Test Bank | Cash Flows – 1st

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Chapter 11

Cash Flows

True/False Questions

1. The four phases of the business life cycle in order are: 1) start-up, 2) expansion, 3) growth and 4) maturity.

Pages: p591

1. Operating activities are likely to be a source of cash in maturity phase businesses.

Pages: p592

1. During the start-up phase, operating activities and financing activities are likely to be a use of cash while investing activities are likely to be a source of cash.

Pages: p592

1. IFRS defines cash flows as both cash and cash equivalents.

Pages: p593

1. In order to meet the IFRS definition of cash equivalent, the investment cannot be subject to a significant amount of risk of changes in value.

Pages: p593

1. IFRS requires that movements between cash and cash equivalents be included in the statement of cash flows.

Pages: p594

1. Bank overdrafts are typically included as a normal cash management activity and are therefore are not reported in the statement of cash flows.

Pages: p595

1. Under IFRS, the appropriate treatment when a customer owes money to the business and at the same time the business owes money to the customer is to offset the two amounts.

Pages: p592

1. Cash sources and uses for investing activities are the result in the size and composition of the contributed equity and borrowings of the entity.

Pages: p592

1. Cash payments to acquire property, plant and equipment, intangible and other assets are a use of cash related to investing activities.

Pages: p597

1. Cash repayments of amounts borrowed are a use of cash related to investing activities.

Pages: p597

1. Cash inflows from the disposal of subsidiaries and other businesses are a source of cash from financing activities.

Pages: p597

1. Cash proceeds from the sale of the business’s shares are a source of cash from financing activities.

Pages: p597

1. Cash payments to acquire the business’s own shares are a use of cash for operating activities.

Pages: p597

1. The acquisition of assets by assuming a related liability would be reported as a use of cash for investing activities.

Pages: p597

1. The conversion of debt to equity would not be reported as a source or use of cash in the statement of cash flows.

Pages: p598

1. The acquisition of another company by issuing shares in the business would not be reported as a source or use of cash in the statement of cash flows.

Pages: p598

1. The two methods of reporting cash flows from operating activities are the direct method and indirect method.

Pages: p600

1. The International Accounting Standards Board encourages the use of the indirect method of reporting cash flows.

Pages: p600

1. The only difference between the reporting of cash flows under the direct method and the indirect method is in the operating activities section.

Pages: p600

1. The amount of the net change in cash during the period may be different when cash flows are calculated using the direct method versus the indirect method.

Pages: p600

1. An increase in inventories during the period would be a use of cash.

Pages: p603

1. A decrease in trade accounts receivable during the period would be a use of cash.

Pages: p603

1. A decrease in trade accounts payable during the period would be a use of cash.

Pages: p603

1. A gain on the sale of equipment reported during the period would be added to profit in order to calculate cash flows related to operating activities under the indirect method.

Pages: p604

1. A loss on the sale of equipment reported during the period would be added to profit in order to calculate cash flows related to operating activities under the indirect method.

Pages: p604

1. The current cash debt coverage ratio is calculated by dividing average total liabilities into cash from operating activities.

Pages: p613

1. The cash debt coverage ratio is calculated by dividing average total liabilities into cash from operating activities.

Pages: p614

1. Free cash flow is calculating by subtracting capital expenditures and cash dividends from cash provided by operating activities.

Pages: p615

1. Operating cash flow per share is calculated by dividing cash from operating activities by ordinary shares plus preference shares outstanding.

Pages: p615

Multiple Choice Questions

1. Which of the following is unlikely to be true about cash flow patterns during the business life cycle?
   1. During the start-up phase, investing activities will be a use of cash
   2. During the growth phase, financing activities will be a source of cash
   3. During the start-up phase, operating activities are likely to be a source of cash
   4. During the maturity phase, operating activities are likely to be a source of cash

Pages: p592

1. Which of the following regarding cash flows is not true?
   1. movements between categories within current assets are excluded from the statement of cash flows
   2. Cash inflows and cash outflows are not generally offset against one another
   3. Some financing activities do not require the use of cash or cash equivalents and are therefore excluded from sources and uses reported on the face of the statement of cash flows
   4. Some investing activities do not require the use of cash or cash equivalents and are therefore excluded from sources and uses reported on the face of the statement of cash flows

Pages: p594

1. Which of the following would be a cash flow related to investing activities?
   1. cash payment require to acquire the business’s own shares
   2. cash proceeds from short-term and long-term borrowings
   3. cash outflows for acquisition of subsidiaries and other businesses
   4. cash proceeds from the sale of the business’s shares

Pages: p596

1. Which of the following would be added to profit or loss when calculating cash flows from operating activities under the indirect method?
   1. an increase in trade accounts receivable
   2. a decrease in inventories
   3. a decrease in trade accounts payable
   4. a decrease in taxes payable

Pages: p603

1. Which of the following is incorrect with respect to calculating cash flows under the direct method?
   1. An increase in trade accounts receivable is deducted from sales
   2. An increase in trade accounts payable is deducted from cost of sales and selling and administrative expenses
   3. An increase in inventories would be deducted from cost of sales and selling and administrative expenses
   4. A decrease in trade accounts receivable is added to cost of sales and selling and administrative expenses

Pages: p609

Use the following information from Teng Companies, Ltd to for items 6-8 below.

1. What is Teng’s current cash debt coverage ratio?
   1. 1.67
   2. 0.44
   3. 6.01
   4. 1.76

Pages: p613

1. What is Teng’s cash debt coverage ratio?
   1. 1.67
   2. 0.44
   3. 6.01
   4. 1.76

Pages: p614

1. What is Teng’s operating cash flow per share?
   1. ¥0.38
   2. ¥0.75
   3. ¥0.58
   4. ¥0.45

Pages: p615

Essay Questions

1. List and briefly describe the four stages of the business life cycle.
2. Describe the difference between cash and cash equivalents.
3. List and briefly describe the three sources and uses of cash as reported in the statement of cash flows.
4. What reporting does IFRS require when a transaction does not involve an exchange of cash?

What two methods of calculating cash flows are permitted by IFRS? Briefly describe how each is calculated. Which method does the IASB recommend? Which method is more commonly used in practice?

Answer

Entities can report either by the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed, or by the indirect method, whereby profit or loss is adjusted for the effects of transaction of a noncash nature, any deferrals or accruals of past or future operating cash receipts and payments, and items of income or expense associated with investing or financing cash flows.

The IASB recommends the direct method though the indirect method is used more commonly in practice.