A major purpose of the statement of cash flows is to highlight the major activities that have provided cash and that have used cash during an accounting period.
True / False
True
Under the accrual basis of accounting, a business may show substantial profit on its income statement but have a critical shortage of cash.
True / False
True
If a firm made a short-term investment of $10,000 in Canadian Treasury Bills August 15, and the Bills mature on September 1 of the same year, the firm should consider the Bills to be cash equivalents.
True / False
True
A statement of cash flows is a required statement for every business that includes an income statement and a balance sheet in its financial reports.
True / False
True
Cash flows are classified into four separate types of activities on the statement of cash flows.
True / False
False
When cash dividends are received from an investment on the same day that the investment is sold, the entire amount of cash received on that day should be shown as an investing activity.
True / False
False
The lending of money and the collection of the principal and interest are classified on the statement of cash flows as investing activities.
True / False
False
On the statement of cash flows, financing activities include lending money and collecting the principal, purchasing and selling plant assets, and purchasing and selling investments made in other companies.
True / False
False
When a firm sells a piece of equipment for an amount in excess of book value, the sale of the equipment will be shown on the statement of cash flows as an investing activity that provided cash equal to the book value.
True / False
False
A withdrawal of assets by a sole proprietor or a partner, or the payment of dividends to shareholders, is classified as an investing activity on the statement of cash flows.
True / False
False
If cash dividends of $45,000 were declared, but only $35,000 were paid, the statement of cash flows should disclose $35,000 as a financing activity.
True / False
True
The issuance of common shares for cash is an example of a financing activity.
True / False
True
If 12% bonds are issued and 14% bonds are retired in the same accounting period, the bond issue is treated as a financing activity (cash increased) and the bond retirement is treated as an investing activity (cash decreased).
True / False
False
The first step in preparing a statement of cash flows is to determine the 'bottom line' figure for the statement of cash flows.
True / False
True
The determination of cash inflows and cash outflows can be made by analyzing changes in noncash balance sheet accounts.
True / False
True
The major difference between a statement of cash flows prepared under the direct method and a statement of cash flows prepared under the indirect method is the presentation of the net cash flows from operating activities.
True / False
True
The CICA recommends and encourages the use of the direct method of determining the cash flows provided or used by operations.
True / False
True
If the ending balance of accounts receivable is less than the beginning balance, it normally means that collections from credit sales were greater than credit sales billed during the year (ignoring changes in the allowance for doubtful accounts).
True / False
True
Increases in merchandise inventories are deducted from the cost of goods sold to determine the purchases of merchandise (direct method).
True / False
False
Under the accrual-basis method of accounting, the wages expense for the time period may not be equal to the cash paid for wages during the time period.
True / False
True
In the determination of cash paid for wages and other operating expenses (direct method), a net increase in prepaid insurance should be deducted from the reported amount of operating expenses.
True / False
False
To prepare a statement of cash flows, an increase in accrued liabilities would be added to wages and other operating expenses (excluding amortization) to determine the total cash paid for wages and other operating expenses (direct method).
True / False
False
Under the direct method of determining net cash flow from operations, an increase in interest payable is deducted from interest expense to determine the cash outflow from payments of interest.
True / False
True
All expenses represent an outflow of cash during the accounting period being covered by the statement of cash flows.
True / False
False
On a statement of cash flows prepared under the direct method, the gains and losses from noncurrent assets are never reported on the statement of cash flows.
True / False
True
On a statement of cash flows prepared under the direct method, the gains and losses from the retirement of debt is shown on the statement of cash flows.
True / False
False
The indirect method does not report individual operating cash inflows and outflows, but adjusts net income for operating activities not involving cash, eliminates gains and losses from investing and financing activities, and changes in noncash current assets and noncash current liabilities relating to operating activities.
True / False
True
Under the indirect method, expenses with no cash outflows are added back to net income to determine the net cash flow from operating activities.
True / False
True
Under the indirect method, a transaction in which an asset is sold for more than its book value would be shown as an investing activity equal to the book value.
True / False
False
The declaration of a cash dividend is a financing activity.
True / False
False
Cash flow on total assets is determined by dividing operating cash flow by average total assets.
True / False
True
_______________ (DIRECT or INDIRECT) is the method of presenting a statement of cash flows that shows the cash flows from customer receipts and the disbursements of cash for merchandise?
DIRECT
_______________ (DIRECT or INDIRECT) is the method of presenting a statement of cash flows that reports net income and then adjusts the net income amount by adding and subtracting items that are necessary to yield net cash provided or used by operating activities.
INDIRECT
Transactions with a company's owners and creditors are called _______________ activities.
FINANCING
Transactions that involve making and collecting loans or that involve purchasing and selling plant assets are called _______________ activities.
INVESTING
Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business are called _______________ activities.
OPERATING
A statement of _______________ reports the cash inflows and outflows for an accounting period.
CASH FLOWS
The collection of accounts receivable is a(n) _______________ (FINANCING, INVESTING, or OPERATING) activity.
OPERATING
The purchase of a building in which production machinery will be installed and operated is a(n) _______________ (FINANCING, INVESTING or OPERATING) activity.
INVESTING
The payment of cash dividends is a(n) _______________ (FINANCING, INVESTING, or OPERATING) activity.
FINANCING
A company sold a machine with a book value of $13,000 for $15,000. This transaction is a(n) _______________ (FINANCING, INVESTING, or OPERATING) activity.
INVESTING
The purchase of merchandise for resale is a(n) _______________ (FINANCING, INVESTING, or OPERATING) activity.
OPERATING
Paying the interest expense on a long term note is an example of a(n) _______________ (FINANCING, INVESTING, or OPERATING) activity.
OPERATING
A transaction that involves both investing and financing activities, but does not affect any cash inflow or outflow is called a _______________ investing and financing activity.
NONCASH
A cash _______________ is a security that is readily convertible to a known amount of cash and is sufficiently close to its maturity date so its market value is unaffected by interest rate changes.
EQUIVALENT
Cash equivalent:
An investment that must be readily convertible to a known amount of cash, and sufficiently close to it s maturity date so its market value is not significantly affected by interest rate changes.
Direct method:
A calculation of the net cash provided or used by operating activities that lists the major classes of operating cash receipts, such as receipts fro m customers, and subtracts the major classes of operating cash disbursements, such as cash paid for merchandise. This method is encouraged by the CICA.
Financing activities:
Transactions with a company's owners and creditors that include getting cash from issuing debt and repaying the amounts borrowed, and getting cash from or distributing cash to owners and giving owners a return on investments.
Indirect method:
A calculation that reports net income and then adjusts the net income amount by adding and subtracting items that are necessary to yield net cash provided or used by operating activities.
Investing activities:
The acquisition and disposal of long-term assets and other investments that are not classified as cash equivalents.
Operating activities:
The principal revenue-producing activities that are not investing or financing activities. Operating activities involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administer ing the business.
Statement of cash flows:
A financial statement that describes the sources and uses of cash for a reporting period, i.e., where a company's cash came from (receipts) and where it went during the period (payments); the cash flows are arranged by an organization's major activities: operating, investing, and financing activities.
