CHAPTER 16

the cash flow statement

Summary of Questions by study Objectives
and Bloom’s Taxonomy

Note: K = Knowledge C = Comprehension AP = Application

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

summary of questions by LEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

CHAPTER STUDY OBJECTIVES

1. Describe the purpose and content of the cash flow statement. The cash flow statement gives information about the cash receipts and cash payments resulting from a company’s operating, investing, and financing activities during the period.

In general, operating activities include the cash effects of transactions that affect profit. Investing activities generally include cash flows resulting from changes in long-term asset items. Financing activities generally include cash flows resulting from changes in long-term liability and shareholders’ equity items.

2. Prepare a cash flow statement using either the indirect or the direct method. There are four steps to prepare a cash flow statement: (1) Determine the net cash provided (used) by operating activities. In the indirect method, this is done by converting profit from an accrual basis to a cash basis. In the direct method, this is done by converting each revenue and expense from an accrual basis to a cash basis. (2) Analyze the changes in long-term asset accounts and record them as investing activities, or as significant noncash transactions. (3) Analyze the changes in long-term liability and equity accounts and record them as financing activities, or as significant noncash transactions. (4) Prepare the cash flow statement and determine the net increase or decrease in cash.

3. Analyze the cash flow statement. The cash flow statement must be read along with the other financial statements in order to adequately assess a company’s financial position. In addition, it is important to understand how the net change in cash is affected by each type of activity—operating, investing, and financing—especially when different companies are being compared. Free cash flow is a measure of solvency: it indicates how much of the cash that was generated from operating activities during the current year is available after making necessary payments for capital expenditures. It is calculated by subtracting the cash used by investing activities from the cash provided by operating activities.

TRUE-FALSE STATEMENTS

1. The sustainability of a business is linked to its ability to generate cash.

2. The cash flow statement gives information on the operating, gross profit and investing activities of a company.

3. Accrual based accounting allows investors to better evaluate a company’s ability to generate cash flow.

4. The cash flow statement is the only statement that shows the flow of cash in a company.

5. Cash equivalents include money market instruments that are due within one year.

6. The use of cash to purchase cash equivalents would be reported on the cash flow statement as an investing activity.

7. Operating activities of a company show the cash effects of revenues and expense transactions.

8. Financing activities include the purchasing and disposing of investments and long-lived assets and lending money and collecting the loans.

9. Under ASPE, receipt of interest and dividends are classified as an operating activity.

10. Under ASPE, payment of interest to lenders of debt is considered an operating activity because the item is reported on the income statement where the results of operations are shown.

11. Under IFRS, companies must report interest and dividends received as an operating activity.

12. An issuance of debt to purchase long lived assets would be an investing activity.

13. The cash flow statement is an optional statement when preparing the financial statements of a company.

14. In order to determine whether a company is financially sound or not, it is essential to understand its cash flows.

15. The information in the cash flow statement should help customers and employees evaluate the company’s financial position.

16. Companies reporting under IFRS have a choice where to classify interest and investments.

17. Under ASPE, dividends are classified as financing activities.

18. Significant investing and financing activities that do not affect cash are NOT reported in the body of the cash flow statement.

19. A comparative income statement is required in order to prepare a cash flow statement.

20. A comparative balance sheet is required in order to prepare a cash flow statement.

21. The first step in preparing the cash flow statement is to determine the net cash provided by operating activities.

22. In preparing the net cash provided by operating activities, profit must first be converted from a cash basis to an accrual basis.

23. The direct method of calculating cash flows from operating activities converts total profit from an accrual basis to a cash basis.

24. The amount of cash flow from operations will be the same under the indirect method or the direct method.

25. To calculate the net cash provided by operating activities under the indirect method, profit is adjusted for items which do not affect cash.

26. In the indirect method of calculating cash flow from operations, depreciation, as a noncash expense, would be added back to profit.

27. All gains and losses from investing activities must be eliminated from profit in order to arrive at net cash from investing activities.

28. When accounts receivable increase during the year, revenues on an accrual basis are lower than revenues on a cash basis.

29. When accounts receivable decrease during the year, more cash was collected during the period than was recorded as revenue.

30. Showing a decrease in accounts receivable as an addition on the cash flow statement implies that a company can increase its cash by collecting its receivables.

31. If the balance of prepaid insurance increases during a period, it indicates more cash was expended for insurance than is reported in the income statement.

32. Using the indirect method, an increase in accounts payable during a period is deducted from profit in calculating cash provided by operating activities.

33. An increase in a current liability account will be deducted from the net cash provided by operating activities.

34. Under the direct method, when accounts receivable increase during the period, it means that less cash was collected from customers than was recorded as revenue by the company.

35. In the direct method, when prepaid expenses decrease from the previous period, then the cash paid for operating activities will be higher than the amount reported on the income statement.

36. In the direct method, cash payments to employees would include the salary expense reported in the income statement plus any decrease during the period in salaries payable.

37. In the direct method, cash payments for interest would include the interest expense minus a decrease in interest payable during the period.

38. Regardless of whether the indirect or direct method is used to calculate operating activities, investing and financing activities are measured and reported in the same way.

39. The indirect method and direct method only apply when calculating the cash flow from investing activities.

40. When bonds are issued in exchange for land, the cash flow from investing activities would decrease.

41. When accumulated depreciation is increased during the period, the amount of cash flow from investing activities would increase.

42. When a long-lived asset is sold, only the proceeds from the sale of the asset are reported in the investing activities.

43. The purchase of a building for cash would be reporting in the financing section of the cash flow statement.

44. When common shares are issued in exchange for land, this transaction is reported in both the financing and investing sections of the cash flows.

45. The payment of a cash dividend by a company reporting under ASPE will result in a reduction of the amount of cash provided by financing activities.

46. The cash flow statement must always balance to the change in the cash position of the company during the period.

47. The cash flow statement covers the same period of time as the income statement and the statements of comprehensive income, retained earnings and changes in shareholders’ equity.

48. The investing activities are presented in the cash flow statement before the operating and financing activities.

49. By reporting cash receipts and cash payments, the direct method provides information that is useful to investors and creditors in predicting future cash flows that is NOT available under the indirect method.

50. A profitable company would always have a positive cash flow.

51. A company with a stronger operating cash flow would be more favourable to an investor than one with a stronger cash flow from investments.

52. If a company is a start-up company, the expectation would be that there would be negative cash used by investing and operating activities and positive cash provided by financing activities.

53. A company who has stable profit would expect to have a positive cash flow from investing activities and a negative cash flow from financing activities.

54. Free cash flow is a measure of discretionary cash flow of a company.

55. Free cash flow is the amount of cash provided by investing activities reduced by the amount of cash provided by operating activities.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

56. The information in a cash flow statement will help users assess all of the following EXCEPT

a. the company’s ability to generate future cash flows.

b. the company’s ability to pay dividends and meet obligations.

c. the company’s ability to turn over its accounts receivable.

d. the reasons for the difference between profit and cash provided or used by operating activities.

57. The cash flow statement is used to

a. provide information about the investing and financing activities during a period.

b. prove that revenues exceed expenses if there is a profit.

c. provide information about the cash receipts and cash payments during a period.

d. facilitate banking relationships.

58. The cash flow statement will NOT report the

a. amount of cheques outstanding at the end of the period.

b. sources of cash in the current period.

c. uses of cash in the current period.

d. change in the cash balance for the current period.

59. Which of the following characteristics does NOT apply to cash equivalents?

a. short-term

b. highly-liquid

c. readily convertible into cash

d. highly sensitive to interest rate changes

60. Cash equivalents are generally debt investments with maturities of

a. $1,000 or more.

b. three months or less.

c. at least six months.

d. one year.

61. Cash outflows from operating activities of a private company reporting under ASPE include all of the following EXCEPT payments to

a. suppliers for inventory.

b. employees for services.

c. lenders for interest.

d. shareholders for dividends.

62. Under IFRS, companies have a choice on the classification of interest received. Which of the following outlines the choice?

a. Interest received must be included in operating activities.

b. Interest received must be included in either operating or financing activities.

c. Interest received must be included in either operating or investing activities.

d. Interest received must be included in investing activities.

63. On the cash flow statement, cash inflows from the sale of bonds is reported as a(n)

a. operating activity.

b. financing activity.

c. investing activity.

d. significant noncash investing activity.

64. The acquisition of land by issuing common shares is

a. a noncash transaction which is not reported in the body of a cash flow statement.

b. a cash transaction and would be reported in the body of a cash flow statement.

c. a noncash transaction and would be reported in the body of a cash flow statement.

d. only reported if the cash flow statement is prepared using the direct method.

65. The order of presentation of activities on the cash flow statement is

a. operating, investing, and financing.

b. operating, financing, and investing.

c. financing, operating, and investing.

d. financing, investing, and operating.

66. Financing activities involve

a. lending money.

b. acquiring investments.

c. issuing debt.

d. acquiring long-lived assets.

67. Investing activities include

a. collecting cash on loans made.

b. obtaining cash from creditors.

c. issuing shares to investors.

d. repaying money previously borrowed.

68. Sale of an asset at a loss will affect which activities?

a. Operating activity will have the loss added to profit; investing will increase for the proceeds on the sale.

b. Operating activity will have the loss subtracted from profit; investing activities will increase for the proceeds on the sale.

c. Operating activity will have the loss added to profit; financing activities will increase for the proceeds on the sale.

d. Operating activity will have the loss subtracted to profit; financing activities will increase for the proceeds on the sale.

69. Under IFRS, cash receipts from interest and dividends are classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either operating or investing activities.

70. All of the following are examples of significant noncash activities EXCEPT

a. the issue of common shares to purchase an asset.

b. the write-off of an uncollectible account receivable.

c. the issue of debt to purchase an asset.

d. the conversion of bonds into common shares.

71. Which of the following transactions does NOT affect cash during a period?

a. write-off of an uncollectible account

b. collection of an accounts receivable

c. issue of common shares

d. issue of notes payable

72. Significant noncash transactions would NOT include

a. conversion of bonds into common shares.

b. asset acquisition through issue of note payable.

c. reacquisition of common shares.

d. exchange of property, plant, and equipment.

73. The cash flow statement classifies cash receipts and cash payments into three types of activities. Which of the following is considered one of the activities reported in the cash flow statement?

a. revenue generating activities

b. promoting activities

c. financing activities

d. expansion activities

74. Which of the following would decrease net cash provided by operating activities?

a. increase in accounts payable.

b. depreciation expense.

c. increase in inventory.

d. loss on sale of equipment.

75. Typical cash payments classified under operating activities include all of the following payments EXCEPT

a. payments to suppliers for inventory.

b. payments to employees for services.

c. payments to lenders for interest.

d. payments to make loans to other companies.

76. Typical cash payments classified under investing activities include all of the following payments EXCEPT

a. payments to purchase debt or equity investments.

b. payments to employees for services.

c. payments to purchase property, plant and equipment.

d. payments to make loans to other companies.

77. For companies reporting under ASPE, typical cash payments classified under financing activities will include the following payment

a. to redeem long-term debt or reacquire shares.

b. to employees for services.

c. to lenders for interest.

d. to make loans to other companies.

78. All of the following are examples of significant noncash activities EXCEPT

a. issue debt in exchange for assets.

b. issue common shares in exchange to purchase assets.

c. exchange of property, plant and equipment.

d. issuance of bonds for cash to purchase assets.

79. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the

a. two cash effects can be netted and presented as one item in the investing activities section.

b. cash inflow and cash outflow should be reported separately in the investing activities section.

c. two cash effects can be netted and presented as one item in the financing activities section.

d. cash inflow and cash outflow should be reported separately in the financing activities section.

80. In preparing a cash flow statement, a conversion of bonds into common shares will be reported in

a. the financing section.

b. the investing section.

c. a separate schedule or note to the financial statements.

d. the shareholders' equity section.

81. Which one of the following items is NOT generally used in preparing a cash flow statement?

a. Statement of comprehensive income

b. Comparative balance sheets

c. Current income statement

d. Additional information

82. Which one of the following items is NOT necessary in preparing a cash flow statement?

a. Determine the change in cash.

b. Determine the cash provided or used by operating activities.

c. Determine cash provided or used by financing activities.

d. Determine the estimated uncollectible accounts receivable.

83. If accounts receivable have increased during the period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. revenues on an accrual basis are greater than revenues on a cash basis.

c. revenues on an accrual basis are the same as revenues on a cash basis.

d. expenses on an accrual basis are greater than expenses on a cash basis.

84. If accounts payable have increased during a period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. expenses on an accrual basis are less than expenses on a cash basis.

c. expenses on an accrual basis are greater than expenses on a cash basis.

d. expenses on an accrual basis are the same as expenses on a cash basis.

85. Which one of the following affects cash during a period?

a. recording depreciation expense

b. declaration of a cash dividend

c. write-off of an uncollectible account receivable

d. payment of an accounts payable

86. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is

a. added to profit.

b. deducted from profit.

c. ignored because it does not affect cash.

d. not reported on a cash flow statement.

87. Anderson Corporation reported profit of $30,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is

a. $25,000.

b. $45,000.

c. $29,000.

d. $30,000.

88. Potter Limited reported a net loss of $10,000 for the year ended December 31, 2013. During the year, accounts receivable decreased $5,000, merchandise inventory increased $8,000, accounts payable increased by $10,000, and depreciation expense of $5,000 was recorded. During 2013, operating activities

a. used net cash of $2,000.

b. used net cash of $8,000.

c. provided net cash of $2,000.

d. provided net cash of $8,000.

89. Starting with profit and adjusting it for items that affected reported profit but which did NOT affect cash is called the

a. direct method.

b. indirect method.

c. allocation method.

d. cost-benefit method.

90. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is

a. deducted from profit.

b. added to profit.

c. ignored because it does not affect profit.

d. ignored because it does not affect expenses.

91. Using the indirect method, depreciation expense for the period

a. is deducted from profit.

b. causes cash to increase.

c. causes cash to decrease.

d. is added to profit.

92. In developing the cash flows from operating activities, most companies in Canada prefer to

a. use the direct method.

b. use the indirect method.

c. present both the indirect and direct methods in their financial reports.

d. prepare the operating activities section on the accrual basis.

93. Which of the following would be subtracted from profit using the indirect method?

a. depreciation expense

b. an increase in accounts receivable

c. an increase in accounts payable

d. a decrease in prepaid expenses

94. Which of the following would be added to profit using the indirect method?

a. an increase in accounts receivable

b. an increase in prepaid expenses

c. depreciation expense

d. a decrease in accounts payable

95. Which of the following would NOT be an adjustment to profit using the indirect method?

a. depreciation expense

b. an increase in prepaid insurance

c. an increase in inventories

d. an increase in land

96. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as

a. a subtraction from profit.

b. an addition to profit.

c. an addition to cash flow from investing activities.

d. a subtraction from cash flow from investing activities.

97. Which of the following adjustments to convert profit to net cash provided by operating activities is correct?

Add to Profit Deduct from Profit

a. Accounts Receivable increase decrease

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Income Taxes Payable decrease increase

98. Which of the following adjustments to convert profit to net cash provided by operating activities is INCORRECT?

Add to Profit Deduct from Profit

a. Accounts Receivable decrease increase

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Accounts Payable increase decrease

99. Operating activities do not include cash flows

a. from revenue

b. from sale of equipment

c. for income tax

d. for wages.

100. A company had profit of $230,000. Depreciation expense is $26,000. During the year, Accounts Receivable and Inventory increased $15,000 and $40,000, respectively. Prepaid Expenses and Accounts Payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities?

a. $196,000

b. $202,000

c. $276,000

d. $288,000

101. On the cash flow statement using the indirect method, a loss on the sale of equipment will

a. be added to profit in the operating section.

b. be deducted from profit in the operating section.

c. appear as an inflow of cash in the investing section.

d. appear as an outflow of cash in the investing section.

102. The indirect and direct methods of preparing the cash flow statement are identical except for the

a. significant noncash activity section.

b. operating activities section.

c. investing activities section.

d. financing activities section.

103. If $200,000 of bonds are issued during the year but $120,000 of old bonds are retired during the year, the cash flow statement will show a(n)

a. net increase in cash of $80,000.

b. net decrease in cash of $80,000.

c. increase in cash of $200,000 and a decrease in cash of $120,000.

d. net gain on retirement of bonds of $80,000.

104. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the cash flow statement?

1. Declaration of a cash dividend paid during the period.

2. Profit for the period.

a. 1

b. 2

c. neither 1 nor 2.

d. both 1 and 2.

105. When using the indirect method, which of the following would NOT be needed to determine net cash provided by operating activities?

a. depreciation expense

b. change in accounts receivable

c. payment of cash dividends

d. change in prepaid expenses

106. When equipment is sold for cash, the amount received is reflected as a cash

a. inflow in the operating section.

b. inflow in the financing section.

c. inflow in the investing section.

d. outflow in the operating section.

Use the following information for questions 107 and 108.

When preparing the financial statements for 2014, John Grinder, CFO for Ocean Technologies Inc., noticed that during the year the company sold equipment with an original cost of $50,000 for cash proceeds of $18,000. At the time of the sale, the equipment had a carrying amount of $20,000. Ocean Technologies uses the direct method to prepare its cash flow statement.

107. On the 2014 cash flow statement, the company should report

a. cash proceeds from investing activities, $20,000.

b. cash proceeds from operating activities, $18,000.

c. cash proceeds from investing activities, $18,000.

d. cash proceeds from operating activities, $20,000.

108. The loss on the sale of equipment will

a. be added to profit in the operating section of the cash flow statement.

b. be deducted from profit in the operating section of the cash flow statement.

c. be shown as a cash outflow from investing activities.

d. not be included in the cash flow statement as it is a noncash charge.

109. Cash receipts from customers are greater than sales revenue when there is

a. an increase in accounts receivable.

b. a decrease in accounts receivable.

c. an increase in cost of goods sold.

d. a decrease in cost of goods sold.

110. Jankowski Corporation reports a $15,000 increase in inventory and a $5,000 increase in accounts payable during the year. Cost of goods sold for the year was $150,000. The cash payments made to suppliers were

a. $150,000.

b. $160,000.

c. $130,000.

d. $145,000.

111. Rodman Inc. had credit sales of $800,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period?

a. $900,000

b. $800,000

c. $700,000

d. $840,000

112. Ellis Inc. had cash sales of $300,000 and credit sales of $500,000. The accounts receivable balance increased $10,000 during the year. How much cash did Ellis receive from its customers during the year?

a. $790,000

b. $810,000

c. $490,000

d. $510,000

113. Richards Limited had a cost of goods purchased of $250,000. The comparative balance sheet analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Richards' cash payments to suppliers?

a. $230,000

b. $220,000

c. $260,000

d. $280,000

114. Stapp Corp. had an increase in inventory of $40,000. The cost of goods sold was $90,000. There was a $5,000 decrease in accounts payable from the prior period. What were Stapp's cash payments to suppliers?

a. $135,000

b. $85,000

c. $125,000

d. $95,000

115. Which of the following items does NOT appear in the cash flow statement under the direct method?

a. cash payments to suppliers

b. cash collections from customers

c. depreciation expense

d. cash from the sale of equipment

116. Mobile Corp. has other operating expenses of $60,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were Mobile's cash payments for operating expenses?

a. $62,000

b. $58,000

c. $50,000

d. $70,000

117. Tabador Corporation shows income tax expense of $80,000. There has been a $2,000 increase in income taxes payable during the year. What was Tabador's cash payment for income taxes?

a. $80,000

b. $78,000

c. $75,000

d. $82,000

118. Which of the following would NOT appear in the operating activities section of a cash flow statement prepared under the direct method?

a. cash receipts from customers

b. cash paid for income taxes

c. gain on sale of equipment

d. cash paid to employees

119. Which of the following statements concerning the cash flow statement is true?

a. The cash flow statement is usually more accurate when using the indirect method.

b. A cash flow statement can be prepared using the direct or indirect method.

c. The cash flow statement reports earnings per share.

d. The cash flow statement is an optional financial statement for external reporting purposes.

120. Boone Inc. reports the following:

End of Year Beginning of Year

Inventory $25,000 $40,000

Accounts Payable 30,000 10,000

If cost of goods sold for the year is $150,000, the amount of cash paid to suppliers is

a. $155,000.

b. $145,000.

c. $115,000.

d. $185,000.

121. Cash payments for operating expenses is increased by a(n)

a. increase in prepaid expenses.

b. decrease in prepaid expenses.

c. increase in accrued expenses payable.

d. increase in accounts payable.

122. A $10,000 increase in accounts payable combined with a $4,000 decrease in inventory will cause the cash payments to suppliers to

a. increase by $10,000.

b. increase by $4,000.

c. increase by $6,000.

d. decrease by $14,000.

123. A $12,000 increase in prepaid expenses combined with an $8,000 increase in accrued expenses payable will cause the cash payments for operating expenses to

a. increase by $12,000.

b. increase by $4,000.

c. increase by $8,000.

d. increase by $20,000.

124. An increase in depreciation expense from $50,000 to $60,000 will cause cash payments for operating expenses to

a. increase by $50,000.

b. decrease by $10,000.

c. increase by $10,000.

d. remain unchanged.

125. Generally, the most important category on the cash flow statement is cash flows from

a. operating activities.

b. investing activities.

c. financing activities.

d. significant noncash activities.

126. Under IFRS, cash paid on interest and dividends is classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either operating or financing activities.

127. In developing the cash flows from operating activities, standard setters prefer to

a. use the direct method.

b. use the indirect method.

c. present both the indirect and direct methods in their financial reports.

d. prepare the operating activities section on the accrual basis.

128. If there is a net decrease in cash we say that cash was

a. “provided” by that activity.

b. “used” by that activity.

c. “generated” by that activity.

d. “absorbed” by that activity.

129. Issuing bonds for land is

a. reported in the operating section.

b. reported in the financing section.

c. not reported in the cash flow statement.

d. reported in the investing section.

130. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

a. cash flows from operating activities.

b. cash flows from investing activities.

c. cash flows from financing activities.

d. usually different from year to year.

131. Free cash flow is equal to

a. cash flow from operating activities.

b. cash flow from financing activities.

c. cash flow from investing activities.

d. cash flow from operating activities less cash flow from investing activities.

132. Summary financial information for Klinger Corporation for the year ended July 1, 2013 is listed below:

Profit $300,000

Depreciation expense 34,000

Beginning inventory 100,000

Ending inventory 70,000

Cost of goods sold 50,000

Interest expense 135,000

Income tax expense 77,000

Operating profit 450,000

Cash provided by operating activities 350,000

Dividends paid 50,000

Cash used by investing activities 122,000

Klinger’s free cash flow for 2013 is

a. $128,000.

b. $228,000.

c. $178,000.

d. $546,000.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

MATCHING QUESTIONS

133. Indirect Method

For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the cash flow statement, using the indirect method. The same letter may be used more than once.

A. Added to profit

B. Deducted from profit

C. Cash outflow—investing activity

D. Cash inflow—investing activity

E. Cash outflow—financing activity

F. Cash inflow—financing activity

G. Significant noncash investing and financing activity

____ 1. Decrease in accounts payable during a period

____ 2. Declaration and payment of a cash dividend

____ 3. Loss on sale of land

____ 4. Decrease in accounts receivable during a period

____ 5. Retirement of bonds at maturity for cash

____ 6. Proceeds from sale of equipment at carrying amount

____ 7. Issue of common shares for cash

____ 8. Purchase of a building for cash

____ 9. Acquisition of land in exchange for common shares

____ 10. Increase in merchandise inventory during a period

134. Direct Method

For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the cash flow statement, using the direct method. The same letter may be used more than once.

A. Added in determining cash receipts from customers

B. Deducted in determining cash receipts from customers

C. Added in determining cash payments to suppliers

D. Deducted in determining cash payments to suppliers

E. Cash outflow—investing activity

F. Cash inflow—investing activity

G. Cash outflow—financing activity

H. Cash inflow—financing activity

I. Significant noncash investing and financing activity

J. Is not shown

____ 1. Decrease in accounts payable during a period

____ 2. Declaration and payment of a cash dividend

____ 3. Decrease in accounts receivable during a period

____ 4. Depreciation expense

____ 5. Conversion of bonds into common shares

____ 6. Decrease in merchandise inventory during a period

____ 7. Sale of equipment for cash at carrying amount

____ 8. Issue of preferred shares for cash

____ 9. Purchase of land for cash

____ 10. Loss on sale of land

ANSWERS TO MATCHING QUESTIONS

133. Indirect Method

1. B

2. E

3. A

4. A

5. E

6. D

7. F

8. C

9. G

10. B

134. Direct Method

1. C

2. G

3. A

4. J

5. I

6. D

7. F

8. H

9. E

10. J

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