Cash Flow Statement

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1. The cash flow statement

a. shows what the company does with their cash
b. reconciles accrual basis to cash basis
c. is used to determine the company’s ability to generate future cash flow
d. all of the above

Check Your Answer
D.   The cash flow statement is used by the investor for all of the items listed.
2. Cash equivalents are

a. treated the same as cash on the cash flow statement
b. have a maturity date of greater than 6 months
c. are not considered the same as cash on the cash flow statement
d. are investments held for quick appreciation

Check Your Answer
A.   Cash equivalents are financial instruments that have a maturity of 90 days or less and fair market value does not change with changes in interest rates.  They are considered cash for purposes of the cash flow statement.
3. Operating activities consist of

a. activities that generate cash related to day to day business activities
b. payments made for long term assets
c. borrowings from long term payables
d. activities related to stockholders

Check Your Answer
A.   Operating activities are the day to day operations of the business.  Included in this category is net income and all differences between net income and cash.  (b) is an investing activity. (c.) and (d) are financing activities.
4. Investing activities consist of

a. activities to generate cash from day to day business activities
b. payments made to purchase and proceeds from selling long term assets
c. borrowings and repayments related to long term payables
d. activities related to stockholders

Check Your Answer
B.  Investing activities are payments for and proceeds from selling long term assets.  Companies invest in long term assets. (a.) is operating, (c) and (d) are financing.
5. Financing activities consist of

a. activities to generate cash from day to day business activities
b. payments made to purchase and proceeds from selling long term assets
c. borrowings and repayments related to long term payables
d. dividends received

Check Your Answer
C.  Financing activities consist of cash activities that impact long term liabilities or stockholders.  (a.) and (d) are operating activities. (b.) is investing activities.
6. The company that issues common stock will report this as a (an) ________activity:

a. investing
b. operating
c. financing
d. day to day

Check Your Answer
C.  Issuing common stock impacts stockholders (equity) and is a financing activity.
7. Payments for Interest expense is reported as a (an) _________ activity:

a. investing
b. operating
c. financing
d. non cash

Check Your Answer
B.  Interest expense is part of net income, which is included in operating activities.
8. The amount reported in the investing section on the cash flow statement when
selling a long-term asset is

a. the book value of the asset
b. the cash received from selling the asset
c. the original cost of the asset
d. the gain or loss from selling the asset

Check Your Answer
B.   Only the amount of cash received or paid is reported in the investing and financing sections.   The gain or loss is reported in the operating section on the indirect method cash flow statement and not reported on the direct method statement.   Cost and book value are not reported as the asset has now been sold.
9. The amount reported in the operating section on the indirect cash flow statement
when selling a long-term asset is

a. the book value of the asset
b. the cash received from selling the asset
c. the original cost of the asset
d. the gain or loss from selling the asset

Check Your Answer
D.  The gain or loss is reported in the operating section on the indirect method cash flow statement.   The cash received is reported in the investing section.
10. Where is depreciation expense reported on the indirect cash flow statement:

a. the investing section
b. the operating section
c. the financing section
d. it is not reported on the cash flow statement because it is non-cash

Check Your Answer
B.  Depreciation expense is added to net income as a non cash expense in the operating section.  It is added because this is an expense that is not paid which means the company has more cash than net income. 
11. The change in accounts receivable reported on the indirect cash flow statement represents:

a. the difference between cash received and sales during the period
b. the difference between cash paid and expenses during the period
c. the amount that is owed from customers
d. the amount that the company wrote off as uncollectible

Check Your Answer
A.    The change in accounts receivable by definition is (a.).  (c.) is reported on the balance sheet as accounts receivable.  (d.) is not cash and is not reported on the cash flow statement.  (b.) is related to payables.
12. The formats “direct” and “indirect” refer to which section of the cash flow statement?

a. the investing section
b. the operating section
c. the financing section
d. non-cash transactions

Check Your Answer
B.   The operating section can be prepared using either format.  The investing and financing sections of the cash flow statement are the same for both operating activity formats.
13. When preparing the direct cash flow statement, you will never report

a. non cash revenues or expense
b. cash paid to suppliers
c. cash received from customers
d. cash paid to employees

Check Your Answer
A.  The direct cash flow statement states the cash that was received and the cash that was paid for different categories of revenues and expenses.  Non cash revenues and expenses are not reported on the direct statement because there is no need to reconcile net income to cash.
14. When preparing a direct cash flow statement, cash paid to suppliers considers

a. accounts payable
b. office supplies
c. inventory
d. both a. and c.

Check Your Answer
D.  Cash paid to suppliers considers the difference in accounts payable and inventory.  The expense cost of goods sold is from inventory provided to the customer and the amount paid for the inventory is determined using the change in accounts payable.
15. Which of the following is considered a non cash transaction?

a. borrowing from a bank
b. purchasing a truck for cash
c. selling an investment for cash
d. purchasing equipment with a note payable

Check Your Answer
D.  The equipment was purchased without paying for cash.  All other transactions involve cash. (a.) is a financing activity and (b) and (c) are investing activities.