THE STATEMENT OF CASH FLOWS 1-Which of the following statements regarding the statement of cash flows is FALSE?

Investors can use the statement of cash flows to help determine A) the amount of leverage a company is using in its financial structure. B) C) D) Management can use the statement of cash flows to help determine dividend policy. Creditors can use the statement of cash flows to assess a companys ability to generate positive cash flows in the future. Investors can use the statement of cash flows to assess the li elihood a company will see e!ternal financing.

"-#egarding the investment decision ma ing process$ the statement of cash flows can NOT be used to help determine whether% A) net profit margins are improving. B) a firm is li ely to need e!ternal financing. C) e!isting debts can be paid off as they mature. D) a firms dividend policy is sustainable. &-Which of the following is a primary purpose of the statement of cash flows? A) 'rovide information about a companys operating$ investing$ and financing activities over an accounting period. )etermine the efficiency of a companys use of wor ing capital over an accounting period. 'rovide a snapshot of a companys financial position at a given point in time.

B) (ssess the profitability of a company over an accounting period. C) D)

*-Which of the following is NOT a reason that cash flow information is important to investment decision-ma ing? Cash flow information allows decision ma ers to determine whether%

A) regular operations generate enough cash to continue business. B) regular operations generate enough income to pay off e!isting debt prior to maturity. C) unforeseen obligations can be met. D) new business opportunities that may arise can be ta en advantage of by the company. +-Which of the following would NOT be a component of cash flow from investing? A) ,ale of land. B) )ividends paid. C) 'urchase of securities. D) 'urchase of e-uipment. .-What is the difference between the direct and the indirect method of calculating cash flow from operations? /he direct method starts with sales and follows cash as it flows A) through the income statement$ while the indirect method starts with net income and ad0usts for non-cash charges and other items. /he indirect method starts with gross income and ad0usts to B) cash flow from operations$ while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations. 1alance sheet items are not included in the cash flow from C) operations for the direct method$ while they are included for the indirect method.

/he direct method will result in a lower or higher cash flow figure D) for operating activities as it details all of the income statement items$ while the indirect method only uses net income. 2-What are the main components of cash flow from operations? A) Capitali3ation activities$ sale of assets$ and purchasing securities. B) )ividends$ long-term debt$ and ownership funds. C) Changes in accounts receivable$ inventory$ accounts payable$ and items that flow through the income statement. D) #epayment of bonds$ issuance of common stoc $ and stoc splits. 4-/he most common method for constructing a statement of cash flows is the% A) direct top-down approach. B) indirect top-down approach. C) indirect bottom-up approach. D) direct bottom-up approach.

5-Which of the following does NOT represent a cash flow relating to operating activity? A) Cash received from customers. B) )ividends paid to stoc holders. C) Interest paid to bondholders. D) Cash paid for salaries.

16-Which of the following is TRUE about the consideration of depreciation in the operations section of a cash flow statement? )irect Method Indirect Method A) )oes not consider Considers B) Considers C) Considers D) )oes not consider Considers )oes not consider )oes not consider

11-( decrease in inventory over a period of time would be considered a7n8% A) ad0usting entry. B) non-cash charge to income. C) use of cash. D) source of cash.

1"-9ohn ,tone$ C:($ is an investment advisor speciali3ing in the preparation of company and industry reports for high net worth customers at ;earmon 1rothers. Currently$ ,tone is preparing a report on ,oft Corporation$ a rapidly growing software company. /he e!plosive growth of this company was financed primarily by an initial public offering in which &$666$666 shares were issued at a price of <"6 per share on 9une "2$ "66*. ,oft Corporation received additional capital when employee stoc options for 1$666$666 shares at a price of <16 were e!ercised on 9anuary 1$ "66+. ,tone reali3es the importance of cash flow on a company=s financial health and would li e to include a pro0ected statement of cash flows for "66+. ,oft Corporation financial statements are presented in /ables 1 and ". Included are the actual statements for the year ending )ecember &1$ "66*. Table 1

Soft Corporation Balance Sheets as of December 31 (in millions) (ctual "66* 'ro0ected "66+ Cash (ccounts #eceivable Inventory ''>? (ccumulated depreciation /otal (ssets <"*.6 12.6 166.6 166.6 7&6.68 <"11.6 <"..6 "*.6 1+6.6 1"+.6 7&+.68 <"56.6

(ccounts payable ;ong-term debt Common stoc #etained earnings /otal liabilities and e-uity Table 2

<51.6 "6.6 46.6 "6.6 <"11.6

<161.6 *6.6 56.6 +5.6 <"56.6

Soft Corporation Income Statement

for Years Ended December 31 (in millions except per share data) (ctual "66* 'ro0ected "66+ ,ales C@A, Aross profit <46.6 7&4.68 <*".6 <154.6 756.68 <164.6

,A>( )epreciation @perating e!penses

71&.68 7&.68 <71..68

7&6.68 7+.68 <7&+.68

Interest e!pense

<7*.68

<7+.68

'reta! Income Income ta! e!pense Bet income

"".6 72.68 <1+.6

.4.6 7"+.68 <*&.6

?',

<".6

<*.&

(verage shares outstanding 7millions8 )ividends per share

2.+ <6.1

16.6 <6.*

Cnder the indirect method$ what will ,tone find ,oft Corporation=s pro0ected net change in cash to be for the year ending )ecember &1$ "66+? A) <"$666$666. B) <5$666$666. C) <*$666$666. D) <2$666$666. 1&-Cse the following financial data for Moose 'rinting Corporation to calculate the cash flow from operations 7C:@8 using the indirect method.

Bet income <""+ Increase in accounts receivable ++ )ecrease in inventory && )epreciation .+ )ecrease in accounts payable "+ Increase in wages payable 1+ )ecrease in deferred ta!es 16 'urchase of new e-uipment .+ )ividends paid 2+

A) Increase in cash of <14&. B) Increase in cash of <"*4. C) Increase in cash of <12&. D) )ecrease in cash of <164.

1*-Use the following information to calculate cash flows from operations using the indirect method.

Net Income $12,000 Depreciation Expense 1,000 oss on sale of machiner! "00 Increase in #ccounts $ecei%a&le 2,000 Decrease in #ccounts 'a!a&le 1,"00 Increase in Income taxes pa!a&le "00 $epa!ment of (onds ),000

A) Increase in cash of <2$+66. B) Increase in cash of <5$+66. C) )ecrease in cash of <4$+66. D) Increase in cash of <16$+66.

1+-/he following information is from the balance sheet of ,ilverstone Company%

Bet Income for +D1D6+ to +D&1D6+% <4$666 (ccount Inventory 'repaid e!p. (ccum. )epr. (ccounts payable 1onds payable 1alance +D&1D6+ <1$2+6 <1$266 <52+ <."+ <++6

1alance +D61D6+ <"$666 <1$"66 <466 <*"+ <.+6

Csing the indirect method$ calculate the cash flow from operations for ,ilverstone Company as of +D&1D6+% A) Increase in cash of <4$6"+.

B) Increase in cash of <4$1"+. C) Increase in cash of <2$2"+. D) /he indirect method cannot be calculated from the information provided.

1.-When calculating cash flow from operations 7C:@8 using the indirect method which of the following is most accurate? A) /he indirect method re-uires an additional schedule to reconcile net income to cash flow. B) When recogni3ing a gain on the sale of fi!ed assets$ the amount is a deduction to operating cash flows. C) In using the indirect method$ each item on the income statement is converted to its cash e-uivalent. D) (ccumulated depreciation would be a deduction to calculate the net cash flow$ because this is a non-cash activity.

12-)arth Corporations most recent income statement shows net sales of <.$666$ and )arths marginal ta! rate is *6 percent. /he total e!penses reported were <&$"66$ all of which were paid in cash. In addition$ depreciation e!pense was reported at <466. ( further e!amination of the most recent balance sheets reveals that accounts receivable during that period increased by <1$666. /he cash flow from operating activities reported by )arth should be% A) <1$"66. B) <"$666. C) <"$"66. D) <1$666.

14-When using the indirect method for computing cash flow from operating activities$ a change in accounts payable will re-uire which of the following? A) B) C) D) ( positive 7negative8 ad0ustment to net income when accounts payable increases 7decreases8. ( negative 7positive8 ad0ustment to net income when accounts payable increases 7decreases8. ( positive ad0ustment to net income regardless of whether accounts payable increases or decreases. ( negative ad0ustment to net income regardless of whether accounts payable increases or decreases.

15-(n analyst contemplates using the indirect method to create the pro0ected statement of cash flows. Ee decides to research the differences between the direct and indirect methods. Which of the following is NOT included in the statement of cash flows under the indirect method? A) )epreciation. B) 'ayment of dividends. C) Cash ta!es. D) Increase in inventories.

"6-Csing the following financial data for Bails$ ?tc.$ calculate the net change in cash using the indirect method. Bet Income )ecrease in (ccounts receivable )epreciation e!pense <1+$666 "66 1"6

Increase in inventory Increase in deferred ta!es 'urchase of e-uipment )ividends paid A) )ecrease in cash of <11$*"+. B) Increase in cash of <1&$1*+. C) )ecrease in cash of <1&$6*+. D) Increase in cash of <1"$2*+.

2+ +6 "$666 1+6

"1-Csing the indirect method$ calculate net cash flow using the following information%

Bet Income <*&$666 Increase in (ccounts receivable &+$+66 )epreciation e!pense &+6 Increase in 'repaid e!pense 16$2+6 )ecrease in income ta!es payable 2+ ,ale of furniture "66 Increase in common stoc "+

A) )ecrease in cash of <"$2+6. B) Increase in cash of <14$2+6. C) Increase in cash of <.4$"+6. D) )ecrease in cash of <"$.66.

""-(n indirect statement of cash flows is made up of which of the following categories? @perating activities starting with net income and ad0usting for A) items that do not affect cash$ investing activities$ and financing activities. @perating activities calculated by converting each item on the B) income statement from accrual to cash basis$ investing activities$ and financing activities. @perating activities starting with net income and converting C) each item to its cash e-uivalent$ indirect activities$ and financing activities. D) @perating e!penses from the income statement converted to cash e-uivalents$ investing activities$ and financing activities.

"&-Csing the following information$ what is the firm=s cash flow from operations? Bet income )ecrease in accounts receivable )epreciation Increase in inventory Increase in accounts payable )ecrease in wages payable Increase in deferred ta!es 'rofit from the sale of fi!ed assets )ividends paid out A) 1.+. B) 12+. C) 14". <166 &6 "+ 12 16 + 12 + &+

D) 1++.

"*-;and costing <+6$666 was sold by 9immy Corporation for a gain of <16$666. (ssuming that 9immy uses the indirect method for presenting operating cash flow$ how will the sale of land be reflected on its statement of cash flows? Cash flow from investing activities will increase by% A) B) C) D) <+6$666F cash flow from operating activities will re-uire a negative ad0ustment to net income of <16$666. <.6$666F cash flow from operating activities will re-uire a positive ad0ustment to net income of <16$666. <+6$666F cash flow from operating activities will re-uire a positive ad0ustment to net income of <16$666. <.6$666F cash flow from operating activities will re-uire a negative ad0ustment to net income of <16$666.

"+-(n e!amination of the cash receipts and payments of Gavier Corporation reveals the following% Cash paid to suppliers for purchase of merchandise <+$666 Cash received from customers Cash paid for purchase of e-uipment )ividends paid Cash received from issuance of preferred stoc Interest received on short-term investments Wages paid #epayment of loan to the ban 1*$666 ""$666 "$666 16$666 1$666 *$666 +$666

Cash from sale of land Gaviers reported cash flow from operations will be% A) -<.$666. B) -<+$666. C) <.$666. D) <+$666.

1"$666

".-Eow would a stoc split be reported on the statement of cash flows? ( stoc split would% A) be reported as a use of cash in the cash flows from financing. B) not be reported on the statement of cash flows because it is a non-cash event. C) be reported as a source of cash in the cash flows from investing. D) be reported as a source of cash in the cash flows from financing.

"2-Which of the following items would NOT be included in cash flow from in estin!? A) ,elling stoc of the company. B) 1uying or selling a building. C) 1uying stoc of a different company.

D) 'roceeds related to ac-uisitions. "4-Which of the following items would NOT be used to compute the cash flow from operations? A) Change in long-term debt. B) )epreciation. C) Bet income. D) Change in inventory levels. "5-Which of the following items would NOT be included in cash flow from financin!? A) )ividends paid to shareholders. B) 'urchase of treasury stoc . C) Aain on sale of stoc of a subsidiary. D) Issuance of common stoc . &6-Which of the following is NOT a cash flow in the calculation of cash flow from operations? A) )ividends received. B) Interest income. C) Interest paid. D) )ividends paid.

&1-( firm has net cash sales of <&$+66$ earnings after ta!es 7?(/8 of <1$666$ depreciation e!pense of <+66$ cost of goods sold 7C@A,8 of <1$+66$ and cash ta!es of <+66. (lso$ inventory decreased by

<166$ and accounts receivable increased by <&66. What is the firm=s cash flow from operations? A) <1$"66. B) <1$466. C) <"$666. D) <1$&66. &"-Which of the following represents a use of funds? A) Increase in a liability account. B) Issuing long-term debt. C) ,ale of common stoc . D) Increase in an asset account. &&-Which of the following statements regarding increasing or decreasing cash flows is FALSE? A) ( decrease in an e-uity account is a decrease in cash flow. B) (n increase in a liability is an increase in cash flow. C) (n increase in an asset is an increase in cash flow. D) ( decrease in a liability is a decrease in cash flow.

&*-When a C.,. company pa"s di idends to its stoc holders$ which type of cash flow does this represent?

A) Investing. B) @perating. C) :ree cash flow. D) :inancing. &+-Interest payments$ either as part of a coupon payment or to creditors$ are always considered which type of cash flow? A) Investing. B) :inancing. C) @perating. D) :ree cash flow.

&.-Which of the following is NOT a category on the statement of cash flows? Cash flow from% A) financing. B) investing. C) sales. D) operations. &2-(ll of the following are cash flows from operations EXCEPT: A) dividends paid to shareholders.

B) interest payments. C) dividends received. D) interest received. &4-9odi ;ein$ small business consultant$ is currently wor ing with #9 ;andscaping$ a sole proprietorship. ,he is trying to educate the owner on the importance of monitoring cash flows. @perating information as of the end of the most recent month appears below%

Cash from sale of truc of <2$666. Cash salaries paid of <12$666. Cash from customers of <*+$666. )epreciation e!pense of <+$+66. Interest on ban line of credit of <1$666. Cash paid to suppliers of <""$666. @ther cash e!penses$ including rent$ of <.$&66. Bo ta!es due.

Csing this information$ ;ein calculates the cash flow from operations for the month at% A) <11$"66. B) -<&66. C) <*$"66. D) -<1$&66.

&5-Which of the following items is NOT found in the financing cash flow part of the statement of cash flows? A) Change in retained earnings. B) )ividends paid.

C) Change in paid-in capital. D) Change in long-term debt.

*6-Which of the following changes will increase a firms cash flow 7i.e. which changes are a source of cash for the firm8? Increase in accounts% A) receivable and decrease in inventory. B) payable and decrease in notes payable. C) receivable and decrease in notes payable. D) payable and decrease in inventory.

*1-If 9ac son , i Company issues common stoc $ and uses the proceeds to purchase fi!ed assets such as e-uipment% A) B) C) D) cash flow from financing would decrease and cash flow from investing would increase. both cash flow from operations and cash flow from financing would decrease. both cash flow from operations and cash flow from financing would increase. cash flow from financing would increase and cash flow from investing would decrease.