Financial Statement Analysis Chapter 3

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be: a. greater than net income b. less than net income c. greater than the change in working capital from operations d. greater than the change in cash

less than net income

One rationale for the statement of cash flows is to: a. ensure that the cash account balances at year-end. b. reconcile differences between net income and cash receipts and disbursements. c. calculate the company's free cash flow. d. examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles.

reconcile differences between net income and cash receipts and disbursements.

All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers, except: a. restaurants b. wineries c. construction companies d. aerospace manufacturers

restaurants

Which of the following would not be a cash flow from investing activities? a. Sale of a patent. b. Collection of interest revenue on a long-term note receivable. c. Collection of principal of a note receivable. d. Purchase of long-term investments.

Collection of interest revenue on a long-term note receivable.

Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline

Maturity

Normally, cash flows from operations will peak during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline

Maturity

Which of the following statements is true? a. A cash dividend is an operating cash outflow. b. Cash paid to repurchase treasury stock is an investing cash outflow. c. Cash paid to acquire stock in another company is a financing outflow. d. Purchase of a patent is an investing cash outflow.

Purchase of a patent is an investing cash outflow.

Which of the following is a cash flow from operating activities? a. Sale of long-term investments in common stock. b. Purchase of merchandise for resale. c. Payment of a note payable. d. Sale of a piece of land no longer used in operations.

Purchase of merchandise for resale.

When preparing the statement of cash flows using the indirect method, an increase in inventories would appear as: a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section

a decrease in the operating activities section

When preparing the statement of cash flows using the indirect method, the sale of marketable securities would appear as: a. a use of cash in the investing activities section b. a source of cash in the investing activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section

a source of cash in the investing activities section

Under the indirect method of preparing the statement of cash flows, add backs to net income include all of the following except: a. depreciation expense b. deferred tax expense c. gains on sale of equipment d. share-based compensation

gains on sale of equipment

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method? a. Subtract amortization expense b. subtract gain on sale of subsidiary c. add an increase in accounts receivable d. add a decrease in accounts payable

subtract gain on sale of subsidiary

Which of the following companies would you expect to report significant amounts of cash provided by financing activities? a. A yet-to-be-profitable biotechnology company. b. A mature company operating in the oil refinery industry. c. A profitable established company in the retail industry. d. A large multinational pharmaceutical company.

A yet-to-be-profitable biotechnology company.

Which of the following transactions would not create a cash flow? a. Payment of a cash dividend. b. The company purchased some of its own stock from a stockholder. c. Amortization of patent for the period. d. Sale of equipment at book value (i.e. no gain or loss).

Amortization of patent for the period.

Which statement is false regarding the preparation of the indirect method of the statement of cash flows? a. An increase in merchandise inventory is subtracted from net income. b. Depreciation expense is added to net income. c. An increase in accounts receivable is added to net income. d. An increase in accounts payable is added to net income.

An increase in accounts receivable is added to net income.

Which of the following statements about the statement of cash flows is correct? a. A purchase of equipment is classified as a cash inflow from investing activities. b. Cash dividends paid are classified as cash flows from operating activities. c. Cash dividends received on stock investments are classified as cash flows from operating activities. d. A company with a net loss on the income statement will always have a net cash outflow from operating activities.

Cash dividends received on stock investments are classified as cash flows from operating activities.

Normally, cash flows from financing will start using cash during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline

Maturity

A company in the growth phase of its product life cycle will normally have which of the following patterns of cash flows? a. Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing. b. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing. c. Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing. d. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing.

Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.

Which of the following statements is false? a. Purchase of equipment is an investing cash outflow. b. Sale of equipment creates investing cash outflow equal to its selling price. c. Purchase of short-term investments is an investing cash outflow. d. Purchase of a patent is an investing cash outflow.

Sale of equipment creates investing cash outflow equal to its selling price.

As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except: a. The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash. b. The existence of negative cash flows from operations can be eliminated by using this financial statement. c. The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm's reported earnings. d. Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm's industry, its strategy, and the stage in its life cycle.

The existence of negative cash flows from operations can be eliminated by using this financial statement.

When preparing the statement of cash flows using the indirect method, the payment of dividends would appear as: a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section

a use of cash in the financing activities section

The expense incurred by issuing stock options should be: a. classified as a financing activity. b. added back to net income in the operating activities section. c. subtracted from net income in the operating activities section. d. does not appear in the statement of cash flows.

added back to net income in the operating activities section.

When preparing the statement of cash flows using the indirect method, an increase in accounts payable would appear as: a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section

an increase in the operating activities section

A cash inflow from financing activities includes: a. receipt of interest payments. b. proceeds from selling equipment. c. proceeds from issuance of bonds payable. d. proceeds from selling investments in equity securities of another company.

proceeds from issuance of bonds payable.

An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is: a. depreciation expense. b. compensation expense related to stock option plans. c. income from an investment accounted for using the equity method. d. unrealized losses on trading investments

income from an investment accounted for using the equity method.

When net income is low relative to operating cash flows, we describe the firm as having recorded: a. income-decreasing accruals. b. income-increasing accruals. c. income neutral accruals. d. abnormal accruals.

income-decreasing accruals.

When net income is high relative to operating cash flows, we describe the firm as having recorded: a. income-decreasing accruals. b. income-increasing accruals. c. income-neutral accruals. d. abnormal accruals.

income-increasing accruals.

As products move through the maturity phase, companies invest to ___________ productive capacity. a. increase b. decrease c. maintain d. Not enough information to answer this question.

maintain

Academic research has found that market rates of return on common stock are the most highly correlated with: a. net income. b. cash flow from operations. c. EBITDA. d. cash flow from investing activities.

net income.

Free cash flows to all debt and common equity shareholders represents the excess of cash flows from: a. operating activities over cash flows for financing activities b. investing over cash flows for operating activities c. investing over cash flows for financing activities d. operating activities over cash flows for investing activities

operating activities over cash flows for investing activities

In a statement of cash flows, interest received from sources other than a company's investments would be classified as cash inflows from: a. lending activities. b. operating activities. c. investing activities. d. financing activities.

operating activities.

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows? a. non-cash items, such as depreciation and amortization b. changes in working capital accounts c. gains and losses related to the sale of plant, property and equipment d. sale or repurchase of capital stock

sale or repurchase of capital stock

Which of the following is the correct formula for calculating cash collections from customers? a. sales for the period plus accounts receivable at the beginning of the period b. sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period c. sales for the period plus accounts receivable at the end of the period d. sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period

sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period

A firm's cash flows will differ from net income each period for all of the following reasons except: a. cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues. b. cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses. c. the company is sustaining losses each period. d. cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement.

the company is sustaining losses each period.

Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method? a. A sale of equipment is an investing activity

the transaction will not affect the operating activities section. b. The gain is added back to net income in the operating activities section. c. The gain is subtracted from net income in the operating activities section. d. The entire sales price is subtracted from net income in the operating activities section.;The gain is subtracted from net income in the operating activities section.

Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers because: a. their cash flow from operations will be much greater than their working capital from operations. b. their cash flow from operations will not differ much from their working capital from operations. c. their cash flow from operations will be much less than their working capital from operations. d. there will be no relation between their cash flow from operations and working capital from operations.

their cash flow from operations will not differ much from their working capital from operations.