Midterm Examination

Question 1

Income does NOT arise from:

a. Sale of merchandise to customers
b. Rendering of services
c. Use of enterprise resources by others
d. Issuance of common stocks at an amount in excess of par value

Answer 1

ANS: d. Issuance of common stocks at an amount in excess of par value

Question 2

Current assets include:
I. Inventories and trade receivables that are sold, consumed, and realized as part of the normal operating cycle even when they are not expected to be realized within twelve months from the balance sheet date.
II. Financial assets that are classified as held for trading.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer 2

ANS: c. Both I and II

Question 3

The Statement of Financial Position is also known as:

a. Income Statement
b. Cash Flow Statement
c. Balance Sheet
d. Equity Statement

Answer 3

ANS: c. Balance Sheet

Question 4

What does the Statement of Comprehensive Income show?

a. Company’s assets and liabilities
b. Cash inflows and outflows
c. Income earned and expenses incurred during a period
d. Changes in equity

Answer 4

ANS: c. Income earned and expenses incurred during a period

Question 5

Which financial statement helps assess the liquidity and financial flexibility of a company?

a. Balance Sheet
b. Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Cash Flow Statement

Answer 5

a. Balance Sheet

Question 6

Retained earnings in the Statement of Changes in Equity are adjusted by:

a. Net income and dividends paid
b. Depreciation and asset purchases
c. Operating income and taxes
d. Revenue and liabilities

Answer 6

ANS: a. Net income and dividends paid

Question 7

The primary purpose of a cash flow statement is

a. To provide relevant information about cash receipts and cash payments of an enterprise during a period.
b. To help investors, creditors, and other users to assess the enterprise’s ability to generate positive future net cash flows.
c. To disclose separately noncash investing and financing transactions.
d. To assess the ability of the enterprise to pay dividends to the stockholders.

Answer 7

ANS: a. To provide relevant information about cash receipts and cash payments of an enterprise during a period.`

Question 8

Cash flows in the cash flow statement are:

a. Inflows of cash and cash equivalents
b. Outflows of cash and cash equivalents
c. Inflows and outflows of cash
d. Inflows and outflows of cash and cash equivalents

Answer 8

ANS: d. Inflows and outflows of cash and cash equivalents

Question 9

These are the principal revenue-producing activities of the entity.

a. Operating activities
b. Financing activities
c. Investing activities
d. Borrowing activities

Answer 9

ANS: a. Operating activities

Question 10

In a cash flow statement, which of the following would increase reported cash flow from operating activities using the direct method?

a. Dividend received from investment
b. Gain on sale of equipment
c. Gain on early retirement of bonds payable
d. Loss on sale of investment

Answer 10

ANS: a. Dividend received from investment

Question 11

Which of the following should be reported when reporting cash flow statement?

I. Conversion of long-term debt to common stock.
II. Conversion of preferred stock to common stock.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer 11

d. Neither I nor II

Question 12

Which of the following activities is classified as an investing activity in the cash flow statement?

a. Interest received
b. Issuing common shares
c. Purchase of equipment
d. Payment of dividends

Answer 12

ANS: c. Purchase of equipment

Question 13

Which is an example of a financing activity in the cash flow statement?

a. Sale of a piece of machinery
b. Repayment of a loan
c. Payment to suppliers
d. Collection of accounts receivable

Answer 13

ANS: b. Repayment of a loan

Question 14

The Direct Method of preparing the Cash Flow Statement includes:

a. Adjusting net income for changes in working capital
b. Listing operating cash receipts and payments directly
c. Reporting depreciation as a cash outflow
d. None of these

Answer 14

ANS: b. Listing operating cash receipts and payments directly

Question 15

In which section of the Cash Flow Statement would you classify “interest paid”?

a. Operating activities
b. Investing activities
c. Financing activities
d. Equity activities

Answer 15

ANS: a. Operating activities

Question 16

[TRUE OR FALSE] Current assets involve cash or a cash equivalent that is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date.

Answer 16

Ans: FALSE.

Question 17

[TRUE OR FALSE] Income may arise from the use of enterprise resources by others for accrued payment.

Answer 17

Ans: TRUE.

Question 18

[TRUE OR FALSE] Financial statements involve the financial performance, position, changes in equity, and cash flows of an entity.

Answer 18

Ans: TRUE.

Question 19

[TRUE OR FALSE] A cash or a cash equivalent that is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date shall be classified as a current asset.

Answer 19

Ans: FALSE.

Question 20

[TRUE OR FALSE] 5) Depreciation is recorded as a cash outflow in the Cash Flow Statement.

Answer 20

Ans: FALSE.

Question 21

[TRUE OR FALSE] Cash flows from operating activities include cash received from customers and cash paid to suppliers.

Answer 21

Ans: TRUE.

Question 22

[TRUE OR FALSE] Issuance of shares to raise capital is classified under financing activities in the Cash Flow Statement.

Answer 22

Ans: TRUE.

Question 23

[TRUE OR FALSE] The Direct Method of preparing a Cash Flow Statement adjusts net income with cash receipts and cash payments from operating activities.

Answer 23

FALSE.

Question 24

[TRUE OR FALSE] The purchase of a building is considered an operating activity in the Cash Flow Statement.

Answer 24

Ans: FALSE.

Question 25

[TRUE OR FALSE] 10) Dividends paid to shareholders are recorded under financing activities.

Answer 25

Ans: TRUE.