Cash Flows

4/8/2011 Cash Flows
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scribd.com/doc/22806908/Cash-Flows 1/48
4/8/2011 Cash Flows
STATEMENT OF CASH FLOWS

TRUE-FALSE STATEMENTS
1. The statement of cash flows is a required statement that must be prepared along with an
income statement, balance sheet, and retained earnings statement.
2. For external reporting, a company must prepare either an income statement or a

statement of cash flows, but not both.
3. A primary objective of the statement of cash flows is to show the income or loss on
investing and financing transactions.
4. A statement of cash flows indicates the sources and uses of cash during a period.
5. Operating activities include the cash effects of transactions that create revenues and
expenses.
6. In preparing a statement of cash flows, the issuance of debt should be reported separately
from the retirement of debt.
7. Noncash investing and financing activities must be reported in the body of a statement of
cash flows.
8. The statement of cash flows classifies cash receipts and payments as operating,
nonoperating, financial, and extraordinary activities.
9. The sale of land for cash would be classified as a cash inflow from an investing activity.
10. Cash flow from investing activities is considered the most important category on the
statement of cash flows because it is considered the best measure of expected income.
11. The receipt of dividends from long-term investments in stock is classified as a cash inflow
from investing activities.
12. The payment of interest on bonds payable is classified as a cash outflow from operating
activities.
13. Any item that appears on the income statement would be considered as either a cash
inflow or a cash outflow from operating activities.
14. The acquisition of a building by issuing bonds would be considered an investing and
financing activity that did not affect cash.
15. The growth phase of the product life cycle occurs when the company is purchasing fixed
assets and beginning to produce and sell.
16. During the maturity phase, cash provided by operating activities and net income are
approximately the same.
4/8/2011 Cash Flows
12-2 Test Bank for Managerial Accounting, Second Edition
17. A loss on under

operations sale ofthe
equipment is added to net income in determining cash provided by
indirect method.
18. Cash provided by operating activities is generally equal to operating income.

19. Using the indirect method, an increase in accounts receivable during a period is deducted
from net income in calculating cash provided by operations.
20. Usingnet
from theincome
indirectin method, an cash
calculating increase in accounts
provided payable during a period is deducted
by operations.
21. In preparing a statement of cash flows, an increase in the Common Stock and Treasury
Stock accounts during a period would be an investing activity.
22. During a period, cost of goods sold + an increase in inventory + an increase in accounts
payable = cash paid to suppliers.
23. During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable
increased by $3,000; therefore, the cash paid for income taxes was $27,000.
24. In computing net cash flow from operating activities using the direct method, each item in
the income statement is adjusted from the accrual basis to the cash basis.
25. Using the direct method, major classes of investing and financing activities are listed in
the operating activities section.
26. Free cash flow is cash from operations less dividends.
27. The current cash debt coverage ratio is computed by dividing net cash provided by
operations by average total liabilities.
28. The cash return on sales ratio is used to evaluate a company’s profitability.
29. The cash basis measure of liquidity is the cash debt coverage ratio.
30. The capital expenditure ratio is calculated as cash from operations divided by capital
expenditures.
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. F 16. T 21. F 26. F
2. F 7. F 12. T 17. T 22. F 27. F
3. F 8. F 13. F 18. F 23. T 28. T
4.
5. T
T 9.
10. T
F 14.
15. T
F 19.
20. T
F 24.
25. T
F 29.
30. F
T
4/8/2011 Cash Flows
Statement of Cash Flows 12-3
MULTIPLE CHOICE QUESTIONS

31. The statement of cash flows
a. must be prepared on a daily basis.
b. summarizes the operating, financing, and investing activities of an entity.

c. is another name for the income statement.
d. is a special section of the income statement.
32. Which one of the following items is not generally used in preparing a statement of cash
flows?
a. Adjusted trial balance
b. Comparative balance sheets
c. Current income
d. Additional statement
information
33. The primary purpose of the statement of cash flows is to

a. provide information about the investing and financing activities during a period.
b. prove that revenues exceed expenses if there is a net income.
c. provide information about the cash receipts and cash payments during a period.
d. facilitate banking relationships.
34. If a company reports a net loss, it
a. may still have a net increase in cash.
b. will not be able to pay cash dividends.
c. will not be able to get a loan.
d. will not be able to make capital expenditures.
35. In addition to the three basic financial statements, which of the following is also a required
financial statement?
a. the "Cash Budget"
b. Statement of Cash Flows
c. Statement of Cash Inflows and Outflows
d. the "Cash Reconciliation"
36. The statement of cash flows will not report the
a. amount of checks outstanding at the end of the period.

b. sources of cash in the current period.
c. uses of cash in the current period.
d. change in the cash balance for the current period.
37. The acquisition of land by issuing common stock is
a. a noncash transaction that is not reported in the body of a statement of cash flows.
b. a cash transaction and would be reported in the body of a statement of cash flows.
c. a noncash transaction and would be reported in the body of a statement of cash flows.
d. only reported if the statement of cash flows is prepared using the direct method.
38. The order of presentation of activities on the statement of cash flows is
a. operating, investing, and financing.
b. operating, financing, and investing.
c. financing, operating, and investing.
d. financing, investing, and operating.
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4/8/2011 Cash Flows

STATEMENT OF CASH FLOWS

2. For external reporting, a company must prepare either an income statement or a

12-2 Test Bank for Managerial Accounting, Second Edition

17. A loss on under

18. Cash provided by operating activities is generally equal to operating income.

26. Free cash flow is cash from operations less dividends.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

b. summarizes the operating, financing, and investing activities of an entity.

33. The primary purpose of the statement of cash flows is to

a. amount of checks outstanding at the end of the period.

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