Cash from Operating: 2006$110; 2005$90; 2004$79; 2003$70

Chapter F11: Tools of the Trade, Part III...The Statement of Cash Flows: Bringing the Focus Back to Cash
Multiple Choice

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1.

/ The following statement is true regarding the statement of cash flows:
This financial statement has been required in its current form since 1913.
Cash inflows are shown in parentheses.
This statement classifies cash transactions as either a revenue or an expense.
* / This statement explains the causes of the change in the cash balance.
Hint for question 1
The statement of cash flows reports cash receipts and cash disbursements classified according to the entity's major activities: operating, investing, and financing.
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2.

/ All of the following are true regarding the purpose of the statement of cash flows except --
to assess a company's ability to generate future cash flows.
to assess a company's overall financial health.
to assess a company's ability to pay dividends to stockholders and interest and principle to creditors.
* / to report net income.
Hint for question 2
The statement of cash flows helps decision makers assess a company's ability to generate future cash flows, need for external debt, ability to pay back debt and dividends, and reconciles the differences between net income and the change in cash.
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3.

/ Decision makers compare net income to net cash from operating activities. To make these amounts more comparable the same accounts are included in each. The following accounts are used to compute both net income and net cash from operating activities except --
interest revenue.
interest expense.
dividend revenue.
* / dividends declared and paid.
Hint for question 3
Which accounts are reported on the income statement?
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4.

/ The following statement is true regarding the operating activity section of the statement of cash flows:
A positive cash flow warrants investigation.
* / The direct or indirect format may be used to present the information.
To prepare this section, transactions affecting long-term asset and long-term liability accounts are analyzed.
The borrowing or repayment of long-term debts would be reported in the operating section.
Hint for question 4
Operating activities report the impact of revenues and expenses on cash. Revenues are the result of engaging in the entity's major line of business.
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5.

/ Use the following information to compute the net cash from operating activities:
Cash sales $100,000, cash from accounts receivable payments $200,000, cash dividends received $3,000, dividends paid $4,000, rent paid $5,000, and depreciation expense $6,000. Net cash from operating activities is a --
$98,000 cash inflow.
$292,000 cash inflow.
$294,000 cash inflow.
* / $298,000 cash inflow.
Hint for question 5
Operating activities report the impact of revenues and expenses on cash. Revenues are the result of engaging in the entity's major line of business.
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6.

/ The following statement is true regarding the investing activity section of the statement of cash flows:
* / To prepare this section, transactions affecting long-term asset accounts are analyzed.
Large purchases of plant assets may signal an emergency.
The selling of a plant asset is reported as a negative amount.
Investing activities include the purchase and sale of inventory.
Hint for question 6
Investing activities include cash transactions that increase and decrease long-term asset accounts. Examples include the purchase and sale of property, plant, and equipment.
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7.

/ Use the following information to compute the net cash from investing activities:
Sell a plant asset for $10,000 cash and a $1,000 gain, purchase a bond investment for $16,000, receive $2,000 interest payment from the bond investment, and pay off a $3,000 mortgage payable.
$4,000 net cash outflow.
$5,000 net cash outflow.
* / $6,000 net cash outflow.
$9,000 net cash outflow.
Hint for question 7
Investing activities include cash transactions that increase and decrease long-term asset accounts. Examples include the purchase and sale of property, plant, and equipment.
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8.

/ The following statement is true regarding the financing activity section of the statement of cash flows:
To prepare this section, transactions affecting both current and long-term liability accounts are analyzed.
* / The ability to issue large quantities of common stock usually indicates investor confidence in the future of the company.
A negative amount may indicate a company is borrowing funds.
The declaration and payment of a large cash dividend may signal an emergency.
Hint for question 8
Financing activities include the issuance of debt or equity and the payment of dividends -- activities that focus on the external financing of the company. Financing activities require analysis of long-term liability and stockholders' equity accounts.
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9.

/ Use the following information to compute the net cash from financing activities:
Issue common stock $200,000; buy back treasury stock $20,000; pay mortgage payable principal $100,000; pay mortgage payable interest $10,000; and declare and pay a cash dividend of $40,000.
$30,000 net cash inflow.
* / $40,000 net cash inflow.
$60,000 net cash inflow.
$80,000 net cash inflow.
Hint for question 9
Financing activities include the issuance of debt or equity and the payment of dividends -- activities that focus on the external financing of the company. Financing activities require analysis of long-term liability and stockholders' equity accounts.
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10.

/ The balance sheet reports a beginning balance of $20,000 in accounts receivable and an ending balance of $15,000. The income statement reports sales revenue of $200,000. During the accounting period, cash collected from customers totals --
$195,000.
$200,000.
* / $205,000.
$215,000.
Hint for question 10
A decrease in a receivable account indicates more cash has been collected during the accounting period than reported revenues.
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11.

/ The balance sheet reports a beginning balance of $200,000 for the net book value of equipment and an ending balance of $160,000. The income statement reports depreciation expense of $20,000, and gain on the sale of equipment of $10,000. The statement of cash flows reports acquisitions of plant assets totaling $30,000. During the accounting period, cash received from the sale of equipment totals --
$20,000.
$40,000.
$50,000.
* / $60,000.
Hint for question 11
An increase in an asset account indicates a cash outflow. A decrease in an asset account indicates a cash inflow. Book value + gain = sales proceeds.
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12.

/ The indirect method shows the reconciliation from net income to operating cash flows. The adjustment that is subtracted during the reconciliation is --
* / non-cash revenues (revenues earned but payment not yet received) reported on the income statement.
non-cash expenses (expenses incurred but not paid) reported on the income statement. One example is depreciation expense.
revenues earned and received in cash.
a decrease in accounts receivable.
Hint for question 12
Accrual-basis net income is being adjusted to cash-basis cash flows from operating activities. Identify the items included in net income but not included in operating cash flows, or vice versa. Which of these items is a subtracting adjustment?
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Chapter F11: Tools of the Trade, Part III...The Statement of Cash Flows: Bringing the Focus Back to Cash
True or False

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1.

/ A company can report a large net income and still have insufficient cash to operate.
* / TRUE
FALSE
Hint for question 1
Usually if net income is high so is cash, but not always. Accrual-basis accounting is used to compute net income.
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2.

/ The direct and indirect methods each result in a different amount for Net Cash Flows From Operating Activities.
TRUE
* / FALSE
Hint for question 2
The only difference between the direct and indirect methods is the format used to report cash flows from operating activities.
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3.

/ All cash transactions will affect the statement of cash flows.
* / TRUE
FALSE
Hint for question 3
The statement of cash flows reports cash receipts and cash disbursements.
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4.

/ Cash flows from operating activities must be the main source of cash for long-term success.
* / TRUE
FALSE
Hint for question 4
Operating cash flows are the only renewable source of cash. Internal financing is generated by operations, while external financing is the result of borrowing or issuing shares of stock.
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5.

/ The income statement, balance sheet, and the statement of cash flows provide an investor with all of the information there is to know about a company.
TRUE
*FALSE
Hint for question 5
To decide whether to invest in a company's stock, investors should analyze the financial statements, articles in the financial press, data about the company's industry, and predictions about the world economy.
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Chapter F11: Tools of the Trade, Part III...The Statement of Cash Flows: Bringing the Focus Back to Cash
Fill In The Blanks

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1.

/ Cash received from the sale of equipment during the accounting period would be reported on the ______.
balance sheet
income statement
* / statement of cash flows
statement of owners' equity
Hint for question 1
Which statement reports cash received?
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2.

/ In the operating activity section of the statement of cash flows, the ______method lists major categories of cash receipts and cash disbursements rather than reconciling net income to operating cash flows.
adjustment
* / direct
indirect
reconciliation
Hint for question 2
Which method lists major categories of cash receipts and cash disbursements?
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3.

/ Dividend revenue received is reported as an operating activity, while dividends paid is reported as a(n) ______activity.
operating
investing
* / financing
indirect
Hint for question 3
Do dividends appear on the income statement? Which section of the balance sheet is affected by the declaration of dividends?
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4.

/ Sales revenue is reported on the income statement, while cash from customers is reported as a(n) ______activity on the statement of cash flows.
* / operating
investing
financing
indirect
Hint for question 4
The statement of cash flows classifies cash transactions as either operating, investing, or financing.
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5.

/ Interest revenue from a bond investment is reported as an operating activity, while the purchase of the bond investment is reported as a(n) ______activity.
operating
* / investing
financing
indirect
Hint for question 5
Which section of the balance sheet is affected by the purchase of a bond investment?
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Chapter F11: Tools of the Trade, Part III...The Statement of Cash Flows: Bringing the Focus Back to Cash
Essay Questions

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1.
/ Briefly describe the three types of activities reported on the statement of cash flows. Describe one cash inflow and one cash outflow for each type of activity.
2.
/ Explain why "net income" and "net cash from operating activities" are usually different in amount.
3.
/ What conclusions might be inferred from the cash flow information provided for Adam Company? What conclusions might be inferred from the cash flow information provided for Baker Company? Which is the stronger of the two companies? Explain why. Assume no stock has been issued and the amounts are in thousands.

• ADAM COMPANY
• Cash from operating: 2006$110; 2005$90; 2004$79; 2003$70
• Cash from investing: 2006($101); 2005($115); 2004($135); 2003($75)
• Cash from financing: 2006($5); 2005$30; 2004$43; 2003$12
• BAKER COMPANY
• Cash from operating: 2006($20); 2005($8); 2004($12); 2003$6
• Cash from investing: 2006$15; 2005$5; 2004($2); 2003($10)
• Cash from financing: 2006$5; 2005$2; 2004$15; 2003$5

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