UFS Chapter 4

Which item may be of concern when analyzing cash flow from financing activities?

Borrowing each year to repay debt from prior years.

What is cash flow from operating activities for Felix Company?

$240

What is cash flow from operating activities for Armstrong Company?

$505

What is cash from financing activities for Armstrong Company?

$90

Using the indirect method, what is net cash flow from financing activities? (a) $15,000 (b) $17,000 (c) ($14,000) (d) ($15,000)

(a) $15,000

Using the indirect method, what is net cash flow from investing activities? (a) ($14,000) (b) ($16,000) (c) $21,000 (d) $14,000

(a) ($14,000)

13. What are internal sources of cash? (a) Cash inflows from operating activities. (b) Cash inflows from investing activities. (c) Cash inflows from financing activities. (d) All of the above.

(a) Cash inflows from operating activities.

4. How would payments for taxes be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing outflow. (d) Financing outflow.

(a) Operating outflow.

Using the indirect method, what is the change in cash? (a) $2,000 (b) ($2,000) (c) $3,000 (d) ($3,000)

(b) ($2,000)

2. Which of the following statements is false? (a) The statement of cash flows shows how cash has been generated and how it has been used for an accounting period. (b) Firms only have financial difficulties when both the net income and cash flow from operations are negative. (c) The statement of cash flows is prepared by calculating changes in all balance sheet accounts. (d) Understanding how to prepare a statement of cash flows helps the analyst to better understand and analyze the cash flow statement.

(b) Firms only have financial difficulties when both the net income and cash flow from operations are negative.

3. How would revenue from sales of goods and services be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing inflow. (d) Financing inflow.

(b) Operating inflow.

22. Which of the following could lead to cash flow problems? (a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers. (b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers. (c) Obsolete inventory, increasing notes payable, easing of credit by suppliers. (d) Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers.

(b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers.

11. An inflow of cash would result from which of the following? (a) The increase in an asset account other than cash. (b) The decrease in an asset account other than cash. (c) The decrease in an equity account. (d) The decrease in a liability account.

(b) The decrease in an asset account other than cash.

19. How is it possible for a firm to be profitable and still go bankrupt? (a) Earnings have increased more rapidly than sales. (b) The firm has positive net income but has failed to generate cash from operations. (c) Net income has been adjusted for inflation. (d) Sales have not improved even though credit policies have been eased.

(b) The firm has positive net income but has failed to generate cash from operations.

10. Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and non-operating expenses? (a) The direct method. (b) The indirect method. (c) The inflow method. (d) The outflow method.

(b) The indirect method.

23. Using the indirect method, what is net cash flow from operating activities? (a) $5,000 (b) $13,000 (c) ($3,000) (d) ($1,000)

(c) ($3,000)

21. Which of the following statements is false? (a) A negative cash flow can occur in a year in which net income is positive. (b) An increase in accounts receivable represents accounts not yet collected in cash. (c) An increase in accounts payable represents accounts not yet collected in cash. (d) To obtain cash flow from operations, the reported net income must be adjusted.

(c) An increase in accounts payable represents accounts not yet collected in cash.

8. What type of accounts are notes payable and current maturities of long-term debt? (a) Cash accounts. (b) Operating accounts. (c) Financing accounts. (d) Investing accounts.

(c) Financing accounts.

9. The change in retained earnings is affected by which of the following? (a) Net income and common stock. (b) Net income and paid-in capital. (c) Net income and payment of dividends. (d) Payment of dividends and common stock.

(c) Net income and payment of dividends.

12. An outflow of cash would result from which of the following? (a) The decrease in an asset account other than cash. (b) The increase in a liability account. (c) The decrease in a liability account. (d) The increase in an equity account.

(c) The decrease in a liability account.

16. Which statement is true for gains and losses from capital asset sales? (a) They do not affect cash and are excluded from the statement of cash flows. (b) They are included in cash flows from operating activities. (c) They are included in cash flows from investing activities. (d) They are included in cash flows from financing activities.

(c) They are included in cash flows from investing activities.

15. Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? (a) Depreciation expense for the period. (b) The change in deferred taxes. (c) The amount by which equity income recognized exceeds cash received. (d) All of the above.

(d) All of the above.

17. Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? (a) Accounts receivable. (b) Inventory. (c) Prepaid expenses. (d) All of the above.

(d) All of the above.

20. Why has cash flow from operations become increasingly important as an analytical tool? (a) Inflation has distorted the meaningfulness of net income. (b) High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms. (c) Firms may have uncollected accounts receivable and unsalable inventory on the books. (d) All of the above.

(d) All of the above.

18. Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities? (a) Accounts payable. (b) Notes payable and current maturities of long-term debt. (c) Accrued liabilities. (d) Both (a) and (c).

(d) Both (a) and (c).

14. What are external sources of cash? (a) Cash inflows from operating activities. (b) Cash inflows from investing activities. (c) Cash inflows from financing activities. (d) Both (b) and (c).

(d) Both (b) and (c).

6. How would the repayment of debt principal be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing outflow. (d) Financing outflow.

(d) Financing outflow.

1. The statement of cash flows segregates cash inflows and outflows by: (a) Operating and financing activities. (b) Financing and investing activities. (c) Operating and investing activities. (d) Operating, financing, and investing activities.

(d) Operating, financing, and investing activities.

Which of the following would increase cash from operating activities?

Decreasing accounts receivable.

An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities.

False

The amounts on a cash flow statement cannot be manipulated. T/F

False

What is the preferred method to generate cash in a firm?

Operating activities.

The following item would be classified as a financing activity on the statement of cash flows:

Payment of dividends.

The following item would be classified as an operating activity on the statement of cash flows:

Payments for inventory.

Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities?

The entire proceeds from sales of long-lived assets are included in investing activities.

All of the following are reasons that the statement of cash flows is useful to the analyst except:

The statement of cash flows is the only financial statement that cannot be manipulated.

Cash flow from operations represents the "cash" income from the company's business operations. T/F

True

The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness. T/F

True

A decrease in accounts receivable should be __________ to convert net income to cash flow from operating activities.

added

7. What type of accounts are accounts receivable and inventory? (a) Cash accounts. (b) Operating accounts. (c) Financing accounts. (d) Investing accounts.

b) Operating accounts.

5. How would the sale of a building be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing inflow. (d) Financing inflow.

c) Investing inflow.

A change in the retained earnings account is the result of the _____________ for the period and the payment of dividends.

net income

A decrease in accrued liabilities should be _____________ to convert net income to cash flow from operating activities.

subtracted

An increase in inventory should be _________ to convert net income to cash flow from operating activities.

subtracted