Cash Flows – Test Bank | 9th Edition

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Chapter 19 Testbank

1. Although the statement of cash flows is developed in a way that is less influenced by professional judgement (relative to accrual accounting), we always need to have a level of healthy scepticism when using information provided to us by managers of an organisation.

True   False

2. AASB 107 defines 'cash flows' as 'inflows and outflows of cash and cash equivalents' and 'cash' as 'cash on hand and demand withdrawals'.

True   False

3. 'Cash equivalents' is defined as 'short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of change in value' according to AASB 107.

True   False

4. AASB 107 requires the disclosure of the policy adopted by the organisation for determining which items are classified as 'cash' and 'cash equivalents' in the statement of cash flows.

True   False

5. Activities that relate to the provision of goods and services and other activities that are neither investing nor financing activities are called manufacturing activities.

True   False

6. Investing activities are defined as 'the acquisition and disposal of long-term assets (including property, plant and equipment and other productive assets) and other investments (such as securities) not included in cash equivalents'.

True   False

7. Preparers of general purpose financial statements have a presentation choice in AASB 107 between including interest expenses within CFOA, or perhaps as part of the cash flows from financing activities and this choice is available within IFRS.

True   False

8. In the US, interest expenses shall be included with CFOA.

True   False

9. Apart from requiring the disclosure of cash flows and non-cash financing and investing activities, AASB 107 suggests—but does not require—that the financial statements (by way of a note) should disclose information about the external financing arrangements of the entity, as at the end of the financial year.

True   False

10. Where the entity uses the direct method, a note to the accounts reconciling cash flows from operating activities to net profit is required because:

A. complex calculations are required to convert cash-based revenues

B. items such as depreciation are only recorded in a cash system and not an accrual system

C. there is likely to be a disparity between cash flows from operations under AASB 107 and the profits reported in the statement of comprehensive income

D. the direct method is required under AASB 107

11. AASB 107 requires that a note to the accounts shall disclose a reconciliation of cash flows from operating activities to operating profit or loss after income tax as reported in the statement of comprehensive income. The correct adjustments to the operating profit/loss after tax include:

A. add; depreciation expense, gain on sale of plant and equipment, increase in interest payable, increase in inventories.

B. subtract; increase in future income tax benefit, increase in accounts receivable, loss on sale of plant and equipment.

C. add; increase in accounts payable, increase in income taxes payable, increase in deferred taxes payable.

D. subtract; amortisation expense, increase in future income benefit, increase in interest payable.

12. Which of the following tables provides an appropriate classification for the items listed for the statement of cash flows for a retailing business?

A.

B.

C.

D.

13. Lions Ltd engaged in the following activities for the year ended 30 June 2024:

Sold shares in Kangaroo Ltd for $70 000. The investment had a carrying amount of $66 000.

Purchased shares in Cats Ltd for $52 000.

Purchased government bonds for $100 000.

Issued Lions Ltd shares for $100 000.

What is the net cash flow used in investing activities?

A. $18 000

B. ($18 000)

C. ($148 000)

D. ($82 000)

14. Which of the following statements is correct in accordance with AASB 107 Statement of Cash Flows?

A. Cash repayments of amounts borrowed are classified under financing activities.

B. Cash proceeds from issuing equity instruments are classified under financing activities.

C. Cash payments to acquire property, plant and equipment are classified under investing activities.

D. Cash advances and loans made to other parties are classified under investing activities.

15. Which of the following would not be an operating activity cash outflow?

A. Taxes paid

B. Acquisition of goods and services

C. Acquisition of intangible assets

D. Employee benefits paid

16. A system of accounting in which revenues are recognised when earned and expenses are recognised when incurred, even in the absence of cash flows, is known as __________.

A. creative accounting

B. pre-tax accounting

C. accrual accounting

D. None of the given answers are correct.

17. A financial statement that provides a reconciliation of opening and closing 'cash', including cash on hand and cash equivalent is known as __________.

A. the statement of cash flows

B. the statement of opening cash

C. the statement of closing cash

D. a balance sheet

18. AASB 101 Presentation of Financial Statements specifically requires that 'an entity shall prepare its financial statements, except for _____________ information, using the accrual basis of accounting'.

A. cash flow

B. asset

C. liability

D. property, plant and equipment

19. AASB 107 requires that information about transactions and events that do not result in cash flows during the financial year, but affect assets and liabilities that have been recognised, is to be disclosed in the financial statements or consolidated financial statements where the transactions and other events involve parties __________ to the entity.

A. external

B. internal

C. relevant

D. None of the given answers are correct.

20. AASB 107 requires that information about transactions and events that do not result in cash flows during the financial year, but affect assets and liabilities that have been recognised, is to be disclosed in the financial statements or consolidated financial statements where the transactions and other events relate to the financing or ______________ of the entity.

A. investing activities

B. accounting

C. operating activities

D. profits

21. According to AASB 107, examples of non-cash financing and investing transactions that should be included in a note supporting the statement of cash flows include conversion of preference shares to __________.

A. cash

B. ordinary shares

C. assets

D. debt

22. According to AASB 107, examples of non-cash financing and investing transactions that should be included in a note supporting the statement of cash flows include payments of dividends through a __________________ rather than through the payment of cash.

A. share investment scheme

B. asset

C. mortgage

D. None of the given answers are correct.

23. When an accountant determines the income and expenses (and therefore the profit) for an accounting period, it is necessary to make ___________________.

A. professional judgements

B. cash flow

C. money

D. estimates

24. An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, ____________ from the date of acquisition.

A. three months or less

B. six months

C. one year

D. 10 years

25. 'Cash equivalents' is defined as 'short-term, ___________ investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of change in value'.

A. highly liquid

B. non-liquid

C. partially liquid

D. non-current

26. _________ is the profit for a period determined in accordance with rules established by the taxation authorities, upon which income taxes are payable.

A. Pre-tax profit

B. Reported profit

C. Taxable profit

D. Cash flow

27. _________ refers to how the resources of the entity have been funded, for example, how much debt there is relative to equity. The information can also describe the types of debt and types of equity in existence.

A. Accounting structure

B. Financial structure

C. Tax structure

D. Legal structure

28. AASB 107, Paragraph 19 states that entities are encouraged to report cash flows from operating activities using the direct method because the direct method provides information that may be useful in estimating ___________ and which is not available under the indirect method.

A. future cash flows

B. present cash flows

C. concurrent cash flows

D. shares

29. 'Cash flows from operating activities' are those that relate to the provision of goods and services and other activities which are ______________________________.

A. non-investing activities

B. non-financing activities

C. neither investing nor financing activities

D. None of the given answers are correct.

30. What is meant by statement of cash flows?

______________________________________________________________________________

31. What is meant by accrual accounting?

______________________________________________________________________________

32. Discuss the role of the external auditor in terms of financial statements.

______________________________________________________________________________

33. Discuss the view of the statement of cash flow as a financial statement promoted within news media.

______________________________________________________________________________

34. Discuss 'digging a little deeper' to determine whether profit has actually been manipulated by managers.

______________________________________________________________________________

35. What are operating activities?

______________________________________________________________________________

36. What are investing activities?

______________________________________________________________________________

37. What are financing activities?

______________________________________________________________________________

38. Discuss Sharma's proposal on how retained cash flows from operating activities (RCFFO) might be an indicator of an entity's financial flexibility.

______________________________________________________________________________

39. How is the current ratio calculated?

______________________________________________________________________________

40. Discuss the inclusion of interest expense within CFOA according to the IFRS and US Financial Accounting Standards Board.

______________________________________________________________________________

Chapter 19 Testbank