Statement Of Cash Flows Ch7 Test Questions & Answers

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 7: Statement of cash flows

Learning objectives

1. Assess the purpose and usefulness of a statement of cash flows

Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q9, Q51, Q52

2. Outline the format and the classification of cash flows in the statement of cash flows

Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q19, Q20, Q21, Q22, Q23, Q24, Q25, Q26, Q27, Q28, Q29, Q30, Q31, Q32, Q53, Q54, Q55, Q56, Q57, Q58, Q59

3. Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

Q33, Q34, Q35, Q36, Q37, Q38, Q39, Q40, Q60, Q61, Q62, Q63

4. Evaluate an entity’s performance using a statement of cash flows

Q41, Q42, Q43, Q44, Q45, Q46, Q47, Q48, Q49, Q50, Q64, Q65

Multiple-choice questions

1. Which of the following options describes the primary purpose of the statement of cash flows?

a. To show the deficit of cash during the period

b. To provide information about the profit or loss during the accounting period

c. To show the cash balance at the end of the period

d. To provide information about the cash receipts and cash payments made during the accounting period

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Which of the following information can be obtained from a statement of cash flows but is not obvious from looking at financial statements prepared on an accrual basis?

a. Whether the entity is collecting its receivables in a timely manner

b. Whether the entity is generating cash from its operations

c. Whether the entity is likely to be able to pay its debts as and when they fall due

d. All the above options are correct

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. For an entity to survive:

a. the net cash flow from financing activities should be positive.

b. the net cash flow from operating activities should be positive.

c. the net cash flow from operating activities should be negative.

d. the net cash flow from investing activities should be positive.

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Which of the following items would not appear in a statement of cash flows?

a. Depreciation expense

b. Lease payments

c. Dividends received

d. Payment of wages

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. When preparing a statement of cash flows, net cash from operating activities + investing activities + financing activities = net increase/decrease in cash for the year. What appears next on the statement?

a. Add the beginning balance of cash for the year to determine the ending balance of cash for the year.

b. Deduct the beginning balance of cash for the year to determine the ending balance of cash for the year.

c. Deduct cash paid to suppliers to determine the ending balance of cash for the year.

d. Nothing. The statement is complete.

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Which of these causes a difference between the profit in the statement of profit or loss and the net cash increase in the statement of cash flows?

a. Depreciation

b. Prepaid insurance

c. Credit purchases not yet paid

d. All of the above

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Which relationship between items in the statement of cash flows (SOCF) and items in the statement of financial position (SOFP) is not correct?

a. Cash from investing activities (SOCF); Non-current assets (SOFP).

b. Cash from financing activities (SOCF); Non-current liabilities and equity (SOFP).

c. Cash from financing activities (SOCF); Non-current assets (SOFP).

d. Cash from operating activities (SOCF); Current assets and liabilities (SOFP).

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. In the current accounting period for Briefcases Pty, sales (calculated on an accrual basis) are $180 000 and the cash received from sales is $215 000. Which of the following statements is correct for Briefcases Pty?

a. Credit sales that occurred in a previous period may have been paid for in the current period.

b. Cash sales for the period were greater than credit sales.

c. Credit sales that occurred in the current period may not yet have been paid for.

d. None of the options are correct.

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Proceeds from the sale of motor vehicles will be included in the statement of cash flows as a(n):

a. financing activity.

b. investing activity.

c. operating activity.

d. cash activity.

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. Which of the following is not a characteristic of cash and cash equivalents?

a. They have a very low, or insignificant, risk of changing in value.

b. They are highly liquid investments.

c. They include short-term borrowings with a maturity of less than 3 months.

d. None of the above. They are all characteristics of cash and cash equivalents.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. What is the correct order of activities for the preparation of a statement of cash flows?

a. (1) Cash flows from investing activities, (2) cash flows from operating activities, (3) cash flows from financing activities

b. (1) Cash flows from financing activities, (2) cash flows from operating activities, (3) cash flows from investing activities

c. (1) Cash flows from investing activities, (2) cash flows from financing activities, (3) cash flows from operating activities

d. (1) Cash flows from operating activities, (2) cash flows from investing activities, (3) cash flows from financing activities

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of these is not an example of cash or cash equivalents?

a. Money market deposit with 6 months’ maturity

b. Bank overdraft

c. Bank and non-bank bills

d. Bank deposits

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. A toy manufacturing business purchases equipment worth $50 000 to be used in their manufacturing process. What type of activity would this transaction be classified as in the statement of cash flows?

a. Operating

b. Investing

c. Financing

d. Non-cash

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. When reconciling operating profit after tax with net cash flow from operating activities, which of the following adjustments is not correct?

a. Add back amortisation

b. Add an increase in a current liability

c. Deduct an increase in a current asset

d. Deduct a loss on the sale of an asset

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of the following represents an investing activity on the statement of cash flows?

a. Repaying money previously borrowed

b. Receiving cash from a share issue

c. Collecting cash on loans previously made to other entities

d. Obtaining cash from creditors

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which section of the statement of cash flows is generally considered to be the best measure of a company’s ability to generate cash?

a. Cash flows from operating activities

b. Cash flows from financing activities

c. Cash flows from investing activities

d. Each section gives an equal estimation

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Cash receipts from dividends are classified as which activity in the statement of cash flows?

a. Financing

b. Investing

c. Operating

d. Financing or investing

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of the below options is an example of a cash outflows from financing activities?

a. cash paid for the purchase of shares.

b. dividends paid to shareholders.

c. the lending of money to another business.

d. payment of income tax.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of these would not be classified as an operating activity in a statement of cash flows?

a. Payment of interest expense

b. Cash received as payment for the purchase of goods on credit

c. Cash dividends received

d. Loan repayments

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. A reconciliation between the operating profit after tax and the net cash flow from operating activities:

a. highlights changes in the working capital accounts from one year to the next.

b. reinforces the link between the cash received from operating activities and the reported profit or loss for the period.

c. shows the differences in accrual transactions and cash flow.

d. all the above options are correct.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. In which section of the statement of cash flows would the purchase of new machinery be included?

a. Cash flows from operating activities

b. Cash flows from investing activities

c. Cash flows from financing activities

d. Purchases of new equipment items are not included in the statement of cash flows

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. An entity’s net cash flow from operating activities is important for users of the statement of cash flows because it:

a. indicates the entity’s ability to generate cash.

b represents the entity’s cash flows from normal business operations.

c. indicates that the business is meeting its current obligations.

d. all of the options are true.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. In the current financial period, Blue Basket Pty’s accrued expenses are recorded as $250 000 and the cash paid for expenses, as shown in the statement of cash flows, is $180 000. Which of the below statements is correct?

a. Depreciation may have been recorded in the statement of profit or loss.

b. Expenses may have been paid for in advance in the previous period.

c. Expenses may have been incurred in the current period and have not been paid by the end of the current period.

d. All of the options are correct.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. From the information below, the net cash flow from operating activities is:

Cash contributions from owner $8000

Receipt of bank interest $50

Dividend payment to shareholders $2500

Cash receipts from customers $4500

Cash purchase of computer $2100

Depreciation on computer $50

Cash payments to suppliers $3500

a. an inflow of $5500.

b. an inflow of $1050.

c. an outflow of $2100.

d. an inflow of $6900.

Feedback: (Receipt of bank interest $50 plus cash receipts from customers $4500 less cash payments to suppliers $3500 = $1050).

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. From the information below, the total net cash flow from investing activities is:

Borrowed $15 000 cash

Sold motor vehicle $1400

Paid Income tax $20 000

Paid Dividends $8500

Received cash from customers $18 000

Cash purchase of furniture $2700

Depreciation on furniture $270

a. an inflow of $1400.

b. an outflow of $2700.

c. an outflow of $1300.

d. an inflow of $6500.

Feedback: (Sold motor vehicle $1400 less purchase of furniture $2700 = ($1300)).

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. If customers owe $120 000 at the beginning of the year and $95 000 at the end of the year, and credit sales total $250 000 for the year, what is the cash received from customers during the year?

a. $370 000

b. $275 000

c. $155 000

d. $120 000

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. The amount owing to suppliers for inventory purchases is $118 000 at the beginning of the year and is $94 000 at the end of the year. If total credit purchases of inventory for the year are $160 000, what is the cash paid to suppliers of inventory for the year?

a. $184 000

b. $66 000

c. $254 000

d. $278 000

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Calculate the net cash flow from operating activities by adjusting the operating profit after tax.
   

a. $15 000

b. $41 000

c. $59 000

d. $65 000

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. In the statement of cash flows in the statement of financial position, what do changes in non-current liabilities and equity appear under?

a. Operating activities

b. Investing activities

c. Financing activities

d. The reconciliation of operating profit with cash flow from operating activities

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of the following items would be classified as investing activities in a statement of cash flows?

a. Proceeds from sale of machinery

b. Proceeds from dividends

c. Proceeds from borrowings

d. Proceeds from customers

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Which of the following would not be classified as a cash flow from investing activities?

a. Proceeds from repayment of loans to other parties

b. Proceeds from the sale of plant and equipment

c. Cash from borrowings

d. Purchase of furniture

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. In relation to converting accrual information to the cash basis, which of the following statements is true?

a. A decrease in current assets means less cash.

b. An increase in current liabilities means less expense.

c. A decrease in current liabilities means more cash.

d. An increase in current assets means less cash.

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Assume all of Shoes Pty’s inventory items are purchased for cash. If cash payments for inventory in the period total $37 000 and the cost of sales, calculated under the accrual basis, is $40 000, which of the below statements is correct?

a. Inventory on hand has decreased by $3000 during the period

b. Creditors are owed $3000 at the end of the period for inventory purchases

c. Inventory on hand has increased by $3000 during the period

d. Creditors are owed $40 000 at the end of the period for inventory purchases

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Using the information below, what is the net cash flow from operating activities?

a. Inflow of $20 000

b. Inflow of $12 000

c. Inflow of $28 000

d. Inflow of $8000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. The balance of Kage Welding’s plant and equipment asset account at the beginning of the year is $800 000, the closing balance is $650 000, and plant and equipment originally purchased for $165 000 are sold during the year. What is the amount Kage Welding spent on purchases of new plant and equipment during the year?

a. $135 000

b. $15 000

c. $485 000

d. $150 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. BLP Pty’s profit after tax is $28 000 and increases in inventory and accounts receivable total $17 000. What is BLP Pty’s net cash flow from operating activities?

a. Inflow of $11 000

b. Inflow of $45 000

c. Outflow of $11 000

d. Outflow of $45 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Blueskin Pty’s opening balance of dividends payable is $120 000, the closing balance is $90 000 and dividends declared at the end of the period are $50 000. How much cash was paid for dividends in that period?

a. $0

b. $20 000

c. $40 000

d. $80 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Pages Pty’s opening balance of borrowings is $330 000, the closing balance is $550 000 and a total of $240 000 is paid off the entity’s borrowings during the period. How much additional cash did Pages Pty borrow during the period?

a. $90 000

b. $120 000

c. $460 000

d. $3100 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Bookchump Pty’s opening balance of accrued expenses is $34 000, the closing balance is $38 000 and accrued expenses recognised at the end of the period are $20 000. How much was paid for accrued expenses during the period?

a. $28 000

b. $16 000

c. $18 000

d. $14 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Using the indirect method to prepare the statement of cash flows, which of the following statements is true?

a. Decrease in current assets means a decrease in cash.

b. Increase in current assets means an increase in cash.

c. Increase in current liabilities means an increase in cash.

d. Decrease in current liabilities means an increase in cash.

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Why have investors increased their reliance on the statement of cash flows?

a. The comparison of profit or loss to the cash flow from operating activities provides insight to an entity’s ability to meet its obligations.

b. The statement highlights an entity’s ability to reinvest in its operations.

c. It is relatively difficult to manipulate the statement of cash flows compared to the statement of profit or loss.

d. All of the options are correct.

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. What is free cash flow?

a. The cash available to repay debt, pay dividends and expand operations

b. The cash available to purchase supplies

c. The cash available to loan to other entities

d. The cash available to pay current liabilities

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Which of the following is not an early warning indicator of cash flow problems?

a. Operating activities are paid for using proceeds raised from the issue of shares

b. Cash received from customers is greater than cash paid to suppliers

c. Operating cash outflows

d. The entity continues to borrow more money than it repays

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Which of the following cash flow ratios is used to determine an entity’s solvency?

a. Debt coverage ratio

b. Free cash flow ratio

c. Cash adequacy ratio

d. Cash flow ratio

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Which of the following statements concerning the cash adequacy ratio is true?

a. It measures the entity’s ability to reinvest in its operations and to make distributions to owners from its operating cash flow.

b. It expresses the cash flow from operating activities as a percentage of capital expenditure plus dividends.

c. A ratio result greater than one suggests a good performance.

d. All of the statements are true.

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Teapots Pty wants to improve their cash flow. Which of the below options would assist in this objective?

a. Utilising the available credit terms when paying suppliers

b. Selling surplus inventory

c. Investing surplus cash

d. All of the above options would assist in improving cash flow

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Books Ltd reports a loss on the statement of profit or loss, but a positive cash inflow of funds from operations. Which of the below could be a possible explanation for this?

a. An increase in accounts receivable

b. An increase in inventory

c. A decrease in accounts payable

d. A decrease in accounts receivable

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. What is the formula for the cash adequacy ratio?

a. Cash from operating activities divided by non-current liabilities

b. Cash from financing activities divided by net assets

c. Cash from operating activities divided by (capital expenditure plus dividends paid)

d. Non-current liabilities divided by cash from operative activities

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Which of the following statements concerning the cash flow ratio is true?

a. The cash flow ratio is a better measure of liquidity than the current ratio because it is calculated using cash flow generated over a whole reporting period rather than the current assets at a point in time.

b. The cash flow ratio is used to assess liquidity.

c. The cash flow ratio compares the cash flow from operating activities with the current liabilities.

d. All of the above statements are true.

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Cash from operating activities less the amount spent on capital expenditure is the formula for:

a. the cash flow to sales ratio.

b. the cash adequacy ratio.

c. free cash flow.

d. the debt coverage ratio.

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

Fill in the blanks

1. The time taken from the purchase of inventory from suppliers to receiving the cash from the sale of that inventory to customers is called the operating ______ ________.

a. cash cycle

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. The statement of cash flows assists decision makers in assessing an entity’s ability to _______________cash flows.

a. generate

Learning objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows

1. A healthy business would normally expect to have a net cash __________ (inflow/outflow) from operating activities.

a. inflow

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Cash __________________ are highly liquid investments and short-term borrowings that are subject to an insignificant risk of change in value.

a. equivalents

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. A net total cash outflow in investing activities is considered ____________ (normal/abnormal) for a healthy growing business.

a. normal

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Borrowing money and raising share capital are included as ________________ activities on a statement of cash flows.

a. financing

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. Cash flows from investing activities arise from changes in non- ___________ ____________ on the statement of financial position.

a. current assets

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. The receipt of dividends would be classified as a cash inflow from ______________ activities.

a. operating

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. __________ expense relating to property, plant and equipment is a common business expense that is not included in the statement of cash flows.

a. Depreciation

Learning objective 7.2 ~ Outline the format and the classification of cash flows in the statement of cash flows

1. During the financial period the amount owing from debtors increased by $40 000. If the credit sales for the period are $500 000 the cash inflows from debtors on the statement of cash flows will be __________.

a. $460 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. If dividends declared at the end of the period are $10 000, and the balance of dividends payable increased by $2000 over the period, the amount of dividends paid during the year is equal to _________.

a. $8000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. The opening balance of inventory is $50 000 and the closing balance is $15 000. If cost of sales is $500 000 for the period, assuming creditors' balances have not altered, the amount of cash paid to suppliers is _____________.

a. $465 000

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. The ___________ method of preparing a statement of cash flows adjusts an entity’s profit or loss for the effects of non-cash transactions and deferrals or accruals of operating activities.

a. indirect

Learning objective 7.3 ~ Produce a statement of cash flows using the direct method and a reconciliation using the indirect method

1. Decision makers have increased their reliance on the statement of cash flows due to the relative difficulty in manipulating the statement of ____________ _______________ compared with manipulating the statement of profit or loss.

a. cash flows

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows

1. Comparing an entity’s profit or loss with its net cash from operating activities can indicate how well an entity is managing its ______________ _____________.

a. working capital

Learning objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows