Ch 6 (IFSA) Practice Problems Flashcards
The three major classifications of activities in a cash flow statement are
A. inflows, outflows, and balances.
B. beginning balance, ending balance, and change.
C. operating, investing, and financing
C is correct.
Answers A and B are incorrect: These are items of information involved in making calculations for the statement of cash flows.
The sale of a building for cash would be classified as what type of activity on the cash
flow statement?
A. Operating
B. Investing
C. Financing
B is correct.
Purchases and sales of long - term assets are considered investing activities. Note: Absent information to the contrary, it is assumed that the sale of a building involves cash. If, for example, the transaction had involved the exchange of a building for common stock or the exchange of a building for a long-term note payable, it would have been considered a significant noncash activity.
Which of the following is an example of a financing activity on the cash flow statement under U.S. GAAP?
A. Payment of dividends
B. Receipt of dividends
C. Payment of interest
A is correct.
Answers B and C are items that are included in operating cash flows. Note: International accounting standards allow companies to include receipt of interest and dividends as either operating or investing cash flows, and international accounting standards allow companies to include payment of interest and dividends as either operating or financing cash flows.
A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be
A. reported as a $1 million financing cash outflow and inflow.
B. reported as supplementary information to the cash flow statement.
C. reported as a $1 million financing cash outflow and a $1 million investing cash inflow.
B is correct.
Noncash transactions, if significant, are reported as supplementary information, not in the investing or financing sections of the cash flow statement.
Interest expense may be classified as an operating cash flow
A. under U.S. GAAP, but may be classified as either operating or investing cash flows under IFRS.
B. under IFRS, but may be classified as either operating or investing cash flows under U.S. GAAP.
C. under U.S. GAAP, but may be classified as either operating or financing cash flows under IFRS.
C is correct.
Interest expense is always classified as an operating cash flow under U.S. GAAP but may be classified as either an operating or financing cash flow under IFRS.
Tax cash flows
A. must be separately disclosed in the cash flow statement under IFRS only.
B. must be separately disclosed in the cash flow statement under U.S. GAAP only.
C. are not separately disclosed in the cash flow statement under IFRS or U.S. GAAP.
A is correct.
Taxes are required to be separately disclosed on the cash flow statement under IFRS only.
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and U.S. GAAP?
A. Operating
B. Investing
C. Financing
A is correct.
The operating section may be prepared under the indirect method. The other sections are always prepared under the direct method.
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method under U.S. GAAP?
A. Net income
B. Cash paid for interest
C. Cash paid to suppliers
A is correct.
Under the indirect method, the operating section would begin with net income and adjust it to arrive at operating cash fl ow. The other items would appear under the direct method as a cash fl ow statement prepared under U.S. GAAP. Note that cash paid for interest may appear on an indirect cash fl ow statement under IFRS if classified as a financing activity.
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers?
A. $110 million
B. $90 million
C. $30 million
B is correct.
Revenues of $100 million minus the increase in accounts receivable of $10 million equal $90 million cash received from customers. The increase in accounts receivable means that the company received less in cash than it reported as revenue.
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. How much cash did the company pay to its suppliers during the year?
A. $90 million
B. $83 million
C. $77 million
B is correct.
Cost of goods sold of $ 80 million plus the increase in inventory of $ 5 million equals purchases from suppliers of $ 85 million. The increase in accounts payable of $ 2 million means that the company paid $ 83 million in cash ( $ 85 million minus $ 2 million) to its suppliers.
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. How much cash did the company pay to its suppliers during the year?
A. $85 million
B. $79 million
C. $67 million
C is correct.
Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).
White Flag, a women’s clothing manufacturer, reported wage expense of $20 million. The beginning balance of wages payable was $3 million, and the ending balance of wages payable was $1 million. How much cash did the company pay in wages?
A. $24 million
B. $23 million
C. $22 million
C is correct.
Beginning wages payable of $3 million plus wage expense of $20 million, minus ending wages payable of $1 million equals $22 million. The expense of $20 million plus the $2 million decrease in wages payable equals $22 million.
