Test Bank Financial Accounting 6E by Libby Chapter 13

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Chapter 013: Statement of Cash Flows
True / False Questions

1. The only difference in presenting a statement of cash flows using the direct method rather
than the indirect method is the details given for investing activities.
FALSE
AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 1
2. Only investments with original maturities of less than three months qualify as cash
equivalents.
TRUE

Difficulty: Medium
L.O.: 1
3. The payment of interest on a note payable is a cash flow from an operating activity.
TRUE

Difficulty: Medium
L.O.: 1
4. Collection of principal on a note receivable is a cash flow from investing activities.

TRUE

Difficulty: Medium
L.O.: 1
13-1
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5. Very few companies use the direct method for disclosing their cash flows from operating
activities.
TRUE
AACSB Tag: Communications

Difficulty: Easy
L.O.: 1
6. When accrued liabilities increase from the beginning to the end of the year, it means cash
was not expended for some of the company's operating expenses so the increase would be
added to net income to convert to cash flow from operating activities under the indirect
method.
TRUE
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
7. Under the indirect method, an increase in accounts receivable during the year will be
deducted from net income to convert to cash flow from operating activities.
TRUE

Difficulty: Easy
L.O.: 2
8. If sales revenue was $1,800,000 and accounts receivable decreased $40,000 while unearned
revenue increased $10,000 during the year, then cash collected from customers equals
$1,840,000.
FALSE
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 2
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9. A growing difference between net income and cash flow from operations can be a sign of
management manipulation of earnings.
TRUE

Difficulty: Hard
L.O.: 3
10. The quality of income ratio can only be interpreted based on knowledge of a company's
business operations and strategies.
TRUE

Difficulty: Medium
L.O.: 3
11. When a company purchases equipment, the cash outflows would be classified as financing
activity.
FALSE

Difficulty: Easy
L.O.: 4
12. Only long-term investments in other companies' stocks and bonds would be disclosed in
the investing activities section, while short-term investments would be in the operating
activities section.
FALSE

Difficulty: Medium
L.O.: 4
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13. From 2009 to 2010, Canadian Beer had a capital acquisitions ratio of 7.49 which means its
net income exceeded its cash investment in property, plant and equipment by almost 7.5
times.
FALSE

Difficulty: Medium
L.O.: 5
14. A low capital acquisitions ratio could indicate a higher need to obtain outside financing to
expand property, plant, and equipment assets.
TRUE

Difficulty: Easy
L.O.: 5
15. Free cash flow measures the sufficiency of cash flow from operating activities to cover
both capital expenditures for property, plant and equipment as well as the payment of
dividends.
FALSE

Difficulty: Easy
L.O.: 5
16. When a company both borrows $150 million during the year and repays $120 million of
notes, the company can disclose the $30 million net cash inflow in of borrowings net of
repayments in the financing activities section of the statement of cash flows.
FALSE

Difficulty: Medium
L.O.: 6
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17. When a cash dividend is declared, it would affect the balance sheet but not the statement
of cash flows.
TRUE

Difficulty: Easy
L.O.: 6
18. Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000
shares of its own common stock, par $10 (current market price $15 share). This transaction
should not be reported on the statement of cash flows because cash was neither paid out nor
received.
FALSE

Difficulty: Medium
L.O.: 7
19. A transaction that does not cause an inflow or outflow of cash should be reported on the
statement of cash flows only if it is an adjustment to convert net income on an accrual basis to
cash basis.
FALSE

Difficulty: Medium
L.O.: 7
20. When using the indirect method, a loss on the sale of equipment should be added to net
income to derive cash flows from operating activities.
TRUE

Difficulty: Medium
L.O.: Sup A
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Multiple Choice Questions

21. The statement of cash flows reports directly on the
A. financial position of the business.
B. accrual basis in accordance with GAAP.
C. causes of the inflows and outflows of cash.
D. financial operating performance of the business.
AACSB Tag: Communications

Difficulty: Easy
L.O.: 1
22. Which of the following transactions would not create a cash flow?
A. The company purchased some of its own stock from a stockholder.
B. Amortization of patent for the period.
C. Payment of a cash dividend.
D. Sale of equipment at book value (i.e. no gain or loss).

Difficulty: Medium
L.O.: 1
23. Which of the following transactions is not a direct use of cash?

A. Acquisition of inventory for cash.
B. Exchanges of bonds payable for land.
C. Purchase of treasury stock with cash.
D. Cash dividend paid.

Difficulty: Medium
L.O.: 1
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24. The statement of cash flows should be dated as follows:

A. December 31, 2010.
B. For the Year Ended December 31, 2010.
C. At Year-End December 31, 2010.
D. At December 31, 2010.

Difficulty: Easy
L.O.: 1
25. Which of the following transactions is not a typical use of cash?

A. Payment of short-term debt with cash.
B. Purchase of treasury stock for cash.
C. Acquisition of a building for cash.
D. Sale of equipment for less than book value.

Difficulty: Easy
L.O.: 1
26. Which of the following would not be a cash flow from investing activities?
A. Purchase of long-term investments.
B. Sale of a patent.
C. Collection of principal of a note receivable.
D. Collection of interest revenue on a long-term note receivable.

Difficulty: Medium
L.O.: 1
27. Which of the following would not be a cash flow from financing activities?
A. Issuance of common stock.
B. Borrowing on a long-term note payable.
C. Collection of a cash dividend.
D. Repayment of principal on a long-term note payable.

Difficulty: Medium
L.O.: 1
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28. Which of the following is a cash flow from operating activities?

A. Purchase of merchandise for resale.
B. Sale of a piece of land no longer used in operations.
C. Sale of long-term investments in common stock.
D. Payment of a note payable.

Difficulty: Medium
L.O.: 1
29. Which of the following would least likely be a cash equivalent?

A. A $10,000, 30 day certificate of deposit.
B. 500 shares of IBM stock.
C. A three-month Treasury bill.
D. A ten-year Treasury note purchased two months before maturity.

Difficulty: Medium
L.O.: 1
30. A cash inflow from financing activities includes

A. proceeds from selling investments in equity securities of another company.
B. proceeds from selling equipment.
C. proceeds from issuance of bonds payable.
D. receipt of interest payments.

Difficulty: Easy
L.O.: 1
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31. For an investment to qualify as a cash equivalent, it must be readily convertible to a

known amount of cash and
A. it must be identified as a cash equivalent on the income statement.
B. must be sufficiently close to its maturity date so that its market value is relatively
insensitive to interest rate changes.
C. the investment must have a known foreign exchange rate.
D. it must mature within 4 months.

Difficulty: Medium
L.O.: 1
32. A cash inflow from operating activities includes

A. collection of the principal of a loan.
B. receipt of interest on an investment.
C. proceeds from issuance of notes payable.
D. collection of sales of equipment used in operations of the business.

Difficulty: Easy
L.O.: 1
33. Which of the following statements about the statement of cash flows is correct?
A. A company with a net loss on the income statement will always have a net cash outflow
from operating activities.
B. A purchase of equipment is classified as a cash inflow from investing activities.
C. Cash dividends received on stock investments are classified as cash flows from operating
activities.
D. Cash dividends paid are classified as cash flows from operating activities.

Difficulty: Medium
L.O.: 1
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34. Which of the following items about the statement of cash flows is correct?
A. Non-cash expenses such as depreciation are deducted from net income with the indirect
method in computing cash flows from operating activities.
B. Cash equivalents are highly liquid investments with maturities at the date of purchase of
less than three months.
C. The acquisition of land by issuing bonds payable would not appear on the statement of
cash flows.
D. Cash paid for interest on debt would be classified as a financing cash flow.

Difficulty: Medium
L.O.: 1
35. Kela Corporation reported 2009 net income of $450,000 including the effects of
depreciation expense, $60,000 and amortization expense on a patent, $10,000. Also, cash of
$50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from
operating activities for 2009 was
A. $440,000
B. $470,000
C. $520,000
D. $570,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
36. Allen Company's 2009 income statement reported total revenues, $850,000 and total
expenses (including $40,000 depreciation) of $720,000. The 2009 balance sheet reported the
following: accounts receivablebeginning balance, $50,000 and ending balance, $40,000;
accounts payablebeginning balance, $22,000 and ending balance, $28,000. Therefore,
based only on this information, the 2009 net cash inflow from operating activities was
A. $126,000
B. $166,000
C. $174,000
D. $186,000
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 2
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37. Creston Company gathered the following data to prepare its 2010 statement of cash flows:
Based only on the above data, the net cash inflow from operating activities during 2010 was
A. $83,000.
B. $89,000.
C. $91,000.
D. $97,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
38. Newton Company reported total sales revenue of $55,000 total expenses of $45,000 and
net income of $10,000 on its income statement for the year ended December 31, 2009. During
2009, accounts receivable decreased by $4,000, merchandise inventory decreased by $6,000,
accounts payable increased by $2,000 and depreciation of $8,000 was recorded. Therefore,
based only on this information, the net cash flow from operating activities for 2009 was:
A. $10,000.
B. $18,000.
C. $19,000.
D. $30,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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39. Drake Company reported total sales revenue of $150,000 total expenses of $152,000 and a
net loss of $2,000 for the year ended December 31, 2009. During 2009, accounts receivable
decreased by $1,000, trade payables increased by $5,000, wages payable increased by $3,000,
and $18,000 in depreciation expense was recorded. Assuming no other adjustments are
needed, the "net cash flow from operating activities" for 2009 was (parentheses indicate net
cash outflow)
A. $29,000.
B. $25,000.
C. $23,000.
D. ($1,000).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
40. Thomas Company reported sales revenue of $500,000 and total expenses of $450,000
(including depreciation) for the year ended December 31, 2009. During 2009, accounts
receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts
payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming
no other data is needed, the net cash inflow from operating activities for 2009 was
A. $44,000.
B. $51,000.
C. $60,000.
D. $67,000.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 2
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41. During 2009, Alpha Corporation reported net income of $10,000. During the year,
depreciation expense was $5,000, accounts payable increased $2,000 and accounts receivable
increased $4,000. Therefore, based upon this information, the "cash inflow from operating
activities" was
A. $21,000.
B. $20,000.
C. $16,000.
D. $13,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
42. Ballet Company reported total sales revenue of $80,000 total expenses of $72,000 and net
income of $8,000 for the year ended December 31, 2009. During 2009, accounts receivable
increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased
by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments
to net income are needed, the net cash inflow from operating activities was
A. $10,000.
B. $11,000.
C. $13,000.
D. $19,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
43. The statement of cash flows (indirect method) reports depreciation expense as an addition
to net income because depreciation
A. causes an inflow of funds for the replacement of assets.
B. reduces reported net income of the period but does not involve an outflow of cash for that
period.
C. is a direct use of cash.
D. reduces reported net income and causes an inflow of cash.

Difficulty: Medium
L.O.: 2
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44. To prepare a statement of cash flows (indirect method), which of the following items
should be added back to net income to derive "cash flow from operating activities"?
A. Depreciation expense.
B. Increase in accounts receivable.
C. Gain on a sale of equipment.
D. Decrease in taxes payable.

Difficulty: Medium
L.O.: 2
45. Austin Company reported net income for 2009 of $60,000, depreciation expense of
$10,000, and amortization expense (patent) of $5,000. Also, accounts payable increased by
$3,000 and inventory decreased by $2,000. The amount of "cash flows from operating
activities" for 2009 was
A. $74,000.
B. $75,000.
C. $76,000.
D. $80,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
46. The 2009 income statement of Coen Company reported total sales revenue of $106,000
and total expenses of $108,000 and a net loss of $2,000. Expenses were: depreciation,
$10,000 and patent amortization, $5,000. There was an increase in inventory of $1,000. Cash
flow from operating activities during 2009, was (parentheses indicate a cash outflow)
A. $ 7,000.
B. $14,000.
C. $12,000.
D. ($3,000).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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47. The 2009 income statement for McGrath Corporation showed the following:
Cash flow from operating activities is

A. $190,000.
B. $183,000.
C. $170,000.
D. $167,000.

Difficulty: Medium
L.O.: 2
48. Which statement regarding the indirect method is false?

A. Depreciation expense is added to net income.
B. An increase in accounts receivable is added to net income.
C. An increase in accounts payable is added to net income.
D. An increase in merchandise inventory is subtracted from net income.

Difficulty: Easy
L.O.: 2
49. Which of the following statements about cash flows from operating activities, in a
statement of cash flows prepared under the indirect method, is correct?
A. An increase in accounts receivable would be subtracted from net income.
B. An increase in salaries payable would be subtracted from net income.
C. An increase in inventory would be added to net income.
D. Depreciation expense would be subtracted from net income.

Difficulty: Medium
L.O.: 2
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50. Assume the 2009 income statement reported total sales revenue of $1,200,000. The 20082009, comparative balance sheets showed that accounts receivable increased by $25,000 and
the unearned revenue account decreased $15,000. The cash inflow from customers for 2009
would be
A. $1,225,000
B. $1,160,000
C. $1,175,000
D. $1,185,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
51. Bold Company's 2009 income statement reported total sales revenue of $250,000. The
2008-2009, comparative balance sheets showed that accounts receivable decreased by
$20,000. The 2009 "cash receipts from customers" would be
A. $230,000.
B. $270,000.
C. $250,000.
D. $ 40,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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52. The financial statements for World Company show the following:
Cost of goods sold $725,000
Cash paid for merchandise is

A. $731,000.
B. $736,000.
C. $719,000.
D. $714,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
53. Madison Company had sales of $154,000. Additional information from the balance sheet
is below:
Cash collected from customers is

A. $148,000.
B. $150,000.
C. $154,000.
D. $160,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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54. Amanda Company reported income tax expense of $250,000. Beginning income taxes
payable was $30,000 while ending income taxes payable was $25,000. What cash was paid
for taxes?
A. $280,000
B. $255,000
C. $245,000
D. It cannot be computed with the given information.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
55. Aaron Inc. reported operating expenses in 2009 of $765,000 (including $80,000 of
depreciation expense). Prepaid expenses increased $25,000 while accrued liabilities increased
$43,000. How much cash was paid for operating expenses in 2009?
A. $702,000
B. $622,000
C. $667,000
D. $703,000

Difficulty: Medium
L.O.: 2
56. Which of the following statements about the quality of income ratio is true?
A. When sales are growing, receivables and inventory normally increase faster than accounts
payable so the ratio increases.
B. Seasonal variations in sales have no impact on the quality of income ratio.
C. Failure to accrue appropriate expenses will inflate net income and reduce the quality of
income ratio.
D. The quality of income ratio is computed by dividing net income by cash flow from
operating activities.

Difficulty: Hard
L.O.: 3
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57. Which of the following statements about the quality of income ratio is true?
A. An increase in operating assets and a decrease in liabilities will reduce operating cash
flows, thereby reducing the ratio.
B. Seasonal variations in sales and purchases of inventory can cause wide deviations in the
quality of income ratio.
C. When sales are growing, receivables and inventory normally increase at a faster rate than
accounts payable often causing operating cash flows to be less than income.
D. All of the answers are true.

Difficulty: Medium
L.O.: 3
58. In 2009, Boogle reported net income of $785 million and positive cash flow from
operations of $1,196 million. In 2008, their net income was $563 million and positive cash
flow from operations was $1,237 million. Which of the following is false about their quality
of income ratios?
A. In 2008 their ratio was 2.2 and in 2009 it was 1.5.
B. Their ratio in 2008 was better than their ratio in 2009.
C. Boogle's quality of income ratios indicates poor performance because net income is less
than cash flow.
D. The ratio in both years shows the company's ability to generate good cash flow from its
operating activities.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 3
59. In 2009, Irish Eyes reported a quality of income ratio of 1.2. In 2008 and 2007 the ratio
was 1.3 and 1.6 respectively. Which of the following was the most likely cause of the
decrease in the ratio?
A. An increase in current assets such as receivables and inventory.
B. An increase in accounts payable and accrued liabilities.
C. A decrease in sales revenue.
D. Both an increase in current assets such as receivables and inventory and a decrease in sales
revenue are likely causes.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 3
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60. Which of the following is a cash outflow connected to investing activities?

A. Repurchase of treasury stock.
B. Purchase of short-term investments.
C. Purchase of property, plant and equipment
D. Both purchases of short-term investments and purchases of property, plant and equipment
are outflows connected to investing activities.

Difficulty: Medium
L.O.: 4
61. Which of the following is true?

A. Cash paid to repurchase treasury stock is an investing cash outflow.
B. Purchase of a patent is an investing cash outflow.
C. A cash dividend is an operating cash outflow.
D. Cash paid to acquire stock in another company is a financing outflow.

Difficulty: Medium
L.O.: 4
62. Canadian Beer reported they sold equipment for $222 million and purchased $1,515
million of new equipment. The equipment sold had a net book value of $150 million. Cash
flow from investing activities would show
A. an inflow of $222 million and outflow of $1,515 million.
B. an inflow of $150 million and outflow of $1,515 million.
C. a net outflow of $1,293 million.
D. a net outflow of $1,365 million.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
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63. Which of the following is false?

A. Purchase of equipment is an investing cash outflow.
B. Purchase of short-term investments is an investing cash outflow.
C. Sale of equipment creates investing cash inflow equal to its selling price.
D. Purchase of a patent is an investing cash outflow.

Difficulty: Medium
L.O.: 4
64. Milliken Company paid $2.2 million to purchase stock in another company, $1.0 million
to repurchase treasury shares, $.5 million to buy short-term investments, sold used equipment
for $.8 million when its book value was $.6 million, and purchased new equipment for $3.4
million. How much will be reported as net investing cash flow?
A. $6.3 million net cash outflow.
B. $5.3 million net cash outflow.
C. $5.1 million net cash outflow.
D. $4.8 million net cash outflow.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
65. Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold
short-term investments for $280,000, and repaid a note payable for $2,300,000 plus $230,000
of interest. The net cash flow from investing activities was
A. $6,250,000 outflow.
B. $8,320,000 outflow.
C. $8,270,000 outflow.
D. $5,970,000 outflow.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
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66. Which of the following statements about the capital acquisitions ratio is true?
A. A high ratio indicates less need for outside financing of property, plant and equipment.
B. The ratio is computed by dividing cash flow from operations by the average property, plant
and equipment, net from the balance sheet.
C. A low ratio may indicate a failure to update property, plant and equipment which can limit
a company's ability to compete in the future.
D. Both a high ratio indicates less need for outside financing of property, plant and equipment
and a low ratio may indicate a failure to update property, plant and equipment which can limit
a company's ability to compete in the future are true.

Difficulty: Medium
L.O.: 5
67. Which of the following statements about the capital acquisitions ratio is false?
A. The ratio is computed by dividing cash flow from operations by cash paid for property,
plant and equipment.
B. Because the need for investment in property, plant and equipment differs dramatically
across industries, a firm's ratio should only be compared with its prior years' ratio or with
firms in the same industry.
C. A high ratio indicates more need for outside financing of current and future purchases of
property, plant and equipment.
D. None of the other answers is false.

Difficulty: Medium
L.O.: 5
68. In 2009, Eva's Enterprises disclosed cash paid for property, plant and equipment of $755
million and cash flow from operations of $5,968 million. Their average property, plant and
equipment from the comparative balance sheet was $6,094 million. Compute Eva's
Enterprises capital acquisitions ratio for 2009.
A. 1.0
B. 5.3
C. 7.9
D. 6.0

Difficulty: Medium
L.O.: 5
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69. In 2008, Eva's Enterprises had a capital acquisitions ratio of 7.9. In 2008, Carlos'
Corporation had a ratio of 3.6. The amount of cash flow from operations was $5,968,000 for
Eva's Enterprises and $5,054,000 for Carlos Corporation. Which of the following statements
is correct?
A. Eva's Enterprises used less cash for investments in property, plant and equipment during
2008 than did Carlos Corporation.
B. Eva's Enterprises has less need for external financing of its investments in property, plant
and equipment indicated by its higher capital acquisitions ratio compared to Carlos
Corporation.
C. Eva's Enterprises invested about $785,000 in property, plant and equipment during 2008.
D. All of the answers are correct.

Difficulty: Hard
L.O.: 5
70. From 2007-2010, Canadian Beer's capital acquisitions ratio was 7.49 while American
Beer's was 4.19. Which of the following statements is true?
A. American Beer's ratio is lower because they are experiencing slow growth.
B. American Beer's ratio shows this company will have less difficulty financing expansion
from operating cash flows than Canadian Beer.
C. American Beer needed to borrow money or issue more stock to cover their investments in
property, plant and equipment since they had an inadequate capital acquisitions ratio.
D. American Beer's lower ratio may indicate a failure to update plant and equipment.

Difficulty: Hard
L.O.: 5
71. In 2009, Tommy's Toys reported the following: long-term debt repayments of $503
million; interest paid, $143 million; and proceeds from exercise of stock options, $27 million.
How much is net cash flow from financing activities in 2009?
A. $476 million net cash outflow.
B. $530 million net cash outflow.
C. $673 million net cash outflow.
D. $ 76 million net cash outflow.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
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72. Burich Co. reported proceeds from short-term borrowings of $2.5 million, proceeds from
long-term borrowings of $6.8 million, repayments of long-term borrowings of $3.5 million,
interest payments of $780,000, repurchase of treasury shares of $500,000 and cash dividends
declared of $1.1 million. Net cash flow from financing activities equals
A. $5,300,000 net cash inflow.
B. $4,200,000 net cash inflow.
C. $1,700,000 net cash inflow.
D. $2,800,000 net cash inflow.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
73. Which of the following is true?

A. Repayments of principal and interest reduce financing cash flows.
B. Repurchase of treasury shares is a cash outflow connected to investing activities.
C. If a company borrows $450 million in long-term notes and repays $380 million of longterm notes, and then these items must both be disclosed and not netted against each other in
the financing section.
D. Both repayments of principal and interest reduce financing cash flows and if a company
borrows $450 million in long-term notes and repays $380 million of long-term notes, then
these items must both be disclosed and not netted against each other in the financing section
are true statements.

Difficulty: Medium
L.O.: 6
74. Which of the following would be a financing cash outflow?

A. Cash dividends declared.
B. Interest paid.
C. Repurchase of treasury shares.
D. Purchase of a building on credit.

Difficulty: Medium
L.O.: 6
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75. Borderline Corp. borrowed $1.2 million in short-term notes and $6.4 million in long-term
notes. The company repaid $4.8 million of long-term notes plus $.6 million of interest.
Borderline issued $8.7 million of common stock and paid a cash dividend of $1.2 million.
Net cash flow from financing activities equals
A. $9.7 million net cash inflow.
B. $10.3 million net cash inflow.
C. $9.1 million net cash inflow.
D. $7.9 million net cash inflow.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
76. Lab Industries, Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold longterm investments for $12,000, received $5,000 of dividend revenue, purchased treasury stock
for $15,000, and purchased new equipment for $19,000. The net cash flow from financing
activities would be
A. $70,000.
B. $27,000.
C. $80,000.
D. ($20,000).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
77. Non-cash financing and investing activities

A. must be reported in the notes to the financial statements.
B. are transactions that do not cause a direct inflow or outflow of cash.
C. are disclosed in a separate schedule on the statement of cash flows.
D. include only activities over 5% of the available cash balance.

Difficulty: Easy
L.O.: 7
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78. A company acquired some land (independently appraised at $12,000) and paid for it by
issuing 1,000 shares of its common stock (par $10 per share; no market price was quoted).
How should this be reported on the statement of cash flows?
A. Report $12,000 as inflow and outflow of cash.
B. Report $12,000 as an inflow of cash.
C. Should not be reported on the statement of cash flows.
D. Report in the schedule of significant noncash transactions.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
79. Slipper Company sold a productive asset, a machine, for cash. It originally cost $20,000.
The accumulated depreciation at the date of disposal was $15,000. A gain on the disposal of
$2,000 was reported. Therefore, the cash inflow from these transactions was
A. $7,000.
B. $3,000.
C. $4,000.
D. $5,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup A
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80. Halbur Company collected the following data in its accounting records in 2009:
No new equipment was purchased during the year. The equipment was sold at the end of the
year. What was the cash in-flow from the sale of equipment in 2009?
A. $3,900.
B. $1,000.
C. $ 900.
D. $ 600.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: Sup A
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Essay Questions
81. For each of the following items, indicate whether it would appear in the operating,
investing, or financing activities section of the statement of cash flows. Place a check mark in
the appropriate column for each transaction. If neither an operating, investing, or financing
activity is appropriate, place a check mark in the "none" column. Assume the indirect method
is used for reporting.
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Difficulty: Medium
L.O.: 1
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82. Use the following information to prepare a statement of cash flows for Hanson Inc. for the
year ended December 31, 2009 using the indirect method. Prepare a schedule for any noncash items for disclosure, if appropriate.
A. Net income $10,000 (depreciation expense, 5,000; inventory decrease, $1,000; no changes
in accounts receivable or accounts payable)
B. Issued capital stock for $4,000 of equipment.
C. Sold equipment for $8,000, book value $8,000.
D. Paid cash dividend, $3,000 (declared in prior year).
E. Paid long-term debt principal, $8,000 and short-term debt principal, $2,000.
F. Purchased equipment for $12,000 in exchange for a note payable due in two years.
The cash balance on January 1, 2009 was $10,000.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 1
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83. Use the following information to prepare a statement of cash flows for Stable Equipment
Company for the year ended December 31, 2008:
Net income for the year 2008 was $5,000. Accounts receivable decreased $2,000, while
inventories increased $4,000, and accounts payable decreased $7,000. Depreciation expense
included in net income was $8,000.
During the year, a piece of land held for future expansion was sold for its book value of
$8,000 and a new service truck was purchased for $14,000.
The company borrowed $18,000 on a two-year note from the bank. Dividends of $6,000 were
paid in cash. Preferred stock was issued to retire $7,000 of long-term notes payable.
The beginning cash balance was $10,000 and the ending balance was $20,000.
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Difficulty: Hard
L.O.: 1
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84. Use the following information to prepare a statement of cash flows (direct method) for
Ames Corporation for the year ended December 31, 2009.
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Difficulty: Easy
L.O.: 1
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85. Marissa Company is preparing a statement of cash flows using the indirect method. The
following data are available:
Calculate cash flows from operating activities.

$30,000 + $18,000
$5,000
$10,000 + $10,000
$7,000 = $36,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
86. Hill Company reported net income of $10,000 for 2009. Additional 2009 information is as
follows:

$10,000 + $2,000 + $400 + $200 + $100 + $300 = $13,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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87. Brooks Company reported net income of $40,000 which included depreciation expense
and depletion expense of $21,000 and $18,000, respectively. The following changes also
occurred during 2009:

$40,000 + $21,000 + $18,000 + $10,000 + $5,000 + $7,000
$10,000 = $91,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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88. Sagaworth Inc. reported the following information:
Compute Sagaworth's net cash flow from operating activities for 2009 under the indirect
method.
$160,000 net cash outflow (
$380,000 + $150,000 + $25,000 + $30,000 + $20,000
$10,000 + $10,000 + $5,000 $10,000).
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 2
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89. Below is the 2009 income statement for the Critters Corporation.
Additional Information:
Accounts receivable increased by $8,000
Merchandise inventory increased by $4,000
Accounts payable increased by $6,000
Prepaid expenses decreased by $2,000
Accrued liabilities decreased by $5,000
Interest payable increased by $1,000
Prepare the operating activities section of the statement of cash flows using the indirect
method.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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90. Brice Corporation reported the following information:
Compute Brice Corporation's cash collected from customers for the year ended December 31,
2009.
$7,900,000 ($8,200,000 $200,000 increase in accounts receivable $100,000 decrease in
unearned revenue)
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 2b
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Compute Brice Corporation's cash paid to suppliers for inventory for the year ended
December 31, 2009.
$6,410,000 ($6,400,000 + $40,000 increase in inventory $30,000 accounts payable increase)
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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Compute Brice Corporation's cash paid for operating expenses for the year ended December
31, 2009.
$1,050,000 ($1,250,000 $200,000 depreciation expense
expenses + $10,000 decrease in accrued liabilities).
$10,000 decrease in prepaid
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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Compute Brice Corporation's cash paid for income taxes for the year ended December 31,
2009.
$180,000 ($165,000 + $15,000 decrease in income taxes payable)
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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94. The following information was reported from the statement of cash flows for Landlover's
Restaurants for the years ending December 31, 2008 through 2010 in millions of dollars:
A. Calculate the quality of income ratio for the years 2008 through 2010.
B. Interpret the quality of income ratio for Landlover's Restaurants for the three year period.
A. 2010 = 2.7, 2009 = 2.7, 2008 = 3.3.
B. Landlover's Restaurants had a strong quality of income ratio for all three years. They were
able to generate positive cash flow from operating activities in excess of net income in all
three years.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
95. Collateral, Inc. reported the following information from their statement of cash flows in
millions of dollars:
Calculate the quality of income ratio for 2008-2010

2010 = 1.23, 2009 = 1.26, 2008 = 1.55.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
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96. Pretzel Corp. reported the following items in 2009 (in millions):
Calculate Pretzel Corp's net cash flow from investing activities for 2009.
$9.5 million net cash outflow (
$2.3
$.6 + $1.1
$8.5 + $.8).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
97. Seneca Corporation reported the following items in 2009 (in millions):
Calculate net cash flow from investing activities for 2009.

$7.2 $1.3 + $0.6 + $0.3).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
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98. Blythe Company paid $2.2 million to purchase stock in another company, $1.0 million to
repurchase treasury shares, $.5 million to buy short-term investments, sold used equipment for
$.8 million when its book value was $.6 million, and purchased new equipment for $3.4
million. How much will be reported as net investing cash flow?
$2.2 million
$.5 million + $.8 million $3.4 million).
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 4
99. The following information was available from the financial statements of Collateral, Inc.
for the years 2010 and 2009 in millions of dollars:
A. Calculate the capital acquisitions ratio for each of the two years:
B. Comment on the sufficiency of the capital acquisitions ratio for the two years.
A. 2009 = 7.90, 2010 = 6.72.
B. The ratio appears to be more than sufficient in both years. Collateral, Inc. is generating
$7.90 of cash flow from operations for every $1 they are investing in new plant and
equipment as of 2009 and $6.72 as of 2010. This indicates they do not need to borrow or issue
stock to secure external financing for their expansion of plant and equipment assets.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
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100. The following information is provided from the statement of cash flows for Tommy's
Toys for the years 2007 through 2011 in millions of dollars:
A. Calculate the capital acquisitions ratio for Tommy's Toys for each of the five years.
B. Comment on the capital acquisitions ratio for Tommy's Toys for the five years.
A. 2011 =2.77, 2010 = 3.06, 2009 = 1.46, 2008 = (0.38), 2007 = 1.62.
B. The capital acquisitions ratio for Tommy's Toys has been erratic over the five years
ranging from a low of
.38 to a high of 3.06. During the five years from 2007 to 2011, the
company had been investing between $262 million and $533 million in new property, plant
and equipment. However, their cash flow from operations was very erratic ranging from a
high of $865 million in 2007 to a low of ($151) million in 2008. The ratio has been affected
not only by the level of investments in these long-lived assets, but by the erratic inflow of
cash from operations. The negative cash flow from operating activities in 2008 meant they
were unable to cover any of the $402 million invested in new property, plant and equipment.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
101. While preparing a statement of cash flows, you encountered the following transaction:
February 1, 2011: Battles Corporation acquired a small office building in exchange for 5,000
shares of its own common stock; par value $10 per share; market value $15 per share.
A. Should this transaction be shown on the statement of cash flows?
B. Why or why not?
A. Yes
B. Because it is a direct exchange, it is reported on the statement of cash flows in the
Schedule of Non-cash Investing and Financing Transactions as "Office building, acquired for
5,000 shares of Battle Corporation's common stock, $75,000".
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
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102. Complete the following statement of cash flows using the indirect method:
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AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2a, 4, 6
103. In 2009, Tommy's Toys reported the following: proceeds from short-term borrowings of
$419 million; proceeds from long-term borrowings of $147 million; long-term debt
repayments of $45 million; interest paid, $128 million; treasury shares repurchased $632
million; and exercise of stock options by employees, $2 million. How much is net cash flow
from financing activities in 2001?
$109 million net cash outflow ($419 million + $147 million $45 million $632 million + $2
million).
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
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104. Kennel Co. reported proceeds from short-term borrowings of $2,500,000, proceeds from
long-term borrowings of $6,800,000, repayments of long-term borrowings of $3,500,000,
interest payments of $780,000, repurchase of treasury shares of $500,000 and cash dividends
declared of $1,100,000. Net cash flow from financing activities equals
$5,300,000 net cash inflow ($2,500,000 + $6,800,000 $3,500,000 $500,000)
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
105. Walden Corp. borrowed $1.2 million in short-term notes and $6.4 million in long-term
notes. They repaid $4.8 million of long-term notes plus $.6 million of interest. They issued
$8.7 million of common stock and paid a cash dividend of $1.2 million.
Net cash flow from financing activities equals
$10.3 million net cash inflow ($1.2 million + $6.4 million $4.8 million + $8.7 million $1.2
million).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 6
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Matching Questions
106. Match each activity below with the proper classification.
1. Collection of interest on a note receivable
2. Borrowing cash from the bank
3. Collections of dividends on long-term investments
4. Payment of cash dividends
5. Purchase of productive assets for cash
6. Sales of productive assets (used in the business)
7. Payment of debt principal with cash
8. Issuance of capital stock for cash
Operating
Financing
Investing
Financing
Financing
Financing
Investing
Operating
1
7
6
4
8
2
5
3

Difficulty: Medium
L.O.: 1
107. Indicate the proper captions for each of the transactions.
1. Purchased stock in another company

2. Issued capital stock for a new machine
3. Borrowed cash on a short-term note
4. Purchased treasury stock and gave a
long-term note payable
5. Purchased land with a short-term note
payable
6. Paid a previously declared cash dividend
7. Declared a cash dividend
Not included in the statement

of cash flows 7
Financing Activities 6
Schedule of non-cash
transactions 2
Financing Activities 3
Financing Activities
Financing Activities
Operating Activities
transactions
transactions
Investing Activities
Investing Activities
8. Paid interest on a note payable

9. Borrowed cash on a long-term note
10. Purchased treasury stock for cash
11. Purchased land for cash
9
10
8
4
5
1
11

Difficulty: Medium
L.O.: 1
13-50

Test Bank Financial Accounting 6E by Libby Chapter 13

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Test Bank Financial Accounting 6E by Libby Chapter 13

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Chapter 013: Statement of Cash Flows

True / False Questions

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

4. Collection of principal on a note receivable is a cash flow from investing activities.

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

AACSB Tag: Communications

AACSB Tag: Analytic

AACSB Tag: Relative Thinking

AACSB Tag: Analytic

Chapter 013: Statement of Cash Flows

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

Multiple Choice Questions

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23. Which of the following transactions is not a direct use of cash?

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

24. The statement of cash flows should be dated as follows:

AACSB Tag: Relative Thinking

25. Which of the following transactions is not a typical use of cash?

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

28. Which of the following is a cash flow from operating activities?

AACSB Tag: Relative Thinking

29. Which of the following would least likely be a cash equivalent?

AACSB Tag: Relative Thinking

30. A cash inflow from financing activities includes

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

31. For an investment to qualify as a cash equivalent, it must be readily convertible to a

AACSB Tag: Relative Thinking

32. A cash inflow from operating activities includes

AACSB Tag: Relative Thinking

AACSB Tag: Relative Thinking

Chapter 013: Statement of Cash Flows

AACSB Tag: Relative Thinking

AACSB Tag: Analytic

AACSB Tag: Analytic

Chapter 013: Statement of Cash Flows

AACSB Tag: Analytic

AACSB Tag: Analytic

Chapter 013: Statement of Cash Flows

AACSB Tag: Analytic

AACSB Tag: Analytic