CHAPTER 60: CASHFLOW

Question 1

1. The primary purpose of a statement of cash flows is to provide relevant information about

a. Differences between net income and associated cash receipts and disbursements
b. An entity’s ability to generate positive net cash flows
c. The cash receipts and cash disbursements of an entity during a period
d. An entity’s ability to meet cash operating needs

Answer 1

c. The cash receipts and cash disbursements of an entity during a period

Question 1

2. Cash receipts from royalties and commissions are
   a. Cash outflows for operating activities
   b. Cash inflows from operating activities
   c. Cash inflows from investing activities
   d. Cash outflows for financing activities

Answer 1

b. Cash inflows from operating activities

Question 2

3. Cash flows arising from trading securities are
   a. Classified as operating activities
   b. Classified as investing activities
   c. Classified as financing activities
   d. Not reported in the cash flow statement

Answer 2

a. Classified as operating activities

Question 3

4. Cash payments to acquire equity instruments are
   a.Cash outflows for financing activities
   b.Cash inflows from investing activities
   c.Cash outflows from investing activities
   d.Cash inflows from financing activities

Answer 3

c.Cash outflows for investing activities

Question 4

5. Cash receipts from issuing shares are
   a. Cash inflows from investing activities
   b. Cash outflows for investing activities
   c. Cash inflows from financing activities
   d. Cash outflows for financing activities

Answer 4

c. Cash inflows from financing activities

Question 5

6. Interest payments to lenders are classified as
   a. Operating activities
   b.Borrowing activities
   c.Lending activities
   d. Financing activities

Answer 5

a. Operating activities

Question 6

7. Dividend payments to shareholders are classified as
   a.Cash outflows for investing activities
   b. Cash inflows from investing activities
   c. Cash inflows from financing activities
   d.Cash outflows for financing activities

Answer 6

d.Cash outflows for financing activities

Question 7

8. Interest received and dividend received may be classified alternatively as cash flow from
   a.Operating activities
   b. Investing activities.
   c.Financing activities
   d.Revenue activities

Answer 7

b. Investing activities.

Question 8

9. Bank overdrafts that are repayable on demand and the bank balance often fluctuates from positive to overdrawn shall be classified as

a.Operating activities
b.Investing activities
c.Financing activities
d.Component of cash and cash equivalents

Answer 8

d.Component of cash and cash equivalents

Question 9

10. Cash advances and loans made by a financial institution are usually classified as

a.Operating activities
b.Investing activities
c.Financing activities
d.Component of cash and cash equivalents

Answer 9

a.Operating activities

Question 10

1. All can be classified as cash and cash equivalents, except

a.Redeemable preference shares due in 60 days
b.Treasury bills due for repayment in 90 days
c.Equity investments
d.A bank overdraft

Answer 10

c.Equity investments

Question 11

2. Which classification of the cash flow arising from the proceeds from an earthquake disaster settlement would be most appropriate?

a.Cash flows from operating activities
b.Cash flows from investing activities
c.Cash flows from financing activities
d.Does not appear in the statement of cash flows

Answer 11

a.Cash flows from operating activities

Question 12

3. Under IFRS, an entity can report finance costs in the statement of cash flows

a.In operating activities
b.Either in operating activities or financing activities
c.In financing activities
d.In investing activities or financing activities

Answer 12

b.Either in operating activities or financing activities

Question 13

4. Under IFRS, the dividend received from share investments can be classified as

a.Either an operating activity or a financing activity
b.Either an operating activity or investing activity
c.Only as an investing activity
d.Only an operating activity

Answer 13

b.Either an operating activity or investing activity

Question 14

5. Cash advances and loans from bank overdraft should reported in the statement of cash flows as

a.Operating activities
b.Investing activities
c.Financing activities
d.Other significant noncash activities

Answer 14

a.Operating activities

Question 15

1. How should a gain from sale of equipment for cash be reported in a statement of cash flows using the indirect method?
   a.In investing activities as a reduction of the cash inflow from the sale
   b.In investing activities as a cash outflow
   c.In operating activities as a deduction from income
   d. In operating activities as an addition to income

Answer 15

c.In operating activities as a deduction from income

Question 16

2. How should a loss on sale of machinery be presented in a statement of cash flows using indirect method?
   a.A deduction from net income
   b. An addition to net income
   c.An inflow and outflow of cash
   d.An outflow of cash

Answer 16

b. An addition to net income

Question 17

3. In a statement of cash flows using indirect approach for operating activities, an increase in inventory is presented as

a.Outflow of cash
b.Inflow and outflow of cash
c.Addition to net income
d.Deduction from net income

Answer 17

d.Deduction from net income

Question 18

4. Supplemental disclosures required only when the statement of cash flows is prepared using the indirect method include

a.A schedule reconciling net income with net cash flows from operating activities.
b.Amounts paid for interest and taxes.
c.Amounts deducted for depreciation and amortization.
d.Significant noncash investing and financing activities

Answer 18

b.Amounts paid for interest and taxes.

Question 19

5. Which of the following should not be disclosed in the statement of cash flows using the indirect method?

a.Interest paid
b.Income taxes paid
c. Cash flow per share
d.Dividends paid on preference shares

Answer 19

c. Cash flow per share

Question 20

7. In a statement of cash flows, depreciation is treated as an adjustment to net income because depreciation

a. Is a direct source of cash
b.Reduces income but does not involve cash outflow
c. Reduces net income and involves an inflow of cash
d Is an inflow of cash for replacement of asset

Answer 20

b.Reduces income but does not involve cash outflow

Question 20

6. In a statement of cash flows, which of the following should be reported as a cash flow from financing activities?

a.Payment to retire mortgage note
b.Interest payment on mortgage note
c. Dividend payment
d.Payment to retire mortgage note and dividend payment

Answer 20

d.Payment to retire mortgage note and dividend payment

Question 21

8. In a statement of cash flows using indirect method, a decrease in prepaid expenses is

a.Reported as an outflow and inflow of cash
b.Reported as an outflow of cash
c.Deducted from net inocme
d.Added to net income

Answer 21

d.Added to net income

increase=deduct, decrease=add

Question 22

9. Dividends received from an equity investee should be presented in the statement of cash flows as

a.Deduction from cash flows from operating activities
b.Addition to cash flows from investing activities
c.Addition to cash flows from operating activities
d.Deduction from cash flows from investing activities

Answer 22

c.Addition to cash flows from operating activities

Question 23

10. What is the treatment of a **three-month treasury bill?** a.Not reported b.An outflow for financing activities c. An outflow for lending activities d.An outflow for investing activities

Answer 23

**a.Not reported**

Question 24

1. In a statement of cash flows, if used **equipment is sold at a gain**, the amount shown as a cash flow from investing activities equals the carrying amount of the equipment a.Plus the gain b.Plus the gain and less the amount of tax c.Plus both the gain and the amount of tax d.With no addition or subtraction

Answer 24

**a.Plus the gain**

Question 25

2. In a statement of cash flows, if **used equipment is sold at a loss,** the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment a.Less the loss and the amount of tax b.Less both the loss and the amount of tax c. Less the loss d. With no addition or subtraction

Answer 25

c. **Less the loss**

Question 26

3. An entity's wages payable increased. Under the direct method, the cash paid for wages would be a.Salary expense plus beginning wages payable b.Salary expense plus the increase in wages payable c Salary expense less the increase in wages payable d.The same as salary expense

Answer 26

c Salary expense **less** the increase in wages payable

Question 27

4. An entity's **accounts receivable decreased**. In the statement of cash flows, the cash collected from customers would be a.Sales revenue plus beginning accounts receivable b. Sales revenue plus the decrease in accounts receivable c.Sales revenue less the decrease in accounts receivable d.The same as sales revenue

Answer 27

b. Sales revenue **plus the decrease** in accounts receivable

Question 28

5. How should an entity report the effect of the finance lease payment in the financing activities section of the statement of cash flows? a.An inflow equal to the present value of future lease payment less principal and interest payment b.An outflow equal to the principal and interest payment c.An outflow equal to the principal payment only d.The lease payment should not be reported.

Answer 28

c.An outflow **equal to the principal payment only**

Question 29

6. All of the following could potentially be classified as either operating or investing cash flow, except a.Interest received b.Dividend received c.Taxes paid specifically identified with investing d.Dividend paid

Answer 29

d.Dividend paid

Question 30

7. **Making and collecting loans** are a.Operating activities b. Investing activities c.Financing activities d.Liquidity activities

Answer 30

b. Investing activities

Question 31

8. Which is presented under cash flows from investing activities? a. Employee costs b.Property revaluation c.Redemption of debentures d.Development costs capitalized in the period

Answer 31

d.**Development costs** capitalized in the period

Question 31

2. When preparing a statement of cash flows using the direct method, **amortization of goodwill** is a.An increase in cash flows from operating activities. b.A reduction in cash flows from operating activities. c.Disclosed as a noncash transaction. d.Not reported in the statement of cash flows.

Answer 31

d. **Not reported** in the statement of cash flows.

Question 31

3. The **amortization** of bond discount related to long-term debt is presented in statement of cash flows prepared as a.Inflow and outflow of cash b.Outflow of cash c.Deduction from net income d.Addition to net income

Answer 31

d.Addition to net income

Question 31

9. **Noncash investing and financing** activities are a.Reported only if the direct method is used. b.Reported only if the indirect method is used. c. Disclosed in a note or separate schedule accompanying the statement of cash flows. d.Not reported.

Answer 31

c. **Disclosed in a note or separate schedule** accompanying the statement of cash flows.

Question 31

10. An entity purchased a building and **paid partly in equity shares and partly in debentures**. The transaction shall be treated as which of the following? a.The purchase of the building is investing and the issuance of shares and debentures is financing. b.The purchase of the building is investing and the issuance of shares and debentures is not reported. c.The transaction shall be disclosed only in the notes. d.The transaction shall be ignored totally.

Answer 31

c.The transaction shall be **disclosed only in the notes.**

Question 31

1. When preparing a statement of cash flows using the indirect method, the **amortization of patent** is reported as a.Increase in cash flows from investing activities. b. Reduction in cash flows from investing activities. c. Increase in cash flows from operating activities. d.Reduction in cash flows from operating activities.

Answer 31

c. Increase in cash flows from operating activities.

Question 32

4. The **amortization of a bond premium related to long-term debt** is presented in statement of cash flows as a.A positive adjustment to net income. b.Cash outflow from investing activities. c.Cash outflow from financing activities. d.A negative adjustment to net income.

Answer 32

d.A **negative adjustment** to net income.

Question 33

5. Which statement about the method of preparing the statement of cash flows is true? a.The indirect method starts with income before tax. b.The direct method is also the reconciliation method. c.The direct method is more consistent with the primary purpose of the statement of cash flows. d.All of these statements are true.

Answer 33

c.The **direct method is more consistent** with the primary purpose of the statement of cash flows.

Question 34

6. Under indirect method, cash flows from operating activities a.Are always equal to accrual accounting income. b. Are calculated as the difference between revenue and expenses. c. Can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d.Can be calculated by appropriately adding to or deducting from net income those items in the income statement that affect cash.

Answer 34

c. Can be calculated by appropriately adding to or deducting from net income those items in the income statement that **do not affect cash.** | NOTE: noncash assets

Question 35

7. Under indirect method, how should an **unrealized gain** on foreign currency transaction be presented? a.As an inflow under financing acvtivities b.It should be ignored as it is an unrealized gain c. It should be disclosed in notes d.As a deduction from net income

Answer 35

d.As a **deduction** from net income

Question 35

9. The statement of cash flows reports all, except a.The net change in cash for the period. b. The cash flows from operations during the period. c. The free cash flow generated during the period. d.Investing transactions.

Answer 35

c. The free cash flow generated during the period.

Question 36

8. Which of the following is **not disclosed** in the statement of cash flows prepared under the **direct method?** a.The major classes of gross cash receipts and gross cash payments. b.The amount amount of income taxes paid. c.A reconciliation of net income to net cash flow from operations. d. A reconciliation of ending retained earnings to net cash flow from operations.

Answer 36

d. A **reconciliation of ending retained earnings** to net cash flow from operations.

Question 37

10. Free cash flow is calculated as net cash provided by operating activities less a.Capital expenditures b.Dividends and depreciation c.Capital expenditures and dividends d. Capital expenditures and depreciation

Answer 37

c.Capital expenditures and dividends