Test Bank Chapter 17 The Cash Flow Statement Mutiple Choice

CHAPTER 17

THE CASH FLOW STATEMENT

CHAPTER STUDY OBJECTIVES

1. Discuss the usefulness, content, and format 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 non-current asset items. Financing activities generally include cash flows resulting from changes in non-current liability and shareholders’ equity items.

2. Prepare a cash flow statement using the indirect 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. (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 non-current 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. Prepare the operating section of the cash flow statement using the direct method. The operating section of the cash flow statement can be prepared using the direct method. The direct method is generally preferred by investors because it provides more detailed information as to the sources and uses of cash. While this method also converts profit from an accrual to a cash basis, it reports the cash receipts from customers, cash receipts from interest, dividends and loans, as well as cash payments to suppliers, employees, interest, taxes, and operating expense.

4. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

19. Significant noncash investing and/or financing activities are presented in the cash flow statement.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

34. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

40. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

42. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

45. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

46. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

47. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

50. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

51. An increase in accounts receivable in the year would increase the total cash receipts from customers reported on the cash flow statement using the direct method.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Hard

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

54. If a company is a startup company, the expectation would be that there would be negative cash used by investing and operating activities and positive cash provided by financing activities.

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

55. 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.

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Easy

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

58. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

59. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

60. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

61. 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

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

62. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

63. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

64. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

65. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

66. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

67. Financing activities involve

a) lending money.

b) acquiring investments.

c) issuing debt.

d) acquiring long-lived assets.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

68. Investing activities include

a) collecting cash on loans made.

b) obtaining cash from creditors.

c) issuing shares to investors.

d) repaying money previously borrowed.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

69. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

70. 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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

71. 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.

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

72. 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

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

73. 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.

Difficulty: Medium

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

74. 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

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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 provide loans to other companies.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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 provide loans to other companies.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

79. The following title would be present in the cash flow statement when there is a negative cash flows within the financing activities:

a) cash flows from financing activities.

b) net cash used by financing activities.

c) net cash flows from financing activities.

d) net cash provided by financing activities.

Difficulty: Easy

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Section Reference: Reporting of Cash Flows

CPA: Financial Reporting

AACSB: Analytic

80. 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

81. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

82. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

83. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

84. 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

85. 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

86. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

87. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

88. Neo 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

89. Highchair Limited reported a net loss of $ 10,000 for the year ended December 31, 2021. 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 2021, 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

90. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

91. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

92. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

93. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

94. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

95. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

96. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

97. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

98. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

99. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

102. 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.

Difficulty: Medium

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

103. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

104. 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

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

105. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

106. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

107. 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.

Difficulty: Easy

Learning Objective: Prepare a cash flow statement using the indirect method.

Section Reference: Preparation of the Cash Flow Statement

CPA: Financial Reporting

AACSB: Analytic

108. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

109. When preparing the financial statements for 2021, Marc Martin, CFO for Maverick Mania 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. Maverick Mania uses the direct method to prepare its cash flow statement. On the 2021 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

110. When preparing the financial statements for 2021, Bart Butler, CFO for Bartender 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. Bartender uses the direct method to prepare its cash flow statement. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

111. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

112. Schneider 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

113. Barney Day 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

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

114. Barker 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 Barker receive from its customers during the year?

a) $ 790,000

b) $ 810,000

c) $ 490,000

d) $ 510,000

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

115. Claudia Clay 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 Claudia Clay's cash payments to suppliers?

a) $ 230,000

b) $ 220,000

c) $ 260,000

d) $ 280,000

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

116. Rice Export 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 Rice Export's cash payments to suppliers?

a) $ 135,000

b) $ 85,000

c) $ 125,000

d) $ 95,000

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

117. 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

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

118. CAT 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 CAT's cash payments for operating expenses?

a) $ 62,000

b) $ 58,000

c) $ 50,000

d) $ 70,000

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

119. 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

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

120. 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

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

121. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

122. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

123. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

124. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

125. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

126. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

127. 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.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

128. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

129. 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.

Difficulty: Easy

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

130. Jack Cleason Consulting reported income tax expense of $ 38,000 on the income statement. There has also been a decrease in the income taxes payable account in the amount of $ 4,000 when compared to prior year. Cash payments for income taxes were therefore

a) $ 38,000.

b) $ 4,000.

c) $ 34,000.

d) $ 42,000.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

131. Ferrell Fine Meats reported sales revenue of $ 377,000 on the income statement. There has also been a decrease in the accounts receivable account in the amount of $ 12,000 when compared to prior year. Cash receipts from customers were therefore

a) $ 377,000.

b) $ 389,000.

c) $ 365,000.

d) $ 12,000.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

132. Power Locker reported sales revenue of $ 1,750,000 and cost of goods sold of $ 992,000 on the income statement. The company also reported an increase in inventory of $ 15,000 when compared to prior year. Under the direct method, Power Locker would report cash payments to supplier in the amount of

a) $ 1,007,000.

b) $ 1,735,000.

c) $ 758,000.

d) $ 977,000.

Difficulty: Medium

Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Section Reference: Direct Method

CPA: Financial Reporting

AACSB: Analytic

133. 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.

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

134. 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.

Difficulty: Easy

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

135. Summary financial information for Klinger Corporation for the year ended July 1, 2021 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 2021 is

a) $ 128,000.

b) $ 228,000.

c) $ 178,000.

d) $ 546,000.

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

136. Which of the following reasons is NOT considered acceptable when examining the decrease in accounts receivable on the cash flow statement?

a) More customers have failed to pay off their accounts compared to prior year.

b) The company hired an employee dedicated to monitoring accounts receivable.

c) The company is collecting its accounting receivable faster.

d) Sales revenue decreased.

Difficulty: Easy

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

137. Vipont Motors has reported the following on its year end cash flow statement: cash provided by operating activities $ 210,000; cash used in investing activities $ 155,000; cash provided by financing activities $ 95,000. What amount would represent Vipont’s free cash flow?

a) $ 210,000

b) $ 150,000

c) $ 55,000

d) $ (40,000)

Difficulty: Medium

Learning Objective: Analyze the cash flow statement.

Section Reference: Using the information in the Financial Statements

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONS

138. 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

139. 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