CH 23 STATEMENT OF CASH FLOWS

S24. The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements? a. Statements of cash flows b. Balance sheets c. Income statements d. Statements of retained earnings

b

S35. The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n) a. addition to net income. b. deduction from net income. c. investing activity. d. financing activity.

b

28. An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n) a. addition to net income in arriving at net cash flow from operating activities. b. deduction from net income in arriving at net cash flow from operating activities. c. cash outflow from investing activities. d. cash outflow from financing activities.

b

29. 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

30. 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

37. When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because a. cash was increased while cost of goods sold was decreased. b. cost of goods sold on an accrual basis is lower than on a cash basis. c. acquisition of inventory is an investment activity. d. inventory purchased during the period was less than inventory sold resulting in a net cash increase.

b

21. It is an objective of the statement of cash flows to a. disclose changes during the period in all asset and all equity accounts. b. disclose the change in working capital during the period. c. provide information about the operating, investing, and financing activities of an entity during a period. d. none of these.

c

38. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in determining cash flow from operating activities? Direct Method Indirect Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease

c

S23. 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

22. 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

39. In determining net cash flow from operating activities, a decrease in accounts payable during a period a. means that income on an accrual basis is less than income on a cash basis. b. requires an addition adjustment to net income under the indirect method. c. requires an increase adjustment to cost of goods sold under the direct method. d. requires a decrease adjustment to cost of goods sold under the direct method.

c

43. Which of the following statements is correct? a. The indirect method starts with income before extraordinary items. b. The direct method is known as the reconciliation method. c. The direct method is more consistent with the primary purpose of the statement of cash flows. d. All of these.

c

P33. Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? a. Five items b. Four items c. Three items d. Two items

c

S27. To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal. b. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions. c. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash. d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

c

S36. Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the past year. The company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expenses for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expenses to the cash basis? Depreciation Increase in Prepaid Expenses a. Deducted From Deducted From b. Added To Added To c. Deducted From Added To d. Added To Deducted From

c

1. The primary purpose of the statement of cash flows is to provide cash-basis information about the company's operating, investing, and financing activities.

F

10. The FASB encourages the use of the indirect method over the direct method.

F

12. When prepaid expenses decrease during a period, expenses on the accrual-basis are lower than they are on a cash-basis.

F

13. Income from an investment in common stock using the equity method is added to net income in computing net cash provided from operating activities.

F

15. Cash payments for operating expenses are computed by subtracting an increase in prepaid expenses and a decrease in accrued expenses payable from operating expenses.

F

16. A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.

F

19. When numerous adjustments are necessary, companies often use a cash flow worksheet instead of preparing a statement of cash flows.

F

4. The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating activities.

F

11. When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported on an accrual basis.

T

14. Cash receipts from customers are computed by adding a decrease in accounts receivable to revenue from sales.

T

17. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.

T

18. Noncash investing and financing activities are disclosed either in a separate schedule or in a separate note to the financial statements.

T

2. The statement of cash flows provides information to help investors and creditors assess the cash and noncash investing and financing transactions during the period.

T

20. The issuance of stock dividends is entered on the cash flow worksheet, but is not reported in the statement of cash flows.

T

3. Companies classify some cash flows relating to investing or financing activities as operating activities.

T

5. The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending cash balances reported in the comparative balance sheets.

T

7. A company can convert net income to net cash flow from operating activities through either the direct method or the indirect method.

T

9. The indirect method adjusts net income for items that affected reported net income but did not affect cash.

T

40. When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease

a

41. When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease Statement of Cash Flows 23 - 11

a

45. In reporting extraordinary transactions on a statement of cash flows (indirect method), the a. gross amount of an extraordinary gain should be deducted from net income. b. net of tax amount of an extraordinary gain should be added to net income. c. net of tax amount of an extraordinary gain should be deducted from net income. d. gross amount of an extraordinary gain should be added to net income.

a

6. Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities.

F

8. The direct method, also called the reconciliation method, reports cash receipts and cash disbursements from operating activities.

F

42. When preparing a statement of cash flows, the following are used for which method in determining cash flows from operating activities? Gross Accounts Receivable Net Accounts Receivable a. Indirect Direct b. Direct Indirect c. Direct Direct d. Neither Indirect

b

P34. Which of the following would be classified as a financing activity on a statement of cash flows? a. Declaration and distribution of a stock dividend b. Deposit to a bond sinking fund c. Sale of a loan receivable d. Payment of interest to a creditor

b

S47. How should significant noncash transactions be reported in the statement of cash flows according to FASB Statement No. 95? a. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions." b. Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major component of the transaction. c. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials. d. They should be handled in a manner consistent with the transactions that affect cash flows.

c

25. Cash equivalents are a. treasury bills, commercial paper, and money market funds purchased with excess cash. b. investments with original maturities of three months or less. c. readily convertible into known amounts of cash. d. all of these.

d

26. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n) a. addition adjustment to net income in the cash flows from operating activities section. b. cash outflow from investing activities. c. cash inflow from investing activities. d. cash inflow from financing activities.

d

31. Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows: Direct Method Indirect Method a. Outflow Inflow b. Inflow Inflow c. Outflow Outflow d. No effect No effect

d

44. Riley Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Riley's statement of cash flows (indirect method), the $25,000 should a. not be shown. b. be shown as cash inflow from investing activities. c. be shown as cash outflow from financing activities. d. be shown as a deduction from net income in the cash flows from operating activities section.

d

46. Which of the following is shown on a statement of cash flows? a. A stock dividend b. A stock split c. An appropriation of retained earnings d. None of these

d