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Chapter 16: Statement of Cash Flows

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Chapter 16: Statement of Cash Flows

16 problems · 0 figures

Multiple Choice 16.1 §16.1 source ↗

Which of the following statements is false?
  1. a.
    Noncash activities should be reported in accrual basis financial statements.
  2. b.
    Net cash flow from operating activities relates to normal business operations.
  3. c.
    Net income usually equals net cash flow from operating activities.
  4. d.
    The statement of cash flows is an essential part of the basic financial statements.

Answer

C. Net income usually equals net cash flow from operating activities.

Multiple Choice 16.3 §16.2 source ↗

Which is the proper order of the sections of the statement of cash flows?
  1. a.
    financing, investing, operating
  2. b.
    operating, investing, financing
  3. c.
    investing, operating, financing
  4. d.
    operating, financing, investing

Answer

B. operating, investing, financing

Multiple Choice 16.5 §16.2 source ↗

Which of these transactions would be part of the operating section?
  1. a.
    land purchased, with note payable
  2. b.
    sales of product, for cash
  3. c.
    cash paid for purchase of equipment
  4. d.
    dividend payments to shareholders, paid in cash

Answer

B. sales of product, for cash

Multiple Choice 16.7 §16.3 source ↗

What is the effect on cash when current noncash operating assets increase?
  1. a.
    Cash increases by the same amount.
  2. b.
    Cash decreases by the same amount.
  3. c.
    Cash decreases by twice as much.
  4. d.
    Cash does not change.

Answer

B. Cash decreases by the same amount.

Multiple Choice 16.9 §16.3 source ↗

What is the effect on cash when current noncash operating assets decrease?
  1. a.
    Cash increases by the same amount.
  2. b.
    Cash decreases by the same amount.
  3. c.
    Cash decreases by twice as much.
  4. d.
    Cash does not change.

Answer

A. Cash increases by the same amount.

Multiple Choice 16.11 §16.3 source ↗

Which of the following would trigger a subtraction in the indirect operating section?
  1. a.
    gain on sale of investments
  2. b.
    depreciation expense
  3. c.
    decrease in accounts receivable
  4. d.
    decrease in bonds payable

Answer

A. gain on sale of investments

Multiple Choice 16.13 §16.3 source ↗

Which of the following would be included in the financing section?
  1. a.
    loss on sale of investments
  2. b.
    depreciation expense
  3. c.
    increase in notes receivable
  4. d.
    decrease in notes payable

Answer

D. decrease in notes payable

Multiple Choice 16.15 §16.5 source ↗

Which of the following is a stronger indicator of cash flow flexibility?
  1. a.
    cash flow from operating activities
  2. b.
    cash flow to sales ratio
  3. c.
    free cash flow
  4. d.
    all three indicate comparable degrees of flexibility

Answer

C. free cash flow

Question 16.1 §16.1 source ↗

What function does the statement of cash flows serve, as one of the four basic financial statements?

Answer

The statement of cash flow serves as a bridge between the cash basis bank transactions and the accrual basis financial statements (balance sheet, income statement, and retained earnings statement). It reveals where the cash came from, and where it went.

Question 16.3 §16.2 source ↗

What categories of activities are reported on the statement of cash flows? Does it matter in what order these sections are presented?

Answer

Operating, Investing, Financing (always in this order).

Question 16.5 §16.2 source ↗

Describe three examples of investing activities, and identify whether each of them represents cash collected or cash spent.

Answer

Any transaction that is related to acquiring or disposing of long-term assets like land, buildings, equipment, stocks, bonds, or other investments. Can be cash spent for purchase of long-term assets, or cash collected from sale of long-term assets.

Question 16.7 §16.3 source ↗

Explain the difference between the two methods used to prepare the operating section of the statement of cash flows. How do the results of these two approaches compare?

Answer

The indirect method begins with net income and adjusts for items that affect cash differently than they affect net income, whereas the direct method requires that each revenue and expense item be converted to reflect the cash impact from that item. The net cash flow result is the same, no matter which of the two methods is used.

Question 16.9 §16.3 source ↗

When preparing the operating section of the statement of cash flows, using the indirect method, how must gains and losses be handled? Why?

Answer

Gains and losses must be removed from the operating section. To accomplish this, reverse the effect of gains or losses; if a gain has been added to net income, it should be subtracted in the operating section; if a loss has been deducted to arrive at net income, it should be added back in the operating section. Why? First, gains and losses relate to long-term assets, which fall under investing activities, not operating activities. Second, the gain/(loss) on the sale of long-term assets represents the excess/(deficiency) computed when the asset’s cost basis is subtracted from sales proceeds, so the number does not accurately represent the cash flow relating to the transaction.

Question 16.11 §16.3 source ↗

Note payments reduce cash and are related to long-term debt. Do these facts automatically lead to their inclusion as elements of the financing section of the statement of cash flows? Explain.

Answer

Not necessarily. Only the principal balance repayment should be included in the financing section; the interest component of the note payment is an operating activity.

Question 16.13 §16.4 source ↗

Would there ever be activities that relate to operating, investing, or financing activities that would not be reported in their respective sections of the statement of cash flows? Explain. If a company had any such activities, how would they be reported in the financial statements, if at all?

Answer

Yes. Some investing and/or financing transactions do not have a cash impact initially. Examples include purchases of long-term assets that are paid for with long-term debt financing, acquisitions of long-term assets in exchange for corporate stock, and repayment of long-term debt using noncash assets. These noncash investing/financing activities would be reported in the notes to the financial statements, or as a notation on the bottom of the statement of cash flows, but not considered an integral part of the statement.

Question 16.15 §16.6 source ↗

Why is using the direct method to prepare the operating section of the statement of cash flows more challenging for accountants than preparing the balance sheet, income statement, and retained earnings statement?

Answer

Using the direct method to prepare the operating section requires that revenue and expense items be converted to the cash basis of accounting, since these items are recorded in company records using the accrual basis of accounting. The balance sheet, income statement, and retained earnings statement use the accrual basis balances that are maintained in the company accounting records, and thus can be obtained directly from the adjusted trial balance, without modifications.

End of the book.

Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.