Finance Test 3 Chapter 7
Amortization of goodwill reduces net income and is a cash outflow.
False
An increase in a liability is a use of cash.
False
An increase in accounts receivable does not require adjusting net income, if preparing the statement of cash flows using the indirect method.
False
Cash flow from financing is normally negative during the start-up phase for a company.
False
Cash flow from operations is usually less volatile than net income.
False
Cash flows from operations is better measure of profitability than net income as it is less susceptible to manipulation by management.
False
In firms that are experiencing tremendous growth, it is rare that net income will exceed cash generated by all activities.
False
Increases in working capital are a source of funds.
False
The financing section of the statement of cash flows (prepared in accordance with GAAP) contains all cash inflows and cash outflows, relating to the financing of a company.
False
The only time a company experiences a negative cash flow from operations is when they are in trouble.
False
A decrease in liabilities would usually show as an outflow in the statement of cash flows.
True
A gain on sale of an asset would require adjusting net income, if preparing the statement of cash flows using the indirect method.
True
An increase in assets would usually show as an outflow in the statement of cash flows.
True
Cash flow from investing when averaged over an extended period of time would normally be expected to be negative (i.e. net outflow).
True
Cash flow from operations will often be negative for companies experiencing tremendous growth.
True
Companies can construct the statement of cash flows using either the direct method or the indirect method.
True
Depreciation and amortization expense need to be added back to net income if preparing the statement of cash flows using the indirect method.
True
Depreciation expense decreases net income but is not a use of cash.
True
Interest income is recorded as an operating inflow of cash.
True
Many financial analysts subtract interest paid from cash from operations and reclassify it as part of cash from financing activities.
True
Net cash flow is not affected by a company's choice of accounting principles for financial reporting purposes.
True
Over an extended period-of-time average cash flow from operations would be expected to be higher than average net income.
True
Payment of a 5% stock dividend will not appear in the statement of cash flows.
True
Taxes paid on capital gains from the sale of marketable securities are recorded as cash outflows from operations.
True
The cash adequacy ratio is normally measured over an extended period-of-time to remove the effect of random disturbances.
True
The cash reinvestment ratio is a measure of the percentage of investment in assets representing operating cash retained and reinvested in the company for both replacing assets and growth in operations.
True
Users sometimes compute net income plus depreciation and amortization (for example EBITDA) as a crude proxy for operating cash flows.
True
