Reference no: EM132570812

True / False Questions

Question 1. The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.

Question 2. The statement of cash flows reports and proves the net change in cash for a reporting period.

Question 3. To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

Question 4. The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

Question 5. Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term investment and financing decisions.

Question 6. A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Question 7. Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

Question 8. Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

Question 9. Cash paid for merchandise is an operating activity.

Question 10. The purchase of shares in another company is classified as a financing activity.

Question 11. Receipts of cash dividends and interest earned on loans are classified as financing activities.

Question 12. The payment of cash dividends to shareholders can be classified as an operating or a financing activity.

Question 13. The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.

Question 14. Conversion of preference shares to ordinary shares is reported in the financing section of the statement of cash flows.

Question 15. A purchase of land in exchange for a long-term note payable is reported in the investing section of the statement of cash flows.

Question 16. A noncash investing transaction should be disclosed in either a footnote or at the bottom of the statement of cash flows.

Question 17. A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000 note payable. The entire transaction is disclosed to users on the statement of cash flows and/or in the notes to the financial statements.

Question 18. A purchase of land in exchange for shares is disclosed on the statement of cash flows or in a note to the statement.

Question 19. Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.

Question 20. The statement of cash flows explains how transactions and events impact the end-of-period cash balance to produce the end-of-period net income.

Question 21. A company's income statement showed the following: income before taxes, $150,000; income taxes paid, $26,000; depreciation expense, $30,000; and gain on sale of property, plant and equipment, $14,000. An examination of the company's current assets and current liabilities showed the following changes as a result of operating activities: accounts receivable decreased $9,400; merchandise inventory increased $18,000; prepaid expenses decreased $6,200; accounts payable increased $3,400. Calculate the net cash provided or used by operating activities.

A. $139,000.

B. $141,000.

C. $145,800.

D. $155,000.

E. $167,000.

Question 22. Use the following information and the indirect method to calculate the net cash provided or used by operating activities:

Income before taxes................................................... $14,000

Depreciation expense.................................................. 12,000

Payment on mortgage payable....................................... 15,000

Gain on sale of land................................................... 7,500

Increase in merchandise inventory.................................. 2,050

Increase in accounts payable......................................... 6,150

Proceeds from sale of land........................................... 8,000

Income taxes paid...................................................... 1,700

A. $12,700.

B. $13,900.

C. $20,900.

D. $28,400.

E. $35,900.

Question 23. In preparing a company's statement of cash flows for the most recent year on the indirect method, the following information is available:

Income before taxes for the year was $60,000

Accounts payable decreased by $18,000

Accounts receivable decreased by $25,000

Inventories increased by $ 5,000

Depreciation expense was $30,000

Income taxes paid was $ 8,000

Net cash provided by operating activities was:

A. $120,000.

B. $44,000.

C. $70,000.

D. $84,000.

E. $30,000.

Question 24. A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $50,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:

A. $50,000.

B. $5,000.

C. $45,000.

D. Zero. This is an operating activity.

E. Zero. This is a financing activity.

Question 25. A company reported that its bonds with a par value of $50,000 and a carrying amount of $57,000 are retired for $60,000 cash, resulting in a loss of $3,000. The amount to be reported under cash flows from financing activities is:

A. $(3,000).

B. $(60,000).

C. $(57,000).

D. Zero. This is an operating activity.

E. Zero. This is an investing activity.