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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 18: Statement of cash flows

Multiple-choice questions

1. The primary purpose of a statement of cash flows is to provide information about an entity’s:

a. gross profit.

b. operating activities.

c. long-term financial position.

d. cash inflows and cash outflows.

Correct answer: d

Learning objective 18.1 ~ explain the reasons for preparing a statement of cash flows.

2. The accounting standard dealing with the statement of cash flows is:

a. IAS 7/AASB 107.

b. IAS 1/AASB 1001.

c. IAS/19/AASB 1019.

d. IAS 18/AASB 118.

Correct answer: a

Learning objective 18.1 ~ explain the reasons for preparing a statement of cash flows.

3. Information about an entity’s cash inflows and cash outflows is provided in the:

a. statement of changes in equity.

b. statement of cash flows.

c. statement of financial position.

d. statement of profit or loss and other comprehensive income.

Correct answer: b

Learning objective 18.1 ~ explain the reasons for preparing a statement of cash flows.

4. When an annual statement of cash flows is prepared the sum of the three major components add up to:

a. profit for the period.

b. the ending working capital.

c. the ending cash at bank account balance.

d. the change in the cash at bank account balance over the year.

Correct answer: d

Learning objective 18.2 ~ describe the general format of the statement of cash flows.

5. IAS 7/AASB 107 requires which of the following items to be disclosed in the note to the statement of cash flows?

1. Details of cash flows from the acquisition and disposal of subsidiaries.
2. A reconciliation of net cash from operating activities with profit after income tax.
3. A reconciliation of cash and cash equivalents with the items reported in the balance sheet.

a. I only

b. I and II only

c. II and III only

d. I, II and III

Correct answer: d

Learning objective 18.2 ~ describe the general format of the statement of cash flows.

6. Which of the following is not a requirement of IAS 7/AASB 107?

a. Reporting of gross cash flows rather than net flows.

b. Provision of a note reconciling gross profit with cash paid for cost of sales.

c. Provision of comparative figures for the previous year as well as current year figures.

d. A reconciliation of the net increase or decrease in cash held with the cash items appearing in the statement of financial position.

Correct answer: b

Learning objective 18.2 ~ describe the general format of the statement of cash flows.

7. The ‘bottom line’ in the statement of profit or loss and other comprehensive income is profit. The ‘bottom line’ in the statement of cash flows is:

a. cash flow from operations.

b. net cash at the end of the year.

c. net cash at the beginning of the year.

d. net increase (decrease) in the cash balance over the period.

Correct answer: d

Learning objective 18.2 ~ describe the general format of the statement of cash flows.

8. Which assertion relating to the statement of cash flows is incorrect?

a. Cash flows from one activity are not normally offset against cash flows from a different activity.

b. GST is not included anywhere in the statement of cash flows.

c. Cash outflows are shown in brackets.

d. The statement is headed ‘for the period ended’.

Correct answer: b

Learning objective 18.2 ~ describe the general format of the statement of cash flows.

9. Which statement concerning the concept of cash adopted by IAS 7/AASB 107 is incorrect?

a. Accounts receivable are generally included in the definition of cash and cash equivalents.

b. Depending on the conditions that apply, a bank overdraft may be treated as a financing activity.

c. Transfers between items included in the definition of cash and cash equivalents are not reported in the statement of cash flows.

d. As a general rule, liquid investments with a term of three month or less, with insignificant risk of changes in value, fall within the definition of cash or cash equivalents.

Correct answer: a

Learning objective 18.3 ~ define the concept of cash in accordance with IAS 7/AASB 107 Statement of Cash Flows.

10. In IAS 7/AASB 107, is/are short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value.

a. cash.

b. bills of exchange.

c. cash equivalents.

d. accounts receivable.

Correct answer: c

Learning objective 18.3 ~ define the concept of cash in accordance with IAS 7/AASB 107 Statement of Cash Flows.

11. Which of the following would be classified as investing activities on a statement of cash flows?

1. Purchase of a computer
2. Issue of debentures
3. Sale of land
4. Payment of dividends

a. I and II only

b. I and III only

c. II and IV only

d. I, II, III and IV

Correct answer: b

Learning objective 18.4 ~ classify cash inflows and cash outflows into operating, investing and financing activities.

12. How would the purchase of government bonds by a sporting club be reported in the statement of cash flows?

a. Financing outflow

b. Financing inflow

c. Investing outflow

d. Investing inflow

Correct answer: c

Learning objective 18.4 ~ classify cash inflows and cash outflows into operating, investing and financing activities.

13. Which of the following is a classification used in the statement of cash flows?

a. Operating activities

b. Selling activities

c. Borrowing activities

d. Administrative activities

Correct answer: a

Learning objective 18.4 ~ classify cash inflows and cash outflows into operating, investing and financing activities.

14. IAS 7/AASB 107 defines activities that relate to changes in the size and composition of the financial structure of an entity as:

a. borrowing activities.

b. investing activities.

c. financing activities.

d. equity activities.

Correct answer: c

Learning objective 18.4 ~ classify cash inflows and cash outflows into operating, investing and financing activities.

15. Which of the following is not classified as a financing activity by IAS 7/AASB 107?

a. Repayment of borrowings.

b. Dividends paid to shareholders.

c. The issue of shares by a company to raise capital.

d. The sale of shares that have been held as an investment.

Correct answer: d

Learning objective 18.4 ~ classify cash inflows and cash outflows into operating, investing and financing activities.

16. Which statement concerning the treatment of the purchase and sale of non-current assets in a statement of cash flows is incorrect?

a. The cash purchase of a non-current asset is treated as an investing outflow.

b. The proceeds of sale from a non-current asset are treated as an investing inflow.

c. The carrying value of a non-current asset that has been sold is treated as an investing outflow.

d. Inflows and outflows for the purchase and sale of non-current assets must not be netted off against each other.

Correct answer: c

Feedback: The carrying amount is a non-cash item.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

17. Which of the following are methods that are used to prepare a statement of cash flows?

1. Use information obtained directly from the primary records of cash transactions.
2. Use information in the accrual-based statement of profit or loss and statement of financial positions but remove the effect of non-cash items.
3. Use information in the accrual-based statement of profit or loss and statement of financial positions but add the effect of non-cash items.

a. I, II and III

b. I and III

c. II and III

d. I and II

Correct answer: d

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

18. What effect does the following journal entry have on cash flows?

DR Depreciation expense $55 000

CR Accumulated depreciation $55 000

a. Decrease inflows

b. Increase outflows

c. Decrease outflows

d. No effect on outflows or inflows

Correct answer: d

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

19. A firm reported that accounts receivable increased by $20 000 between the current year and the prior year. If accrual-basis sales were $150 000 the amount of cash received from customers during the year was:

a. $150 000.

b. $130 000.

c. $170 000.

d. $20 000.

Correct answer: b

Feedback: $130 000 = $150 000 - $20 000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

20. For a manufacturer, which of the following is not an operating cash outflow?

a. Payment of GST

b. Payment of wages

c. Payment to suppliers

d. Payment for the purchase of manufacturing equipment

Correct answer: d

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

21. If cost of sales is $300 000, inventory has increased by $12 000 and creditors have decreased by $20 000 what is the amount of cash paid for the purchase of goods for resale?

a. $332 000

b. $320 000

c. $288 000

d. $268 000

Correct answer: a

Feedback: $332 000 = $300 000 + $12 000 + $20 000

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

22. From the following information, determine the amount of cash received from customers during 2018-19.

Accounts receivable (30-Jun-2018) $81 000

Accounts receivable (30-Jun-2019) $76 000

Sales $350 000

a. $431 000

b. $423 000

c. $345 000

d. $355 000

Correct answer: d

Feedback: $355 000 = $350 000 + $81 000 – $76 000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

23. Fraser Inc supplied the following information for 2019.

Beginning inventory $ 60 000

Ending inventory 90 000

Cost of sales 130 000

Credit purchases for the year are:

a. $160 000

b. $130 000

c. $100 000

d. $90 000

Correct answer: a

Feedback: $ 160 000 = $130 000 – $60 000 + $90 000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

24. The statement of profit or loss shows interest revenue for the year of $12 000 and the balance sheet show interest receivable at the beginning of the year of $5 000 and at the end of the year of $8 000. The amount of interest received in cash for the year is:

a. $13 000

b. $17 000

c. $9 000

d. $12 000

Correct answer: c

Feedback: $9 000 = $12 000 + $5000 – $8000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

25. If wages expense for the year is $480 000, wages accrued at the beginning of the period are $15 600 and wages accrued at the end of the period are $18 200 what amount for wages paid will appear in the statement of cash flows?

a. $477 400

b. $461 800

c. $480 000

d. $482 600

Correct answer: a

Feedback: $477 400 = $480 000 + $15 600 – $18 200.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

26. The records of Angelo’s Pizza showed the following:

30 June 18 30 June 19

Pizza ovens and equipment $39 000 $43 000

Accumulated depreciation ovens and equipment 5 000 8 000

Cost of equipment sold 6 000

Carrying value of equipment sold 3 000

Proceeds of sale of equipment 4 500

The investing cash outflow for equipment for the year ending 30 June 2019 is:

a. Equipment purchased $6 000

b. Equipment purchased $10 000

c. Equipment purchased $3 000

d. Equipment purchased $4 500

Correct answer: b

Feedback: Equipment purchased $10 000 = $43 000 – $39 000 + $6000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

27. The records of Angelo’s Pizza showed the following:

30 June 18 30 June 19

Pizza ovens and equipment $39 000 $43 000

Accumulated depreciation ovens and equipment 6 000 9 000

Cost of equipment sold 6 000

Carrying value of equipment sold 1 000

Proceeds of sale of equipment 4 500

The amount of depreciation expense on ovens and equipment that would appear in a note attached to a statement of cash flows reconciling profit with cash flow from operations is:

a. $6 000.

b. $8 000.

c. $9 000.

d. $15 000.

Correct answer: b

Feedback: $8 000 = $9 000 – $6 000 + $5 000.

Accumulated depreciation on equipment sold = cost of equipment sold $6000 minus carrying value of equipment sold $1000 = $5000.

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

28. The following details relate to the equity of R. Simpson, sole proprietor.

End year 1 End year 2

Capital $60 000 $60 000

Current account 24 000 CR 38 000 CR

Includes profit for the year of $48 000.

How much was withdrawn by R. Simpson during year 2?

a. $34 000

b. $62 000

c. $72 000

d. Cannot be calculated from the information provided

Correct answer: a

Feedback: $34 000 = $48 000 – ($38 000 – $24 000).

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

29. From the information provided below, determine the amount of cash received from customers during 2019.

Accounts receivable (31-Dec-2018) $23 000

Accounts receivable (31-Dec-2019) 31 000

Sales 270 000

a. $239 000

b. $262 000

c. $270 000

d. $278 000

Correct answer: b

Feedback: ($262 000 + $23 000 – $31 000)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

30. During the year Mike’s Bikes reported that accounts receivable had increased by $13 000. If accrual basis sales were $118 000 the amount of cash received from customers during the year must have been:

a. $105 000.

b. $118 000.

c. $131 000.

d. Cannot be calculated from the information provided.

Correct answer: a

Feedback: $118 000 – $13 000

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

31. Superb Ltd reports for 2018:

Beginning inventory $ 42 000

Ending inventory 35 000

Cost of sales 120 000

The credit purchases for the year equal:

a. $113 000

b. $120 000

c. $127 000

d. $155 000

Correct answer: a

Feedback: ($120 000 – $42 000 + $35 000)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

32. If credit purchases for the period are $150 000 determine the cash paid for the purchase of inventory for 2018.

Beginning accounts payable $22 000

Ending accounts payable 26 000

a. $154 000

b. $150 000

c. $146 000

d. Unable to be calculated

Correct answer: c

Feedback: ($150 000 + $22 000 – $26 000)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

33. Pearson Co’s cost of sales for the year ended 30 June 2019 was $180 000. During the year, accounts payable and inventory each increased by $18 000. What amount of cash was paid for purchases during the year?

a. $162 000

b. $180 000

c. $198 000

d. $216 000

Correct answer: b

Feedback: ($180 000 – $18 000 accounts payable + $18 000 inventory)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

34. The ledger account for buildings had a balance of $720 000 at the beginning of the year and a balance of $1 050 000 at the end of the year. If the buildings have been revalued upwards by $100 000 during the year what is the investing outflow for the period, for buildings, assuming no buildings were sold?

a. $130 000

b. $230 000

c. $330 000

d. $430 000

Correct answer: b

Feedback: ($230 000 = $1 050 000 – $720 000 – $100 000)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

35. The statement of profit or loss of Little Co shows accrual-basis interest income for the year ended 30 June 2019 as $4 000. The comparative balance sheets show that interest receivable at 30 June 2018 and 30 June 2019 was $500 and $800 respectively. The amount of cash received by way of interest during the year was:

a. $4 500

b. $3 700

c. $3 200

d. $4 300

Correct answer: b

Feedback: ($4 000 + $500 – $800)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

36. Jackson Company’s accounting records are set out below.

Beginning balance Ending balance

$ '000 $ '000

Accounts receivable 45 52

Accounts payable 30 26

Prepaid expenses 22 26

Inventory 40 43

Sales - 90

Cost of sales - 60

Expenses (other than cost of sales) - 41

Determine the amount of cash paid for purchases of inventory during the period.

a. $64 000

b. $60 000

c. $53 000

d. $67 000

Correct answer: d

Feedback: ($60 000 + $30 000 – $26 000 – $40 000 + $43 000)

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

37. The records of Thin Crust Pizzas showed the following.

30 June 18 30 June 19

Pizza ovens and equipment $69 000 $73 000

Accumulated depreciation ovens and equipment 30 000 22 000

Cost of equipment sold 8 000

Carrying value of equipment sold 6 000

Proceeds of sale of equipment 7 500

What is the investing cash inflow for equipment sold during 2018/19?

a. Carrying value of equipment sold $6 000

b. Equipment sold $8 000

c. Proceeds of sale of equipment $7 500

d. Cost of equipment sold $8 000

Correct answer: c

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

38. The balance sheets of D. Thomas, sole trader, showed the following.

30 June 2018 30 June 2019

Capital – D. Thomas $200 000 $300 000

The profit for the year ended 30 June 2019 was $120 000. During the year additional capital of $20 000 was contributed in cash. Drawings in cash were made weekly. The amount of drawings for the year was:

a. $40 000.

b. $60 000.

c. $20 000.

d. $80 000.

Correct answer: a

Feedback: (Drawings of $40 000 = $200 000 + $120 000 + $20 000 - $300 000

Learning objective 18.5 ~ prepare a statement of cash flows for a sole trader using the direct method by analysing cash records and other financial statements.

39. Under IAS 7/AASB 107 which of the following is required to be disclosed in the notes attached to the statement of cash flows?

a. The opening bank balance

b. The closing bank balance

c. Standby credit arrangements

d. Proceeds from a share issue

Correct answer: c

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

40. When preparing the note attached to the cash flow statement reconciling profit and cash flow from operations, losses incurred from the sale of non-current assets are:

a. added back to the profit.

b. subtracted from the profit.

c. do not appear in the reconciliation.

d. sometimes added back to the profit and sometimes subtracted from the profit depending on whether a loss or profit on disposal is incurred.

Correct answer: a

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

41. When preparing the note reconciling profit/loss and cash flow from operations, depreciation:

a. is subtracted from a profit.

c. is added back to a loss.

d. is added back to a profit.

b. does not appear in the reconciliation.

Correct answer: d

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

42. Using the indirect approach, determine the net cash flow from operating activities from the information provided.

Profit $45 000

Depreciation 10 000

Decrease in prepaid expenses 3 000

Increase in accounts receivable 6 000

Decrease in accounts payable 5 000

a. $27 000

b. $43 000

c. $47 000

d. $63 000

Correct answer: c

Feedback: ($45 000 + $10 000 + $3 000 - $6 000 - $5 000)

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

43. In its most recent financial year Boomerang Ltd reported that accounts payable increased $8 000; inventory decreased $12 000; profit was $68 000 and depreciation expense was $4 000. Using the indirect approach, what is the net cash flow from operating activities that will be reported in the statement of cash flows?

a. $92 000

b. $88 000

c. $52 000

d. $44 000

Correct answer: a

Feedback: ($68 000 + $8 000 + $12 000 + $4000)

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

44. For a statement of cash flows, when preparing the note reconciling a net loss and cash flow from operations, depreciation is:

a. subtracted from net loss.

b. added back to the net loss.

c. does not appear in the reconciliation.

d. appears as part of the profit figure.

Correct answer: a

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

45. Given the following information, calculate the net cash from operating activities for the period.

Profit $380 000

Accounts receivable decreased by 12 000

Proceeds from the sale of equipment 41 000

Inventory increased by 20 000

Depreciation expense 40 000

Carrying value of equipment sold 3 000

a. $368 000

b. $374 000

c. $386 000

d. $456 000

Correct answer: b

Feedback: $374 000 = $380 000 + $12 000 – $41 000 – $20 000 + $40 000 + $3 000.

Learning objective 18.6 ~ determine the notes to the statement of cash flows.

46. Osco Ltd uses the allowance method of accounting for bad and doubtful debts. Bad and doubtful debts expense shown in the income statement is $10 000 and the amount of bad debts actually written off is $8 000. If sales are $220 000 and accounts receivable have increased by $12 000 over the period, the amount to be shown in the statement of cash flows for receipts from customers is:

a. $200 000

b. $210 000

c. $220 000

d. $240 000

Correct answer: a

Feedback: $200 000 = $220 000 – $12 000 – $8 000.

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

47. A statement of cash flows is being prepared using accrual based information. Using the direct write-off method to calculate cash receipts from customers, bad debts written off is:

a. not adjusted.

b. shown as cash outgoing.

c. added to accrual-basis revenue.

d. subtracted from accrual-basis revenue.

Correct answer: d

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

48. The balance sheet of Genny’s Consulting showed the following:

30 June 18 30 June 19

Dividend payable $30 000 $45 000

What amount will appear in the statement of cash flows for dividends paid for the year ended 30 June 2019?

a. $15 000

b. $30 000

c. $45 000

d. $75 000

Correct answer: b

Feedback: $24 000 (the dividend provided for in ‘18 which is paid in ‘19).

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

49. Discount allowed is a:

a. cash item that is included as an outflow in the statement of cash flows.

b. cash item that is included as an inflow in the statement of cash flows.

c. cash item that is adjusted in a note attached to the statement of cash flows.

d. non-cash item that is deducted from accrual based revenue and thus not included in the statement of cash flows.

Correct answer: d

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

50. Assume tax is paid annually in a lump sum. The beginning balance in the current tax liability account is $52 000 and the ending balance is $73 000. There was no under or over provision of tax for the year. What is the amount of tax paid to be included in the statement of cash flows for the period?

a. Nil

b. $52 000

c. $73 000

d. $13 000

Correct answer: b

Feedback: $52 000. i.e. the amount of tax owing for the previous year. (Tax is paid in arrears.)

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

51. According to AASB’s Interpretation 1031, which of the following statements relating to the treatment of GST in the statement of cash flows are correct?

1. All GST outlays and GST collections are regarded as effecting operating activities.
2. Cash flows from operating activities are reported at gross amounts inclusive of GST.
3. Cash flows from investing activities are shown net of GST, with GST on investing activities included as part of operating activities.

a. I and III only

b. I and II only

c. II and III only

d. I, II and III

Correct answer: d

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

52. Which of the following transactions would be reported directly in the statement of cash flows rather than in the notes?

a. Interim dividend paid

b. A bonus share issue

c. Amortisation of goodwill

d. The acquisition of another entity by means of a share issue

Correct answer: a

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

53. The balance sheets of Blue Skies Ltd show:

30 June 2018 30 June 2019

Final Dividend Payable $18 000 $23 000

In addition to the information above, an interim dividend of $10 000 was declared and paid on 31 January 2019. The dividends paid amount that will appear in the statement of cash flows for the year ended 30 June 2019 will be:

a. $10 000

b. $15 000

c. $28 000

d. $33 000

Correct answer: c

Feedback: Opening final dividend paid plus interim dividend paid = $18 000 + $10 000.

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

54. The accrual-basis tax expense in the income statement is $90 000, the beginning balance in the current tax liability account is $130 000 and the ending balance is $150 000. What is the amount of tax paid to be included in the statement of cash flows for the year?

a. $70 000

b. $110 000

c. $130 000

d. $150 000

Correct answer: a

Feedback: $70 000 = $130 000 + $90 000 – $150 000.

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

55. The balance sheets of Rainbow Ltd show:

31 December 2018 31 December 2019

Current tax liability $55 000 $65 000

The statement of profit or loss and other comprehensive income for the year ended 31 December 2019 shows income tax expense of $65 000.

What amount, in respect of income tax paid, will appear in the statement of cash flows for the year ended 31 December 2019? Assume tax is paid annually in arrears and there are no over- or under-provisions of tax.

a. Nil

b. $55 000

c. $65 000

d. $120 000

Correct answer: b

Feedback: Opening tax liability $55 000.

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

56. Davis Ltd provided the following information for the year ended 30 June 2020.

Sales $345 000

Accounts receivable 1 July 2019 60 000

Accounts receivable 30 June 2020 50 000

Bad debts written off during the year 26 000

Direct method (DR Bad debts expense $26 000; CR Accounts receivable $26 000).

Cash receipts from customers for the year ending 30 June 2020 were:

a. $309 000.

b. $329 000.

c. $361 000.

d. $381 000.

Correct answer: b

Feedback: ($329 000 = $345 000 + $60 000 – $50 000 – $26 000)

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

57. Xander Ltd's financial information includes the following.

Sales $140 000

Accounts receivable balance 1 July 18 20 000

Accounts receivable balance 30 June 19 28 000

Bad debts written off 3 000

Discount allowed 9 000

[] The direct write-off method is used.

The cash received from customers for the year ended 30 June 19 was:

a. $120 000.

b. $144 000.

c. $160 000.

d. $138 000.

Correct answer: a

Feedback: ($140 000 + $20 000 – $28 000 – $3 000 – $9 000)

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

58. Bender Ltd uses the allowance method of accounting for bad and doubtful debts. Their accounts show:

Allowance for doubtful debts 1 July 2019 $21 600

Allowance for doubtful debts 30 June 2020 18 000

Bad & doubtful debts expense for the year 4 000

The amount of bad debts actually written off during the year is:

a. $4 000

b. $7 600

c. $18 000

d. $21 600

Correct answer: b

Feedback: ($7 600 = $21 600 + $4 000 – $18 000)

Learning objective 18.7 ~ identify and explain some of the more advanced issues involved in the preparation of the statement of cash flows.

59. Which of the following statements is not correct?

a. The statement of cash flows effectively duplicates the function of the cash budget.

b. Analysis of an entity’s cash flow position requires an examination of trends in statement of cash flows items over several years.

c. The statement of cash flows can explain the effects of operating activities on the entity’s cash position.

d. The statement of cash flows can provide information about the causes of changes in the entity’s cash position over the period.

Correct answer: a

Learning objective 18.8 ~ prepare and analyse the statement of cash flows for a company after consideration of the more advanced issues.

60. Which of the following are non-cash transactions?

1. Share dividend
2. Discount allowed
3. Bad debt write-off
4. Impairment of goodwill

a. I and IV only

b. II and IV only

c. II, III and IV only

d. I, II, III and IV

Correct answer: d

Learning objective 18.8 ~ prepare and analyse the statement of cash flows for a company after consideration of the more advanced issues.

61. Which statement concerning the indirect method of preparing a cash flow statement is correct?

a. With the indirect method, depreciation is deducted from profit to arrive at net cash from operating activities.

b. The direct, rather than the indirect method of preparation, is the method preferred by standard setters.

c. The indirect method is more expensive to implement that the direct method.

d. The investing and financing sections of a cash flow statement differ depending on whether the direct or indirect method of preparation is used.

Correct answer: b

Learning objective 18.8 ~ prepare and analyse the statement of cash flows for a company after consideration of the more advanced issues.

62. Which of the following is not a way in which cash flows may be manipulated?

a. Use of barter

b. Use of lease financing

c. Deferring repayment of debts

d. Charging excessive depreciation

Correct answer: d

Learning objective 18.9 ~ identify the limitations of the statement of cash flows.

63. Which of the following are limitations of a statement of cash flows?

1. Only past cash flows are reported
2. Cash flows can be manipulated, e.g. postponing expenditures
3. Non-cash transactions can be significant in affecting future investing and financing cash flows

a. I and II only

b. II and III only

c. I, II and III

d. None are considered limitations.

Correct answer: c

Learning objective 18.9 ~ identify the limitations of the statement of cash flows.

64. Which of the following are non-cash transactions or events?

1. Credit sale
2. Barter transaction
3. Purchase of a building partly financed by a mortgage
4. Takeover paid for with shares in the acquiring company

a. I and II only

b. I, II and IV only

c. II and IV only

d. All of the above are non-cash transactions or events.

Correct answer: d

Learning objective 18.9 ~ identify the limitations of the statement of cash flows.

65. Which statement concerning the interpretation of a statement of cash flows is incorrect?

a. The notes to the statement of cash flows are important in interpreting the firm’s cash position.

b. Ways in which cash flows can be manipulated include delaying cash payments and employing finance leases.

c. It is the indirect method rather than the direct method of preparation that is preferred by the standard setters.

d. The statement of cash flows as required under IAS 7/AASB 107 only goes some of the way in enabling users to establish the liquidity/solvency position of an entity.

Correct answer: c

Learning objective 18.9 ~ identify the limitations of the statement of cash flows.