ACCT 3311 - Ch. 23

operating activities

Cash flow activities include the cash effects of transactions that create revenues and expenses, and thus enter into the determination of net income.

financing activities

Cash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and paying them dividends.

indirect method

Method of preparing the cash flow statement that starts with net income and converts it to net cash provided by operating activities, by adjusting net income for items that affected reported net income but did not affect cash. Also called the reconciliation method.

cash equivalents

Short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in fair value due to changes in interest rates. Generally, only investments with original maturities of 3 months or less qualify under this definition. Examples are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.

The information to prepare the statement of cash flows comes from all of the following sources except: a. retained earnings statement. b. selected transaction data. c. comparative balance sheets. d. current income statement.

a

Which of the following is not one of the benefits that creditors and investors can derive from the statement of cash flows? A. Assess the effectiveness of management's borrowing policy. B. Assess the company's ability to generate future cash flows. C. Asses the company's ability to pay future cash dividends. D. Explain the difference between net income and net cash flow from operating activities.

a

Which of the following is not one of the three activities classified on the statement of cash flows? a. Managing. b. Investing. c. Operating. d. Financing.

a

If a plant asset is sold for cash and a loss results, which sections are affected in the statement of cash flows under the indirect method? a. Investing only. b. Operating and investing. c. Operating and financing. d. Financing only.

b

Of the following questions, which one would not be answered by the statement of cash flows? a. Where did the cash come from during the period? b. What was the cash used for during the period? c. Were all the cash expenditures of benefit to the company during the period? d. What was the change in the cash balance during the period?

c

The reconciliation of net income to net cash flow from operating activities is reported under: A. the direct method only. B. the indirect method only. C. both the direct method and the indirect method. D. neither the direct nor the indirect method.

c

Which of the following is not needed in order to prepare a statement of cash flows? a. Comparative balance sheets. b. Current year's income statement. c. Last year's statement of cash flows. d. Selected transaction data.

c

Acquiring land and a building by issuing common stock would be reported as: A. an investing activity. B. a financing activity. C. both an investing activity and a financing activity. D. a noncash investing and financing activity.

d

Activities involving the cash effects of transactions that enter into the determination of net income are: A. financing activities. B. investing activities. C. noncash investing and financing activities. D. operating activities.

d

All of the following adjustments are added to net income in computing net cash flow from operating activities except: A. amortization expense. B. a decrease in supplies. C. an increase in salaries payable. D. an increase in accounts receivable.

d

All of the following adjustments would be deducted in determining net cash flow from operating activities except: A. amortization of bond premium. B. revenue from equity method investments. C. gain on sale of plant assets. D. increase in accrued liabilities.

d

All of the following would be considered investing activities except: a. purchase of equipment for cash. b. sale of land for cash. c. purchase on 25% interest in the stock of a supplier. d. receipt of cash dividends from investments.

d

Net cash flow from operating activities is determined by eliminating a. earned revenues from net income. b. incurred expenses from net income. c. cash expenses and cash revenues from net income. d. noncash expenses and noncash revenues from net income.

d

The primary purpose of the statement of the cash flows is to provide information about the: a.entity's ability to generate future cash flows. b. entity's ability to pay dividends and meet obligations. c. reasons for the difference between net income and net cash flow from operating activities. d. entity's cash receipts and cash payments during a period.

d

Under the direct method of preparing the statement of cash flows, cash receipts from customers is equal to: A. Sales revenues - Decrease in accounts receivable. B. Net cash sales. C. Sales revenues + Increase in accounts receivable. D. Sales revenues - Increase in accounts receivable.

d

(True or False) When accounts payable increase during a period, cost of goods sold on an accrual basis is lower than cost of goods sold on a cash basis.

false

(True or False) The conversion of net income to net cash provided by operating activities may be accomplished using either the direct method or the indirect method.

true

(True or False) The differences between the direct method and the indirect method only affect the operating activities section of the statement of cash flows.

true

(True or False) The direct method is more consistent with the objective of the statement of cash flows because it shows operating cash receipts and payments where the indirect method does not.

true

(True or False) The reconciling items in the work sheet are not entered in any journal or posted to any account.

true

Which of the following is not one of the benefits that creditors and investors can derive from the statement of cash flows? A. Assess the effectiveness of management's borrowing policy. B. Assess the company's ability to generate future cash flows. C. Asses the company's ability to pay future cash dividends. D. Explain the difference between net income and net cash flow from operating activities.

a

Which of the following is not one of the benefits that creditors and investors can derive from the statement of cash flows? a. Asses the company's ability to pay future cash dividends. b. Assess the effectiveness of management's borrowing policy. c. Assess the company's ability to generate future cash flows. d. Explain the difference between net income and net cash flow from operating activities.

b

All of the following would be classified as financing cash flows except: a. purchases of treasury stock. b. proceeds from the sale of stock. c. interest paid on long-term debt. d. dividends paid on preferred stock.

c

Collier Company sold some of its plant assets during 2012. The original cost of the plant assets was $1,500,000 and the accumulated depreciation at date of sale was $1,400,000. The proceeds from the sale of the plant assets were $210,000. The information concerning the sale of the plant assets should be shown on Collier's statement of cash flows (indirect method) for the year ended December 31, 2012, as a (n) a. subtraction from net income of $110,000 and a $100,000 increase in cash flows from financing activities. b. addition to net income of $110,000 and a $210,000 increase in cash flows from investing activities. c. subtraction from net income of $110,000 and a $210,000 increase in cash flows from investing activities. d. addition of $210,000 to net income.

c

statement of cash flows

the basic financial statement that reports cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances

(True or False) Cash flows from events whose effects are included in net income, but which are not related to operations, should be reported either as investing activities or as financing activities.

true

(True or False) If a company records a loss on the sale of equipment, the amount of the loss must be added back to net income to determine the proper amount of net cash provided by operating activities.

true

(True or False) Operating activities as defined by GAAP, involve the cash effects of transactions that enter into the determination of net income.

true

(True or False) Some changes in working capital, although they affect cash, do not affect net income.

true

(True or False) The cash received from the sale of property, plant, and equipment at a gain, although reported in the income statement, is classified as an investing activity.

true

(True or False) The information in a statement of cash flows should help investors, creditors, and others to assess the reasons for the difference between net income and net cash flow from operating activities.

true

(True or False) The principal advantage of the indirect method is that it focuses on the difference between net income and net cash provided by operating activities, thus providing a useful link between the statement of cash flows, the income statement, and the balance sheet.

true

(True or False) The statement of cash flows provides information not available from other financial statements.

true

(True or False) Unlike the other financial statements, the statement of cash flows is not prepared from the adjusted trial balance.

true

investing activities

Cash flow activities that include (1) purchasing and disposing of investments and productive long-lived assets using cash, and (2) lending money and collecting the loans.

direct method

Method of preparing the cash flow statement, which reports cash receipts and cash disbursements from operating activities. This results in the presentation of a condensed cash receipts and cash disbursements statement.

significant noncash transactions

Transactions and events that are investing or financing activities but that do not involve cash and thus are omitted from the statement of cash flows. These include acquisition of assets by assuming liabilities or by issuing equity securities, exchanges of nonmonetary assets, refinancing of long-term debt, conversion of debt or preferred stock to common stock, and issuance of equity securities to retire debt. Companies either disclose these transactions in a separate schedule on the statement of cash flows or in a separate note to the financial statements.

Koppernaes Co. provided the following information on selected transactions during 2012: Purchase of land by issuing bonds $550,000 Proceeds from issuing stock 510,000 Purchases of inventory 950,000 Purchases of treasury stock 250,000 Loans made to affiliated corporations 175,000 Dividends paid to preferred stockholders 90,000 Proceeds from issuing preferred stock 210,000 Proceeds from sale of land 225,000 The net cash provided (used) by investing activities during 2012 is A. $50,000. B. $(500,000). C. $(225,000). D. $(900,000).

a

Net cash flows from operating activities under the indirect method is determined by eliminating: a. noncash revenues and noncash expenses from net income. b. earned revenues from net income. c. only noncash expenses from net income. d. incurred expenses from net income.

a

The last step in the preparation of the statement of cash flows worksheet is to enter the a. increase or decrease in cash on the cash line and at the bottom of the worksheet. b. balance sheet accounts and their beginning balances in the balance sheet accounts section. c. balance sheet accounts and their ending balances in the balance sheet accounts section. d. data which explain the changes in the balance sheet accounts in the reconciling columns of the work sheet.

a

Tucker Co. provided the following information on selected transactions during 2012: Repayment of bond principal $ 450,000 Proceeds from issuing common stock 760,000 Purchases of inventory 940,000 Proceeds from the sale of treasury stock 120,000 Purchase of 10% interest in stock of Handi Corp. 220,000 Dividends paid to common & preferred stockholders 80,000 Proceeds from issuing preferred stock 150,000 Proceeds from sale of land 280,000 The net cash provided (used) by financing activities during 2012 is A. $500,000. B. $380,000. C. $150,000. D. $(260,000).

a

Under the direct method of preparing the statement of cash flows, cash receipts from customers is equal to: a. Sales revenues - Increase in accounts receivable. b. Sales revenues - Decrease in accounts receivable. c. Sales revenues + Increase in accounts receivable. d. Net sales revenue.

a

Which of the following activities would be classified as an investing activity? a. Cash paid on account. b. Cash paid to purchase land to be held for future use. c. Cash received from interest revenue. d. Cash received for dividends.

b

Which of the following is not needed in order to prepare a statement of cash flows? A. comparative balance sheets. B. last year's statement of cash flows. C. current year's income statement. D. selected transaction data.

b

A statement of cash flows typically would not disclose the effects of a. capital stock issued at an amount greater than par value. b. stock dividends declared. c. cash dividends paid. d. a purchase and immediate retirement of treasury stock.

b

An analysis of the machinery accounts of Jezak Company for 2012 is as follows:Machinery Accumulated Depreciation Net Balance at January 1, 2012 $1,650,000 $850,000 $800,000 Purchases of new machinery in 2012 for cash 425,000 — 425,000 Depreciation in 2012 — 275,000 (275,000) Balance at Dec. 31, 2012 $2,075,000 $1,125,000 $950,000 The information concerning Jezak's machinery accounts should be shown in Jezak's statement of cash flows (indirect method) for the year ended December 31, 2012, as a (n) A. subtraction from net income of $425,000 and a $275,000 decrease in cash flows from financing activities. B. addition to net income of $275,000 and a $425,000 decrease in cash flows from investing activities. C. $425,000 increase in cash flows from financing activities. D. $150,000 decrease in cash flows from investing activities.

b

Cabinis Co. provided the following information on selected transactions during 2012: Purchase of land by issuing bonds $550,000 Proceeds from issuing bonds 900,000 Purchases of inventory 2, 975,000 Purchases of treasury stock 190,000 Loans made to affiliated corporations 425,000 Dividends paid to preferred stockholders 120,000 Proceeds from issuing preferred stock 325,000 Proceeds from sale of equipment 650,000 The net cash provided by financing activities during 2012 is A. $725,000. B. $915,000. C. $1,040,000. D. $1,465,000.

b

Caraway Company sold some of its plant assets during 2012. The original cost of the plant assets was $500,000 and the accumulated depreciation at date of sale was $310,000. The proceeds from the sale of the plant assets were $150,000. The information concerning the sale of the plant assets should be shown on Caraway's statement of cash flows (indirect method) for the year ended December 31, 2012, as a (n) A. subtraction from net income of $150,000 and a $190,000 increase in cash flows from financing activities. B. addition to net income of $40,000 and a $150,000 increase in cash flows from investing activities. C. subtraction from net income of $190,000 and a $150,000 increase in cash flows from investing activities. D. addition of $150,000 to net income.

b

The payment of a cash dividend would be classified as a(n): a. operating activity. b. financing activity. c. significant noncash transaction. d. investing activity.

b

Tucker Co. provided the following information on selected transactions during 2012: Repayment of bond principal $ 450,000 Proceeds from issuing common stock 760,000 Purchases of inventory 940,000 Proceeds from the sale of treasury stock 120,000 Purchase of 10% interest in stock of Handi Corp. 220,000 Dividends paid to common & preferred stockholders 80,000 Proceeds from issuing preferred stock 150,000 Proceeds from sale of land 280,000 The net cash provided (used) by investing activities during 2012 is A. $40,000. B. $60,000. C. $180,000. D. $(880,000).

b

When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities? a. A change in interest payable b. A change in dividends payable c. A change in income taxes payable d. All of these are adjustments.

b

The issuance of a stock split would be classified as a (n) a. investing activity. b. financing activity. c. significant noncash transaction. d. operating activity.

c

The method of calculating net cash flow from operating activities that results in the presentation of a condensed cash receipts and cash disbursements statement is the: A. reconciliation method. B. indirect method. C. direct method. D. cash flow method.

c

The payment of a cash dividend would be classified as a(n): A. operating activity. B. investing activity. C. financing activity. D. significant noncash transaction.

c

The primary purpose of the statement of cash flows is to provide information a. about the operating, investing, and financing activities of an entity during a period. b. that is useful in assessing cash flow prospects. c. about the cash receipts and cash payments of an entity during a period. d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

c

Under the direct method, cash payments to suppliers equals cost of goods sold: a. plus an increase in inventory and accounts payable. b. minus a decrease in inventory and accounts payable. c. minus an increase in inventory and plus a decrease in accounts payable. d. plus an increase in inventory and minus an increase in accounts payable.

d

Which method adjusts net income to net cash flows from operating activities? a. Accrual. b. Direct. c. Adjustment. d. Indirect.

d

Which method adjusts net income to net cash flows from operating activities? A. Direct. B. Adjustment. C. Accrual. D. Indirect.

d

Which of the following activities would be classified as an investing activity? A. Cash received from interest revenue. B. Cash paid on account. C. Cash received for dividends. D. Cash paid to purchase land to be held for future use.

d

Which of the following is the first step in preparing the statement of cash flows? A. Determine the net cash flow from operating activities. B. Determine the net income. C. Determine the cash flow from investing activities. D. Determine the change in cash.

d

Which of the following is the first step in preparing the statement of cash flows? a. Determine the net cash flow from operating activities. b. Determine the net income. c. Determine the cash flow from investing activities. d. Determine the change in cash.

d

Which of the following items might be classified differently in a statement of cash flows prepared using IFRS rather than GAAP? a. Interest expense paid on bonds. b. Interest revenue received from notes receivable. c. Dividends paid to preferred shareholders. d. All of these answer choices are correct.

d

(True or False) As its name implies, the indirect method is not directly involved with the computation of accrual based net income because it results in the presentation of a condensed cash basis income statement.

false

(True or False) Because the payment of cash dividends reduces both cash and retained earnings by a similar amount, this transaction has no effect on the statement of cash flows.

false

(True or False) Both GAAP and IFRS allow noncash investing and financing activities to be included in a separate schedule as part of the statement of cash flows.

false

(True or False) Depreciation expense is an adjustment to net income under the direct method.

false

(True or False) Determining net cash provided by operating activities involves analysis of the income statement alone as it is the statement that reflects the amount of cash generated from operations as well as the amount of cash used to conduct the operations.

false

(True or False) Financing activities include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets.

false

(True or False) If a cash inflow and a cash outflow result from similar type transactions, such as the purchase and sale of property, plant, and equipment or the issuance and repayment of debt, they may be shown as a net amount from the two transactions in the statement of cash flows.

false

(True or False) Payment of a stock dividend is classified as a cash outflow from financing activities.

false

(True or False) Stock dividends and stock splits are classified as financing activities.

false

(True or False) The amortization of a bond premium should be handled in the same manner as depreciation of a plant asset, that is, added to net income when determining net cash provided by operating activities.

false

(True or False) The financing activities section of a statement of cash flows would include interest paid on bonds and long-term notes payable.

false

(True or False) The investing activities section of a statement of cash flows would include cash received from dividends on long-term investments in stocks.

false

(True or False) The operating activities section of a statement of cash flows would include cash spent to acquire new equipment.

false

(True or False) The redemption of bonds would be classified as an investing activity.

false

(True or False) The statement of cash flows is divided into four activities.

false

(True or False) To prepare the statement of cash flows, only comparative balance sheets and a current income statement are needed.

false

(True or False) Under the direct method, a loss on the sale of long-term investments would be shown in the operating activities section.

false

(True or False) Unlike U.S. GAAP, IFRS does not specify that companies must classify cash flows as operating, investing, or financing.

false

(True or False) When a repair to equipment is debited to accumulated depreciation because it extends the asset's useful life, the transaction is considered neither an increase nor a decrease in cash for the period.

false

(True or False) When computing net cash provided by operating activities under the indirect method, an increase in accounts receivable (net) during the year must be added to accrual based net income because more sales were made then those reflected in the income statement.

false

(True or False) When the direct method is used in determining cash provided by operating activities, users of the statement of cash flows are unable to reconcile the net income to the net cash provided by operations because this is only provided when the indirect method is used.

false

(True or False) When using the indirect method, a company does not have to consider compensation expense from stock options in computing net cash flow from operating activities.

false