Ch 23: Describe the usefulness and format of the statement of cash flows. - Practice

A company's annual statement of cash flows would provide answers to which of the following questions?

"By what amount did the firm's dividends paid increase or decrease during the past year?"

In which of the following scenarios is the company engaging in investing activities?

A company sells two of the nine warehouses it owns.

Of the following companies, which is in the best position to meet its current financial obligations?

A firm whose financial statements show a steady increase in net income accompanied by a steady increase in cash flows

Which of the following would be classified as an operating activity?

An activity that involves the cash effects of transactions that enter into the determination of net income

Which of the following would be classified as a cash flow from financing activities?

Dividends paid on preferred stock

A company's statement of cash flows provides details about a firm's cash payments only.

False

A company's statement of cash flows should be of little or no interest to the company's employees

False

The net change in cash reported on a company's statement of cash flows need not reconcile the beginning and ending cash balances reported in the comparative balance sheets.

False

Which of the following information is provided by a company's statement of cash flows? I. Whether all cash expenditures during a particular period were to the company's benefit II. How the company used its cash during a particular period III. How much the company's cash balance changed during a particular period

II and III only

In February, Reynolds Industries purchased a piece of land for $100,000. Two months later, the company sold the land for the same amount. Given this scenario, which of the following statements is accurate?

In Reynolds' statement of cash flows, the $100,000 outflow from the purchase of the land should be reported separately from the $100,000 inflow from the sale of the land.

When reviewing the operating activities section of a company's statement of cash flows, an investor could find which of the following pieces of information?

The amount of taxes paid by the company.

Which of the following statements is accurate with regard to a company's statement of cash flows?

The company's net income can be found in the operating activities section of the statement.

A company's annual statement of cash flows __________ provide information about how much the firm spent to repurchase a portion of its outstanding shares over the past year.

Would

Of the following companies, which is most likely experiencing operating problems?

a company whose financial statements show consistent net income but an ongoing decrease in cash flows from operations

When examining a firm's financial statements for the past five years, you notice that the firm's income has remained consistent while its cash flow from operations has decreased. In fact, during the past two years, the firm has had a negative cash flow from operations. These findings suggest that the firm

appears to be experiencing operating problems.

In order to be considered a cash equivalent, an investment must

be readily convertible into a known amount of cash.

Last year, a company issued $500,000 in bonds and paid $60,000 in stockholder dividends. When compiling its statement of cash flows for the year, the company would classify

both of these amounts as cash flows related to financing activities.

A company's statement of cash flows provides information about

both the company's cash receipts and its cash payments.

If a firm issues $500,000 of 8%, 10-year bonds, it would be engaging in __________ activities.

financing

A company just received $25,000 in dividends on one of its stock investments. The company should classify this payment as a cash flow related to

operating activities because any dividends received are reported on the company's income statement.

A company's statement of cash flows

provides insight into the company's ability to pay stockholder dividends.

Last year, a company obtained a $50,000 loan. During the current year, the company used the cash to buy a piece of manufacturing equipment. The company paid $2,500 interest on the loan before the year was through. When compiling its statement of cash flows, the company would classify

the equipment's purchase price as a cash outflow related to investing activities, and the interest paid on the equipment loan as a cash outflow related to operating activities.

During the fiscal year that just ended, a company collected $75,000 in principal on loans that it had made to other firms, as well as $12,000 in interest on those loans. When compiling its statement of cash flows, the company would classify

the principal received as a cash inflow related to investing activities, and the interest received as a cash inflow related to operating activities.

A company's statement of cash flows __________ contains information about how many bonds the company issued during the period under consideration.

would not

Cash flows relating to investing or financing activities are never classified as cash flows relating to operating activities.

False

A company has just signed a 90-day nontrade note payable in order to borrow $20,000. When preparing its statement of cash flows (using the indirect method), how should the company report the interest paid on the note?

As a cash outflow from operating activities

In January of last year, Newton Inc. sold 15,000 shares of its own common stock for $180,000. Ten months later, Newton repurchased 5,000 of those shares at a price of $11 per share. When compiling its statement of cash flows for the year, Newton should record which of the following entries in relation to these stock transactions, and why?

Both a $180,000 cash inflow and a $55,000 cash outflow should be recorded in the financing section because both transactions involve stockholders' equity items, and all cash flows must be reported gross.

In January, Clinton Corporation purchased 20,000 shares of ABC Inc. common stock for $80,000. In December, Clinton sold all 20,000 shares for $90,000. In its statement of cash flows for the year, Clinton

must report the $80,000 outflow from investing activities separately from the $90,000 inflow from investing activities.

Last year, a company issued $600,000 in bonds and paid $75,000 in stockholder dividends. When compiling its statement of cash flows for the year, the company would classify

the bond amount as a cash inflow, and the dividend amount as a cash outflow.

Which of the following events would be classified as an investing activity?

The sale of land for cash

Which of the following questions could be answered through analysis of a company's annual statement of cash flows?

"Why did the firm's available cash decrease over the past year even though the firm reported an increase in net income?"

What is the primary reason why a company's employees should be interested in the company's statement of cash flows?

It provides a picture of the company's ability to meet its salary and wage obligations.

Which of the following statements is true with regard to a company's statement of cash flows?

It reconciles the company's starting and ending cash balances for a given period.

Over the course of the year, a company paid $10,000 in interest on one of its bank loans. How should the company classify this payment, and why?

It should be classified as a cash flow related to operating activities because any interest paid to lenders is reported on the company's income statement.

In March, Parker Products repurchased 25,000 of its outstanding common shares at a price of $14 per share. Seven months later, Parker sold 15,000 of these shares on the open market for $15.50 each. When recording the effects of these transactions on its annual statement of cash flows, Parker reports only a $117,500 cash outflow related to financing activities. Is this entry correct, and why?

Parker is correct in placing this entry in the financing section. However, rather than recording only a net cash outflow of $117,500, Parker should have reported both a cash outflow of $350,000 and a cash inflow of $232,500.

When reviewing a firm's statements of cash flows for the past four years, you notice that the firm's net income remained constant from year to year while its net cash flows increased. What do these findings suggest?

The firm is in a better position to meet its financial obligations now than it was four years ago.

Last year, Alpha Corporation spent $250,000 to repurchase 15,000 shares of its own outstanding common stock. The company also paid $40,000 in interest on a construction loan that it had obtained from its bank. How should these transactions be reflected on Alpha's annual statement of cash flows, and why?

The two transactions should be reported in separate sections of the statement because one involves a change in equity while the other involves a change in income. Specifically, Alpha should record a $250,000 cash outflow in the financing section and a $40,000 cash outflow in the operating section.

Last year, XYZ Inc. sold one of its warehouse facilities for $1,500,000. It also earned $25,000 in interest on a loan that it made to another company. How should these transactions be reflected on XYZ's annual statement of cash flows, and why?

The two transactions should be reported in separate sections of the statement because one involves long-term assets while the other involves income. Specifically, XYZ should record a $1,500,000 cash inflow in the investing activities section and a $25,000 cash inflow in the operating activities section.

What is the primary purpose of a company's statement of cash flows?

To provide information about the company's cash receipts and cash payments during a particular period

Which of the following is an objective of a firm's statement of cash flows?

To provide information about the firm's cash and noncash investing and financing activities during a particular period

A company's statement of cash flows is useful to investors who want to assess the company's investing and financing transactions during a period.

True

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

You are in the process of reviewing your company's financial records for the past year. As you look at the company's list of equipment purchases, you notice that one of the purchase amounts has been incorrectly recorded in the books as $54,000 instead of $45,000. When correcting this error, you'll need to make the appropriate adjustment in which section of the company's statement of cash flows?

cash outflows from investing activities section