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C249 CH 23
Cash Flows
| Question | Answer |
|---|---|
| A company’s statement of cash flows does all of the following things EXCEPT provide accrual-basis data about the company’s financial activities during a given period. provide insight into the company’s ability to pay stockholder dividends. | provide accrual-basis data about the company’s financial activities during a given period. |
| Which is true with regard to a company’s statement of cash flows: It reports the company’s cash payments but not cash receipts for a given period. It reconciles the company’s starting and ending cash balances for a given period. | It reconciles the company’s starting and ending cash balances for a given period. |
| True or False: A company’s statement of cash flows is of little use to investors who want to assess the company’s investing and financing transactions during a period. | False |
| Which of the following is an objective of a firm’s statement of cash flows? | To provide information about the firm’s operating, investing, and financing activities during a particular period |
| True or False: The main purpose of a company’s statement of cash flows is to provide information about the company’s cash receipts and cash payments during a period. | True |
| If a firm issues $500,000 of 8%, 10-year bonds, it would be engaging in __________ activities. | Financing |
| To determine a firm’s change in cash, you need information from the assets section of its comparative balance sheets. revenues section of its comparative income statements. net income section of its comparative income statements. | assets section of its comparative balance sheets. |
| True or False: The FASB encourages firms to use the direct method when adjusting income from operations to net cash flow from operating activities. | True |
| To determine their net cash flow from operating activities, companies must report their expenses and revenues on a cash basis. How do they accomplish this? | By eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash |
| Which of the following methods uses a reconciliation of a firm’s net income to its net cash flow from operating activities? The indirect method The direct method | Both |
| True or False: If a firm’s prepaid expenses increase during a period, its expenses on a cash-basis income statement will be higher than those on an accrual-basis income statement. | True |
| Information about the change in a firm’s accounts payable from one year to the next would be useful in finding out what? | would be useful when calculating the firm’s change in cash but not when calculating its change in total assets. |
| A firm recently sold a piece of equipment for $89,000. The equipment’s original cost was $175,000, and accumulated depreciation was $90,000. If the firm uses the indirect method, how should this transaction be shown on its statement of cash flows? | As a deduction from net income of $4,000 and an $89,000 cash inflow from investing activities |
| When preparing a company’s statement of cash flows, the first step is to determine the | change in cash. |
| When preparing a company’s statement of cash flows, the first step is to determine the change in cash. net cash flow from investing activities. net cash flow from financing activities. net cash flow from operating activities. | change in cash. |
| Of the items listed below, only _______ would be classified as a financing activity on a company’s statement of cash flows. declaration and distribution of a stock dividend sale of a loan receivable making a deposit to a bond sinking fun | making a deposit to a bond sinking fun |
| True or False: If you have access to the assets section of a firm’s comparative balance sheets, you can calculate the firm’s change in cash from one period to another. | True |
| To determine a firm’s change in cash over the course of a fiscal year, you should subtract the firm’s ________ at the end of the prior fiscal year from its ________ at the end of the current fiscal year. | cash; cash |
| True or False: The FASB encourages firms to use the direct method when adjusting income from operations to net cash flow from operating activities. | True |
| True or False: Information about the change in a firm’s accounts payable from one year to the next would be useful when calculating the firm’s change in cash but not when calculating its change in total assets. | True |
| True or False: Information about the change in a firm’s accounts receivable from one year to the next would be useful when calculating the firm’s change in total assets and when calculating its change in cash. | False, NOT for cash |
| If you have access to the assets section of a firm’s comparative balance sheets, you can calculate the firm’s change in cash from one period to another. True or False? | True |
| When compiling its yearly statement of cash flows, a firm notes that it has $35,000 in depreciation expense. The firm also experienced a $35,000 decrease in accrued liabilities. What adjustments to the firm’s net income occur? | The depreciation expense would be added to the firm’s net income while the decrease in accrued liabilities would be subtracted from it; thus, the cumulative effect is not a change in the firm’s net income. |
| When using the indirect method to prepare a statement of cash flows, a firm notes that its ending inventory balance is greater than its beginning inventory balance. In this situation, why must the firm make an adjustment to its reported net earnings? | The firm must make an adjustment because its cost of goods sold on an accrual basis is lower than on a cash basis. |
| Which of the following adjustments would lead to a decrease in a firm’s net cash flow from operating activities? | an adjustment for a decrease in deferred income tax liability |
| When a firm’s accounts receivable increase, you can add the amount of the increase to the firm’s sales revenue to determine its cash receipts from customers. True or False? | False |
| The FASB requires companies to classify all income taxes paid as operating cash outflows. True or False? | False |
| Cash collected from customers and cash received from interest are both examples of _____________________ cash reciepts. | Operating |
| The direct method of compiling a statement of cash flows: is more consistent with the statement’s primary purpose. begins with calculation of a firm’s cost of goods sold. is also known as the reconciliation method. is discouraged by the FASB. | is more consistent with the statement’s primary purpose. |
| What is the difference between operating cash reciepts and cash disbursements? | Operating cash receipts involve collecting money for goods or services rendered, while cash disbursements involve paying money for goods and services. |
| In order to understand the difference between these two concepts, it is imperative to recognize that the ________ method works to differentiate between net cash flow and net income, while the ________ method works to show cash receipts and payments | indirect; direct |
| When preparing its statement of cash flows, a firm discovers that its accounts receivable balance has decreased over the course of the period. Given this information, which of the following statements is accurate? | direct method, this discovery should lead to an upward adjustment when calculating cash receipts for customers. indirect method, this discovery should lead to a upward adjustment when calculating cash flow from operating activities. |
| Subtracting operating cash disbursements from operating cash receipts will yield _____________________ cash flow from operations | net |
| Which of the following is added to operating expenses under the direct method? a decrease in net income a decrease in accrued expenses payable an increase in net income an increase in accrued expenses payable | a decrease in accrued expenses payable |
| Reporting cash receipts and cash disbursements from operating activities is known as the direct method, also called the reconciliation method. True or False? | False |
| Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods in which of the following ways? | No effect for both types! |
| Cash paid to employees for services and cash paid to creditors for interest are both examples of cash ___________________. | Disbursements |
| For items that affect reported net income but do not affect cash, the indirect method adjusts net income. True or False?? | True |
| When preparing its statement of cash flows, a firm discovers that its prepaid insurance decreased over the course of the period. Given this information, which of the following statements is accurate? | indirect method, this discovery should lead to an upward adjustment when calculating net cash flow from operating activities. Direct method, this discovery should lead to a downward adjustment when calculating cash payments for operating expenses. |
| When calculating its net cash flow from operating activities, a firm notes that its accounts payable balance decreased over the course of the period. What does this finding indicate? | It indicates that the firm must make an increase adjustment to its cost of goods sold under the direct method. |
| Under the direct method, a company will deduct an increase in ________________________ expenses payable from operating expenses. | Accrued |
| True or False: The direct method generally reports all disbursements and receipts from daily operating activities. | True |
| Which of the following is NOT an example of operating cash reciepts? cash collected from customers cash received from dividends cash received from interest cash paid to suppliers for goods | cash paid to suppliers for goods |
| How does an increase in Prepaid Expense affect operating expenses with the direct method? | Increase operating expenses |
| How does an increase in Accrued Expense affect operating expenses with the direct method? | Decreases operating expenses |
| Cora and Dan are discussing operating cash receipts and cash disbursements. Cora says that the two are quite different from one another, but Dan disagrees. Who is correct? | Cora, operating cash receipts involve collecting money for goods or services rendered, while cash disbursements involve paying money for goods and services. |
| What is the difference between the direct method and the indirect method? | The direct method works to show cash receipts and payments, while the indirect method works to differentiate between net cash flow and net income. |
| True or False: If a firm’s prepaid expenses increase and its accrued expenses payable decrease, add both the amount of the increase and the amount of the decrease to the firm’s operating expenses to determine its cash payments for operating expenses. | True |
| Which of the following formulas yields net cash flow from operating activities? | operating cash receipts – operating cash disbursements |
| Under the direct method, a decrease in accrued expenses payable is ________ operating expenses. | Added to |
| Under the direct method, an increase in accrued expenses payable is deducted from prepaid expenses. added to operating expenses. deducted from operating expenses. added to prepaid expenses. | deducted from operating expenses. |
| Which of the following is NOT an example of a cash disbursement? cash paid to suppliers for goods cash provided to employees for services cash paid to creditors for interest cash received from interest | cash received from interest |
| When preparing its statement of cash flows, a firm discovers that its accounts payable balance has increased over the course of the period. Given this information, which of the following statements is accurate? | indirect method, this discovery should lead to an upward adjustment when calculating net cash flow from operating activities. direct method, this discovery should lead to a downward adjustment when calculating cash payments to suppliers. |
| If a firm uses the indirect method to compile the operating cash flows, it would subtract all except an increase in accounts receivable. amortization of a patent. amortization of a bond premium. a gain on the sale of land. | amortization of a patent. |
| The net cash provided by operating activities was $155,000. For 2018, depreciation on plant assets was $45,000, amortization of patent was $8,000, and cash dividends paid on common stock was $54,000. What was Triton’s net income for 2018? | 102,000 (155,000 - 45,000 - 8,000 = 102,000) |
| Barring the effects of all other adjustments to net income, if a firm sustains a $25,000 loss on its investment in common stock using the equity method, then its net income will be __________ than its net cash flow from operating activities. | Lower |
| Morton Corporation sold several of its plant assets. The original cost of these assets $1.72 million, and accumulated depreciation $1.43 million. Proceeds were $325,000. How should the sale of plant assets be shown in the firm’s statement of cash flows? | As a $35,000 deduction from net income and a $325,000 increase in cash flows from investing activities |
| When calculating its net cash flow from operating activities, a firm subtracts $18,000 from its net income in relation to an amortization transaction. This adjustment suggests that the transaction involved amortization of bond ____________. | Premium |
| When calculating its net cash flow from operating activities, a firm makes a $19,000 positive adjustment to its net income. The adjustment was LEAST likely related to a(n) gain on the sale of equipment. loss on impairment of assets. | gain on the sale of equipment. |
| True or False: The only thing needed to prepare the statement of cash flows is the comparative balance sheet. | False |
| True or False: Write-downs and similar “book” entries do not need to be added back to or subtracted from a firm’s net income when creating a statement of cash flows. | False |
| Which of the following is NOT included in the sources of information used to prepare the statement of cash flows? last year’s income statement this year’s retained earnings statement comparative balance sheets | last year’s income statement |
| Analysis of a firm’s Retained Earnings account is necessary or not necessary when preparing the firm’s yearly statement of cash flows? | Necessary |
| True or False: A firm should classify payment of a stock dividend as an operating activity. | False |
| True or False: If a firm has any income from an investment in common stock using the equity method, it should be subtracted from net income when calculating net cash flow from operating activities. | True |
| True or False: When compiling a firm’s statement of cash flows, write-downs and similar “book” entries should be added back to or subtracted from the firm’s net income as appropriate. | True |
Created by:
tbeeche