Chapter 16 Study Questions

The statement of cash flows is not one of the basic financial statements.

Cash, as the term is used for the statement of cash flows, could indicate either cash or cash equivalents.

The statement of cash flows is an optional financial statement.

The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities.

The statement of cash flows reports a firm's major sources of cash receipts and major uses of cash payments for a period.

Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income.

To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting.

Cash flows from investing activities, as part of the statement of cash flows, include receipts from the sale of land.

Cash flows from financing activities, as part of the statement of cash flows, include payments for dividends.

Cash flows from investing activities, as part of the statement of cash flows, include payments for the purchase of treasury stock.

Cash flows from investing activities, as part of the statement of cash flows, include receipts from the issuance of bonds payable.

There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method.

The direct method of preparing the operating activities section of the statement of cash flows reports major classes of gross cash receipts and gross cash payments.

Under the direct method of reporting cash flows from operations, the major source of cash is cash received from customers.

The main disadvantage of the direct method of reporting cash flows from operating activities is that the necessary data are often costly to accumulate.

A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is emphasized.

Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed.

Cash flows from investing activities, as part of the statement of cash flows, include payments for the acquisition of fixed assets.

The acquisition of land in exchange for common stock is an example of noncash investing and financing activity.

If a business issued bonds payable in exchange for land, the transaction would be reported in a separate schedule on the statement of cash flows.

A cash flow per share amount should be reported on the statement of cash flows.

When using the worksheet method to analyzing noncash accounts , no order of analysis is required, but it is more efficient to start with Retained Earnings and proceed upward in the account listing.

Rarely would the cash flows from operating activities, as reported on the statement of cash flows, be the same as the net income reported on the income statement.

Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000.

If land costing $145,000 was sold for $205,000, the $60,000 gain on the sale would be added to net income in of the operating activities section of the statement of cash flows (prepared by the indirect method).

In preparing the cash flows from operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period.

In determining the cash flows from operating activities for the statement of cash flows by the indirect method, the depreciation expense for the period is added to the net income for the period.

In preparing the cash flows from operating activities section of the statement of cash flows by the indirect method, the amortization of bond discount for the period is deducted from the net income for the period.

If cash dividends of $135,000 were paid during the year and the company sold 1,000 shares of common stock at $30 per share, the statement of cash flows would report net cash flow from financing activities as $165,000.

The declaration and issuance of a stock dividend would be reported on the statement of cash flows.

If 800 shares of $40 par common stock are sold for $43,000, the $43,000 would be reported in the cash flows from financing activities section of the statement of cash flows.

If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the cash flows from financing activities section of the statement of cash flows.

Net income was $51,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash flow from operations is $37,000.

Net income for the year was $29,500.

A building with a cost of $153,000 and accumulated depreciation of $42,000 was sold for a $11,000 gain. When using the indirect method, the cash generated from this investing activity was $121,000.

Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows.

Cash paid to acquire treasury stock should be shown on the statement of cash flows from investing activities.

Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows.

Purchasing equipment by issuing a six-month note should be shown on the statement of cash flows under the investing activities section.

In preparing the statement of cash flows, the correct order of reporting cash activities is Financing, Operating, Investing.

Cash inflows and outflows are not netted in the investing or financing sections of the statement of cash flows but are separately disclosed to give the reader full information.

There is no difference in the Investing and Financing sections of the statement of cash flows using the indirect and direct method.

Under the direct method of preparing a Statement of Cash Flows, the gain on the sale of land is not adjusted or reported as part of cash flows from operating activities.

The manner of reporting cash flows from investing and financing activities will be different under the direct method as compared to the indirect method.

Sales reported on the income statement were $372,000.

To determine cash payments for merchandise for the cash flow statement using the direct method, a decrease in accounts payable is added to the cost of merchandise sold.

To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation.

To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in accrued expenses is added to operating expenses other than depreciation.

To determine cash payments for income tax for the cash flow statement using the direct method, an increase in income taxes payable is added to the income tax expense.

Free cash flow is cash flow from operations, less cash used to purchase fixed assets to maintain productive capacity and cash used for dividends.

Free cash flow is the measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

Which of the following is not one of the four basic financial statements? A. balance sheet B. statement of cash flows C. statement of changes in financial position D. income statement

Which of the following concepts of cash is not appropriate to use in preparing the statement of cash flows? A. cash B. cash and money market funds C. cash and cash equivalents D. cash and U.S. treasury bonds

Which of the following can be found on the statement of cash flows? A. cash flows from operating activities B. total assets C. total changes in stockholders' equity D. changes in retained earnings

On the statement of cash flows, the cash flows from operating activities section would include A. receipts from the issuance of capital stock B. receipts from the sale of investments C. payments for the acquisition of investments D. cash receipts from sales activities

Preferred stock issued in exchange for land would be reported in the statement of cash flows in A. the cash flows from financing activities section B. the cash flows from investing activities section C. a separate schedule D. the cash flows from operating activities section

Cash paid to purchase long-term investments would be reported in the statement of cash flows in A. the cash flows from operating activities section B. the cash flows from financing activities section C. the cash flows from investing activities section D. a separate schedule

Which of the following would not be found in a Schedule of Noncash Investing and Financing Activities, reported at the end of a Statement of Cash Flows? A. equipment acquired in exchange for a note payable B. bonds payable exchanged for capital stock C. purchase of treasury stock D. capital stock issued to acquire fixed assets

Which of the following does not represent an outflow of cash and therefore would not be reported on the statement of cash flows as a use of cash? A. purchase of noncurrent assets B. purchase of treasury stock C. discarding an asset that had been fully depreciated D. payment of cash dividends

Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows? A. retirement of bond payable B. acquisition of treasury stock C. declaration of stock dividends D. issuance of long-term debt

A ten-year bond was issued at par for $250,000 cash. This transaction should be shown on a statement of cash flows under A. investing activities B. financing activities C. noncash investing and financing activities D. operating activities

Cash paid for preferred stock dividends should be shown on the statement of cash flows under A. investing activities B. financing activities C. noncash investing and financing activities D. operating activities

The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports A. the increase or decrease in cash B. cash at the end of the year C. net cash flow from investing activities D. net cash flow from financing activities

Which of the following is a noncash investing and financing activity? A. payment of a cash dividend B. payment of a six-month note payable C. purchase of merchandise inventory on account D. issuance of common stock to acquire land

Which of the following should be shown on a statement of cash flows under the financing activity section? A. the purchase of a long-term investment in the common stock of another company B. the payment of cash to retire a long-term note C. the proceeds from the sale of a building D. the issuance of a long-term note to acquire land

A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under A. investing activities B. financing activities C. noncash investing and financing activities D. operating activities

Cash flow per share is a A. required to be reported on the balance sheet B. required to be reported on the income statement C. required to be reported on the statement of cash flows D. not required to be reported on any statement

On the statement of cash flows prepared by the indirect method, the cash flows from operating activities section would include A. receipts from the sale of investments B. amortization of premium on bonds payable C. payments for cash dividends D. receipts from the issuance of capital stock

The statement of cash flows is not useful for: A. planning future investing and financing activities B. determining a company's ability to pay its debts C. determining a company's ability to pay dividends D. calculating the net worth of a company

Cash receipts received from the issuance of a mortgage notes payable would be classified as A. investing activities. B. operating activities. C. either financing or investing activities. D. financing activities.

The order of presentation of activities on the statement of cash flows is A. operating, investing, and financing. B. operating, financing, and investing. C. financing, operating, and investing. D. financing, investing, and operating.

Financing activities include A. lending money. B. acquiring investments. C. issuing debt. D. acquiring long-lived assets.

Investing activities include A. collecting cash on loans made. B. obtaining cash from creditors. C. obtaining capital from owners. D. repaying money previously borrowed.

Cash receipts from interest and dividends are classified as A. financing activities B. operating activities. C. investing activities. D. either financing or investing activities.

Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method in A. the cash flows from financing activities section B. the cash flows from investing activities section C. a separate schedule D. the cash flows from operating activities section

Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? A. an increase in inventory B. a decrease in accounts payable C. preferred dividends declared and paid D. a decrease in accounts receivable

Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method? A. depreciation expense B. gain on sale of land C. a loss on the sale of equipment D. dividends declared and paid

Which of the following below increases cash? A. depreciation expense B. acquisition of treasury stock C. borrowing money by issuing a six-month note D. the declaration of a cash dividend

Which one of the following below would not be classified as an operating activity? A. interest expense B. income taxes C. payment of dividends D. selling expenses

Which one of the following below should be added to net income in calculating net cash flow from operating activities using the indirect method? A. a gain on the sale of land B. a decrease in accounts payable C. an increase in accrued liabilities D. dividends paid on common stock

On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be A. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities B. added to net income in converting the net income reported on the income statement to cash flows from operating activities C. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends D. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends

Accounts receivable from sales transactions were $44,000 at the beginning of the year and $53,000 at the end of the year. Net income reported on the income statement for the year was $105,000.

On the statement of cash flows, the cash flows from investing activities section would include A. receipts from the issuance of capital stock B. payments for dividends C. payments for retirement of bonds payable D. receipts from the sale of investments

A building with a book value of $ 46,000 is sold for $51,000 cash Using the indirect method, this transaction should be shown on the statement of cash flows as follows: A. an increase of $46,000 from investing activities B. an increase of $51,000 from investing activities and a deduction from net income of $5,000 C. an increase of $51,000 from investing activities D. an increase of $46,000 from investing activities and an addition to net income of $5,000

Cash paid for equipment would be reported in the statement of cash flows in A. the cash flows from operating activities section B. the cash flows from financing activities section C. the cash flows from investing activities section D. a separate schedule

If a gain of $9,000 is incurred in selling (for cash) office equipment having a book value of $55,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is A. $46,000 B. $9,000 C. $55,000 D. $64,000

Which of the following types of transactions would be reported as a cash flow from investing activity on the statement of cash flows? A. issuance of bonds payable B. issuance of capital stock C. purchase of treasury stock D. purchase of noncurrent assets

Land costing $46,000 was sold for $79,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? A. $79,000 B. $46,000 C. $125,000 D. $33,000

Equipment with an original cost of $60,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000.

On the statement of cash flows, the cash flows from financing activities section would include A. receipts from the sale of investments B. payments for the acquisition of investments C. receipts from a note receivable D. receipts from the issuance of capital stock

On the statement of cash flows, the cash flows from financing activities section would include all of the following except A. receipts from the sale of bonds payable B. payments for dividends C. payments for purchase of treasury stock D. payments of interest on bonds payable

Cash dividends paid on capital stock would be reported in the statement of cash flows in A. the cash flows from financing activities section B. the cash flows from investing activities section C. a separate schedule D. the cash flows from operating activities section

Cash dividends of $85,000 were declared during the year. Cash dividends payable were $10,000 at the beginning of the year and $15,000 at the end of the year. The amount of cash for the payment of dividends during the year is A. $90,000 B. $80,000 C. $95,000 D. $75,000

On the statement of cash flows, a $20,000 gain on the sale of fixed assets would be A. added to net income in converting the net income reported on the income statement to cash flows from operating activities B. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities C. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends D. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends

A business issues 20-year bonds payable in exchange for preferred stock. This transaction would be reported on the statement of cash flows in A. a separate schedule B. the cash flows from financing activities section C. the cash flows from investing activities section D. the cash flows from operating activities section

Land costing $88,000 was sold for $50,000 cash. The loss on the sale was reported on the income statement as other expense. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? A. $50,000 B. $88,000 C. $138,000 D. $38,000