance to decision makers.
The purpose of the statement of cash flows is to report the cash
inflows and cash outflows for an accounting period. The cash flows
are classified as either operating, financing or investing
activities. Decisions using the evaluation of cash flows include
those by both internal and external decision makers. External
decision makers decide whether to invest in or lend money to a
company. Internal decision makers evaluate the impact of cash flows
for decisions such as keeping or ending a product line, outsourcing
a product, or downsizing a division.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Decision
MakingDifficulty: MediumLearning Objective: C1122.Define and
discuss the differences between operating, investing, and financing
activities.
Operating activities involve the day-to-day business activities
that generate operating income. Examples are production and
purchase of merchandise, the sale of goods to customers, and the
expenditures to administer the business. Investing activities
generally include those transactions that affect long-term assets.
They also include the purchase and sale of short-term investments
other than cash equivalents and trading securities, and lending and
collecting from notes receivable. Financing activities include
those transactions and events that affect long-term liabilities and
equity. They also include borrowing and repaying principle amounts
of both long- and short-term notes.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2
123.Define and explain significant noncash investing and
financing activities and the method of reporting them on the
statement of cash flows.
Noncash investing and financing activities involve the purchase
or sale of assets which are financed via noncash sources, such as
borrowing funds or exchanging stock for assets. These activities
are disclosed in either a note to the statement of cash flows or in
a separate schedule reported with the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C3124.Describe the
format of the statement of cash flows, including the reporting of
significant noncash investing and financing activities.
The statement of cash flows involves reporting cash receipts and
cash payments organized into three categories: operating,
financing, and investing. Noncash financing and investing items are
reported in a note or in a separate schedule with the statement.
The statement reconciles the beginning and ending cash and cash
equivalents balances and explains the amount of net increase or
decrease in this balance.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C4
125.Explain the value of separating cash flows into operating
activities, investing activities, and financing activities to
financial statement users in analyzing cash flows and the company's
financial performance and condition.
By separating cash flows into three categories, the statement of
cash flows allows users to focus their analysis on specific areas
of importance. The operating section of the statement reveals the
net effect of cash inflows and cash outflows from the core
activities of a business which directly affect its operating
income. Operating cash flows indicate the health of a business. A
business with a declining or negative amount of cash from operating
activities may be in financial difficulty. Analysis of the
financing section reveals to financial statement users how a
business raises funds from the outside. Analysis of the investing
activity section reveals whether or not a firm is acquiring new
assets and disposing of existing assets and thus investing in the
future of the company.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A1126.An analysis of
Hamilton Company's cash flows revealed that net cash used in
investing activities was $52,000 and net cash used in financing
activities was $38,000. These uses led to an overall decrease in
the company's cash position of $10,000. Provide an analysis of this
company's overall cash performance.
At first glance, the net decrease in the cash position may seem
to indicate negative performance. However, the use of cash in
investing activities and financing activities could actually
indicate strong performance. The cash used in investing activities
could have been used for the purchase of newer, more efficient
plant assets which will in turn increase the company's production
efficiency. The cash used in investing activities might also
indicate that excess cash has been placed in higher-yield
investments. The cash used in financing activities was most likely
used to reduce debt thus reducing the company's debt risk.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A1
127.Define the cash flow on total assets ratio and explain how
it is used to evaluate cash flows and to assess company
performance.
The cash flow on total assets ratio is defined as cash flows
from operations divided by average total assets. The ratio can be
used as a measure of the quality of earnings. The analysis of this
ratio is commonly performed over time to determine trends in
operating cash flows, especially as compared with operating
income.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2128.What are the
five usual steps involved in the preparation of the statement of
cash flows?
The preparation of the statement of cash flows involves five
common steps: (1) compute the net increase or decrease in cash; (2)
compute the net cash used or provided by operating activities; (3)
compute the net cash provided or used by investing activities (4)
compute net cash provided or used by financing activities; (5)
prove and report beginning and ending cash balance.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P1129.Explain how
the cash flows from operating activities section of the statement
of cash flows is prepared using the indirect method.
The indirect method for preparing the operating section of the
statement of cash flows is the most widely used method. The
indirect method starts with net income and then adjusts net income
for (1) changes in non-cash current assets and current liabilities,
(2) operating items not providing or using cash, (3) nonoperating
gains and losses.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
130.Explain how cash flows from investing and financing
activities are determined.
Cash flows from investing activities are determined by
identifying changes in all noncurrent asset accounts, the current
accounts for both notes receivable and investments in securities
(excluding trading securities). Cash flows from financing
activities are determined by identifying changes in all noncurrent
liability accounts and the equity accounts.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P3131.Explain the
use of a spreadsheet in the preparation of the statement of cash
flows.
The spreadsheet provides an analytical framework for the
preparation of the statement of cash flows. The upper portion of
the spreadsheet is used to analyze the changes in balance sheet
accounts for the accounting period. The lower portion of the
spreadsheet is organized into the statement of cash flows
activities of operating, financing, investing, and noncash. Changes
in the balances analyzed in the top section are then entered into
the appropriate section of the cash flows in the lower section of
the spreadsheet.
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: HardLearning Objective: P4
132.Explain how the cash flows from operating activities section
of the statement of cash flows is prepared using the direct
method.
The direct method for reporting cash flows provided or used by
operations (which is recommended by the FASB) involves listing
separately the major items of operating cash inflows and cash
outflows. The operating cash outflows are then subtracted from
operating cash inflows to obtain the net inflow or net outflow of
cash. A separate schedule reporting the reconciliation between net
income and net cash provided or used by operating activities is
required.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P5
Problems
133.Use the following company information to prepare a schedule
of significant noncash investing and financing activities: (a) Sold
a building with a book value of $125,000 for $195,000 cash and land
with a book value of $32,000 for $65,000 cash.(b) Issued 10,000
shares of $10 par value common stock in exchange for equipment with
a market value of $135,000.(c) Retired a $100,000, 10% bond by
issuing another $100,000, 12% bond issue.(d) Acquired land by
issuing a ten-year, 9%, $44,000 note payable.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C3
134.Based on the following information provided about a
company's operations, calculate its cost of goods purchased and its
cash paid for merchandise.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2
135.Use the following income statement and information about
selected current assets and current liabilities to calculate the
net cash provided or used by operating activities using the direct
method.
Selected beginning and ending balances of current asset and
current liability accounts, all of which relate to operating
activities, are as follows:
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2
136.Based on the following income statement and balance sheet
for Rashid Corporation, determine the cash flows from operating
activities using the indirect method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2
137.Martin, Inc.'s, income statement is shown below. Based on
this income statement and the other information provided, calculate
the net cash provided by operations using the indirect method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P2
138.The following information is available for the Ehrens
Corporation:
Additional information:(1) There was no gain or loss on the
sales of the long-term investments, nor on the bonds retired.(2)
Old equipment with an original cost of $37,550 was sold for $2,100
cash.(3) New equipment was purchased for $67,550 cash.(4) Cash
dividends of $33,600 were paid.(5) Additional shares of stock were
issued for cash.
Prepare a complete statement of cash flows for calendar-year
2009 using the indirect method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P2Learning Objective:
P3
139.The following information is available for the Eldridge
Company:
Additional information:(1) There was no gain or loss on the
sales of the long-term investments, nor on the bonds retired.(2)
Old machinery with an original cost of $45,060 was sold for $2,520
cash.(3) New machinery was purchased for $81,060 cash.(4) Cash
dividends of $40,320 were paid.(5) Additional shares of stock were
issued for cash.
Prepare a complete statement of cash flows for calendar-year
2009 using the indirect method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P2Learning Objective:
P3
140.Use the following company information to calculate its net
cash provided or used by investing activities: (a) Equipment with a
book value of $125,000 and an original cost of $220,000 was sold at
a gain of $22,000.(b) Paid $49,000 cash for a new truck.(c) Sold
land costing $30,000 for $26,000 cash, realizing a $4,000 loss.(d)
Purchased treasury stock for $53,000 cash.(e) Long-term investments
in stock are sold for $41,000 cash, realizing a gain of $3,500.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P3141.Use the
following information to calculate the net cash provided or used by
financing activities for the Brooks Corporation: (a) Net income,
$10,000(b) Sold common stock for $4,000 cash(c) Paid cash dividend
of $3,000(d) Paid bond payable, $8,000(e) Purchased equipment for
$12,000 cash
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P3
142.Based on the information provided below, complete the
following worksheet to be used to prepare the statement of cash
flows. (a) Net income for the year was $30,000.(b) Dividends of
$10,000 were declared and paid.(c) Stylish's only noncash expense
was depreciation which totaled $50,000.(d) The company purchased
plant assets for $70,000.(e) Notes payable in the amount of $40,000
were issued during the year for cash.
AACSB: AnalyticAICPA BB: Leveraging TechnologyAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P4
143.The following selected account balances are taken from a
merchandising company's records:
(a) Calculate the cash payments made during 2010 for
merchandise. Assume all of the company's accounts payable balances
result from merchandise purchases.(b) Calculate the cash receipts
from customer sales during 2010.(c) Calculate the cash payments for
salaries during 2010.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P5
144.Use the following calendar-year information to prepare David
Company's statement of cash flows using the direct method:
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P5
145.For each of the following separate cases, use the
information provided to calculate the missing cash inflow or cash
outflow:
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P5
146.Use the following information about the calendar-year cash
flows of MacArthur Company to prepare a statement of cash flows
(direct method) and a schedule of noncash investing and financing
activities.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: C3Learning
Objective: P5
147.For each of the following independent cases, use the
information provided to calculate the missing cash inflow or cash
outflow:
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P5
148.Water Girl Corp.'s 2009 income statement follows:
Required:Calculate the company's net cash provided or used by
operating activities using the direct method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P5
149.Based on the following income statement and balance sheet
for Montego Bay Corporation, determine the cash flows from
operating activities using the direct method.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: MediumLearning Objective: P5150.A company
reported operating cash flows of $57,000 and average total assets
of $962,000. Calculate its cash flow on total assets ratio.
$57,000/$962,000 = 5.9%.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: A2151.Polaroid
reported net cash provided by operating activities of $131.4
million. Assets at the beginning of the year totaled $2,197.7
million and totaled $2,040.0 million at the end of the year.
Calculate the cash flow on total assets ratio for Polaroid.
$131.4/[($2,197.7 + $2,040.0)/2] = 6.2%
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2
152.Kodak reported assets of $13,362 million at January 1 and
$13,369 million as of December 31 of the current year. Kodak's net
cash flows from operations were $2,204 million. Calculate the cash
flow on total assets ratio for Kodak.
$2,204/[($13,362 + $13,369)/2] = 16.5%
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2153.A company
reported operating cash flows in Year 1 of $23,400 and $26,220 in
Year 2. Its average total assets in Year 1 were $262,000 and
$285,000 in Year 2. Calculate the cash flow on total assets ratio
for both years. Comment on the results.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A2154.A corporation
reported average total assets in Year 1 of $397,350 and $440,800 in
Year 2. Its net operating cash flow for Year 1 was $35,667 and
$35,790 for Year 2. Calculate the cash flow on total assets ratio
for both years. Comment on the results.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A2
155.A company reported average total assets of $496,000 in Year
1 and $604,000 in Year 2. Its net operating cash flow in Year 1 was
$41,150 and $55,500 in Year 2. Calculate its cash flow on total
assets ratio for both years. Comment on the results.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A2
Fill in the Blank Questions
156.A main purpose of the statement of cash flows is to report
all the major cash ________ and cash _______________.Receipts (or
inflows); payments (or outflows).
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C1157.Investments that
are readily convertible to a known amount of cash and are
sufficiently close to their maturity so that the market value is
unaffected by interest rate changes are
______________________________.Cash equivalents
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C1
158._____________ activities include the cash effects of
transactions and events that determine net income.Operating
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective:
C2159.___________________ activities generally include those
transactions and events that affect long-term assets.Investing
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective:
C2160.___________________ activities include those transactions
that affect long-term liabilities and equity.Financing
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C2161.Noncash
financing and investing activities are disclosed in the
____________ or in a separate ______________________________.Notes;
schedule included with the statement of cash flows.
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: C3
162.The statement of cash flows is divided into three sections
called the _____________, _____________, and _______________
sections.Operating, investing, financing
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: EasyLearning Objective: C4163.Probably the
most important section of the statement of cash flows in analyzing
the financial performance of a company's ongoing business is the
____________ section.Operating activities
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: A1164.The cash flow
on total assets ratio is computed by dividing _____________ by
____________.Cash flows from operations; average total assets
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: A2165.Information
to prepare the statement of cash flows usually comes from three
sources: (1) __________________________, (2)
_______________________, and (3) ____________________.Comparative
balance sheets; current income statement; additional
information
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P1
166.All cash transactions eventually affect noncash ___________
accounts.Balance sheet
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: HardLearning Objective: P1167.When preparing
the operating section of the statement of cash flows using the
indirect method, noncash expenses are _____________ net
income.Added to
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: MediumLearning Objective: P2168.The
reporting of investing and financing activities is
_________________ under the direct and indirect methods of
preparing the statement of cash flows.Identical
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
MeasurementDifficulty: EasyLearning Objective: P3169.The use of a
spreadsheet for analysis is especially useful when preparing the
statement of cash flows using the _____________ method.Indirect
AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN:
Leveraging TechnologyDifficulty: MediumLearning Objective: P4
170.The FASB requires a reconciliation of net income to net cash
provided or used by operating activities when the ______________
method is used.Direct
AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN:
ReportingDifficulty: HardLearning Objective: P516-55