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Understanding Financial Statements

Lyn M. Fraser, Aileen Ormiston

Chapter 4

Statement of Cash Flows - all with Video Answers

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Chapter Questions

Problem 1

________ The statement of cash flows segregates cash inflows and outflows by:
(a) Operating and financing activities.
(b) Financing and investing activities.
(c) Operating and investing activities.
(d) Operating, financing, and investing activities.

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Problem 2

________ Which of the following statements is false?
(a) Publicly held companies may choose to prepare either a statement of cash flows or a statement of changes in financial position.
(b) The statement of cash flows was mandated by the FASB in the late $1980 \mathrm{~s}$.
(c) Understanding how to prepare a statement of cash flows helps the analyst to better understand and analyze the cash flow statement.
(d) The statement of cash flows is prepared by calculating changes in all balance sheet accounts.

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Problem 3

________ How would revenue from sales of goods and services be classified?
(a) Operating outflow.
(b) Operating inflow.
(c) Investing inflow.
(d) Financing inflow.

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Problem 4

________ How would payments for taxes be classified?
(a) Operating outflow.
(b) Operating inflow.
(c) Investing outflow.
(d) Financing outflow.

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Problem 5

________ How would the sale of a building be classified?
(a) Operating outflow.
(b) Operating inflow.
(c) Investing inflow.
(d) Financing inflow.

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Problem 6

________ How would the repayment of debt principal be classified?
(a) Operating outflow.
(b) Operating inflow.
(c) Investing outflow.
(d) Financing outflow.

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Problem 7

________ What type of accounts are accounts receivable and inventory?
(a) Cash accounts.
(b) Operating accounts.
(c) Financing accounts.
(d) Investing accounts.

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Problem 8

________ What type of accounts are notes payable and current maturities of lon term debt?
(a) Cash accounts.
(b) Operating accounts.
(c) Financing accounts.
(d) Investing accounts.

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02:01

Problem 9

________ The change in retained earnings is affected by which of the following?
(a) Net income and common stock.
(b) Net income and paid-in capital.
(c) Net income and payment of dividends.
(d) Payment of dividends and common stock.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 10

________ Which method of calculating cash flow from operations requires the adjustme of net inoome for deferrals, accruals, noncash, and nonoperating expenses?
(a) The direct method.
(b) The indirect method.
(c) The inflow method.
(d) The outflow method.

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Problem 11

________ An inflow of cash would result from which of the following?
(a) The increase in an asset account other than cash.
(b) The decrease in an asset account other than cash.
(c) The decrease in an equity account.
(d) The decrease in a liability account.

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Problem 12

________ An outflow of cash would result from which of the following?
(a) The decrease in an asset account other than cash.
(b) The increase in a liability account.
(c) The decrease in a liability account.
(d) The increase in an equity account.

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Problem 13

________ What are internal sources of cash?
(a) Cash inflows from operating activities.
(b) Cash inflows from investing activities.
(c) Cash inflows from financing activities.
(d) All of the above.

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Problem 14

________ What are external sources of cash?
(a) Cash inflows from operating activities.
(b) Cash inflows from investing activities.
(c) Cash inflows from financing activities.
(d) Both (b) and (c).

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Problem 15

________ Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities?
(a) Depreciation expense for the period.
(b) The change in deferred taxes.
(c) The amount by which equity income recognized exceeds cash received.
(d) All of the above.

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03:46

Problem 16

________ Which statement is true for gains and losses from capital asset sales?
(a) They do not affect cash and are excluded from the statement of cash flows.
(b) They are included in cash flows from operating activities.
(c) They are included in cash flows from investing activities.
(d) They are included in cash flows from financing activities.

Akash M
Akash M
Numerade Educator

Problem 17

________ Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?
(a) Accounts receivable.
(b) Inventory.
(c) Prepaid expenses.
(d) All of the above.

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Problem 18

________ Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities?
(a) Accounts payable.
(b) Notes payable and current maturities of long-term debt.
(c) Accrued liabilities.
(d) Both (a) and (c).

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Problem 19

________ How is it possible for a firm to be profitable and still go bankrupt?
(a) Earnings have increased more rapidly than sales.
(b) The firm has positive net income but has failed to generate cash from operations.
(c) Net income has been adjusted for inflation.
(d) Sales have not improved even though credit policies have been eased.

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03:46

Problem 20

________ Why has cash flow from operations become increasingly important as an analytical tool?
(a) Inflation has distorted the meaningfulness of net income.
(b) High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms.
(c) Firms may have uncollected accounts receivable and unsalable inventory on the books.
(d) All of the above.

Akash M
Akash M
Numerade Educator

Problem 21

________ Which of the following statements is false?
(a) A negative cash flow can occur in a year in which net income is positive.
(b) An increase in accounts receivable represents accounts not yet collected in cash.
(c) An increase in accounts payable represents accounts not yet collected in cash.
(d) To obtain cash flow from operations, the reported net income must be adjusted.

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Problem 22

________ Which of the following could lead to cash flow problems?
(a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.
(b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers.
(c) Obsolete inventory, increasing notes payable, easing of credit by suppliers.
(d) Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers.
The following information is available for Jacqui's Jewelry and Gift Store:
$$
\begin{array}{lr}
\text { Net income } & \$ 5,000 \\
\text { Depreciation expense } & 2,500 \\
\text { Increase in deferred tax liabilities } & 500 \\
\text { Decrease in accounts receivable } & 2,000 \\
\text { Increase in inventories } & 9,000 \\
\text { Decrease in accounts payable } & 5,000 \\
\text { Increase in accrued liabilities } & 1,000 \\
\text { Increase in property and equipment } & 14,000 \\
\text { Increase in short-term notes payable } & 19,000 \\
\text { Decrease in long-term bonds payable } & 4,000
\end{array}
$$

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Problem 23

Use the indirect method to answer questions 23-26.
________ What is net cash flow from operating activities?
(a) $$(\$ 3,000)$$
(b) $$(\$ 1,000)$$
(c) $$\$ 5,000$$
(d) $$\$ 13,000$$

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Problem 24

Use the indirect method to answer questions 23-26.
________ What is net cash flow from investing activities?
(a) $$\$ 14,000$$
(b) $$(\$ 14,000)$$
(c) $$\$ 21,000$$
(d) $$(\$ 16,000)$$

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Problem 25

Use the indirect method to answer questions 23-26.
________ What is net cash flow from financing activities?
(a) $$\$ 15,000$$
(b) $$(\$ 15,000)$$
(c) $$\$ 17,000$$
(d) $$(\$ 14,000)$$

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Problem 26

Use the indirect method to answer questions 23-26.
________ What is the change in cash?
(a) $$(\$ 3,000)$$
(b) $$\$ 3,000$$
(c) $$\$ 2,000$$
(d) $$(\$ 2,000)$$

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