Chapter 12: Statement of Cash Flows

Question 1

The ___ provides cash receipt and cash payment information and reconciles the change in cash for a period of time.

Answer 1

Statement of cash flows

Question 2

The primary purpose of the statement of cash flows is to show ___.

Answer 2

The change in cash from the beginning of the period to the end of the period

Question 3

F. The three categories of the cash flows are ___, ___, and ___.

Answer 3

Operating activities
Investing activities
Financing activities

Question 4

F. ___ include cash activities related to net income.
For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are examples because revenues and expenses are included in net income.

Answer 4

Operating activities

Question 5

F. ___ include cash activities related to noncurrent assets. Noncurrent assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount of loans made to other entities.

Answer 5

Investing activities

Question 6

Noncurrent assets include ___, ___, and ___.

Answer 6

(1) long-term investments
(2) property, plant, and equipment
(3) the principal amount of loans made to other entities.

Question 7

F. ___ include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments.

Answer 7

Financing activities

Question 8

Noncurrent liabilities and owners’ equity items include ___, ___, and ___.

Answer 8

(1) the principal amount of long-term debt
(2) stock sales and repurchases
(3) dividend payments

Question 9

What are the four steps required to prepare a statement of cash flows?

1. ___
2. ___
3. ___
4. ___

Note: they are the same for indirect and direct methods with the exception of step 1 (direct method simply presents the income statement on the cash basis).

Answer 9

1. Prepare the operating activities section by converting net income from an accrual basis* to a cash basis.
2. Prepare the investing activities section by presenting cash activities for noncurrent assets.
3. Prepare the financing activities section by presenting cash activities for noncurrent liabilities and owner’s equity.
4. Reconcile the change in cash from the beginning of the period to the end of the period.

Question 10

Three measures are often used to evaluate cash flow:

1. ___
2. ___
3. ___

Answer 10

1. Operating cash flow ratio
2. Capital expenditure ratio
3. Free cash flow

Question 11

___ measures the company’s ability to generate enough cash from daily operations over the course of a year to cover current obligations.

Answer 11

Operating cash flow ratio

Question 12

___ measures the company’s ability to generate enough cash from daily operations to cover capital expenditures.

Answer 12

Capital expenditure ratio

Question 13

___ measures the company’s ability to generate enough cash from daily operations to cover capital expenditures and determines how much cash is remaining to invest elsewhere in the company.

Answer 13

Free cash flow

Question 14

F. The goal of the statement of cash flows is to start with the beginning of the year cash balance, ___, ___, and find the resulting end-of-year cash balance.

Answer 14

Add all cash receipts for the year

Subtract all cash payments for the year

Question 15

The ___ section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business.

Answer 15

operating activities

Question 16

F. The information needed to prepare the statement of cash flows includes___, ___, and ___.

Answer 16

• the balance sheet
• income statement
• other selected data

Question 17

F. What are the three adjustments for the indirect method of the preparation of the statement of cash flows?

Answer 17

1. Add back expenses that do not affect cash, such as depreciation.
2. Add back losses and deducting gains related to investing activities.
3. Add and subtract changes in current assets (except cash) and current liabilities using the adjustment rules.

Question 18

As a result of the demand for more cash flow information, the ___ formally created the statement of cash flows in 1987.

Answer 18

FASB

Question 19

In step 1 of the preparation of the statement of cash flows, the ___ method starts with net income and makes adjustments to convert net income to a cash basis. The ___ method makes adjustments directly to each income statement revenue and expense line item, thereby converting each line item to a cash basis. The resulting cash provided by (used by) operating activities is identical in both approaches.

Answer 19

Indirect

Direct

Question 20

Rather than showing every single transaction in a formal report, the statement of cash flows summarizes these transactions as ___.

Answer 20

One line item

Question 21

F. quiz: The three types of activities on the statement of cash flows are:

a. investing, operating and financing
b. operating, investing and financing
c. operating, investing and free flow
d. operating, indirect and direct

Answer 21

b. operating, investing and financing

Question 22

F. quiz: The following data is available for your company:

Proceeds from sale of land - $100,000
Proceeds from sale of equipment - 50,000
Issuance of common stock - 70,000
Purchase of equipment - 30,000
Payment of cash dividends - 60,000

Net cash provided by investing activities is:

a. $150,000
b. $190,000
c. $120,000
d. $130,000

Answer 22

c. $120,000

add 100,000
add 50,000
less 30,000

Stock sales and dividend payments are not part of investing, they are financing.

Question 23

quiz: Positive signs of a successful company as seen on the statement of cash flows do NOT include:

a. investments in property, plant and equipment
b. banks are willing to lend money to the company
c. the sale of a majority of a company’s plant assets
d. operating activities are the largest source of cash

Answer 23

c. the sale of a majority of a company’s plant assets

Question 24

F. quiz: Under the indirect method of preparing the statement of cash flows, the starting point to determine Net cash provided by operating activities is:

a. the ending cash balance
b. sales
c. the beginning cash balance
d. net income

Answer 24

d. net income

Question 25

F. quiz: Net income is $132,000, accounts payable increased $10,000 during the year, inventory decreased $6,000 during the year, and accounts receivable increased $12,000 during the year. Under the indirect method, what is net cash provided by operating activities?

a. $102,000
b. $112,000
c. $124,000
d. $136,000

Answer 25

d. $136,000

add 132,000
add 10,000
add 6,000
less 12,000

Question 26

F. quiz: Which is an example of a cash flow from a financing activity?

Select one:

a. Receipt of cash from sale of land
b. Issuance of debt for cash
c. Purchase of equipment for cash
d. None of the above

Answer 26

b. Issuance of debt for cash

Financing activities include noncurrent liabilities and owners’ equity items

Question 27

F. quiz: Under the indirect method of preparing the statement of cash flows, a gain on the sale of equipment is:

a. ignored since this transaction does not affect cash
b. subtracted from net income in the operating activities section
c. subtracted from the book value of the equipment in the financing activities section
d. added to net income in the operating activities section

Answer 27

b. subtracted from net income in the operating activities section

Question 28

quiz: The statement of cash flows should NOT be used to evaluate an entity’s ability to:

a. earn net income
b. pay dividends
c. generate future cash flows
d. meet obligations

Answer 28

a. earn net income

Question 29

quiz: On a statement of cash flows prepared with the indirect method, financing activities do NOT include

a. payment of dividends
b. payment of principal amounts of long-term debt
c. sale of treasury stock
d. payment of interest on long-term debt

Answer 29

d. payment of interest on long-term debt

Question 30

quiz: The statement of cash flows provides information about :

a. decisions made by a company’s management
b. a company’s future cash flows
c. a company’s ability to pay interest and dividends
d. all of the above

Answer 30

d. all of the above