Chapter 21The Statement of Cash FlowsTrue/False Questions1. Amounts held in cash equivalent investments must be reported separately from amounts held as cash on the statement of cash flows. Answer: FalseLearning Objective:Level of Learning: . !enerally spea"ing# cash flows from operating activities include the elements of net income reported on a cash basis. Answer: $rueLearning Objective: % Level of Learning: &. 'n using a spreadsheet to prepare the statement of cash flows# the spreadsheet entries duplicate the actual journal entries used to record the transactions during the year. Answer: $rueLearning Objective: ( Level of Learning: %. 'nterest payments on debt are classified as cash outflows from financing activities. Answer: FalseLearning Objective: ) Level of Learning: *. $ransactions that represent noncash investing and financing should be reported in the statement of cash flows. Answer: $rueLearning Objective: + Level of Learning: ). 'f the direct method is used to report cash flows from operating activities in the body of the statement of cash flows# a reconciliation of net income to net cash flows from operating activities also is required. Answer: $rueLearning Objective: % Level of Learning: 1+. ,ash paid for ta-es and interest must be disclosed on the face of the statement or in the disclosure notes under both the direct and indirect methods of reporting cash flows from operating activities. Answer: $rueLearning Objective: % Level of Learning: 1(. $he purchase of treasury stoc" is an investing cash outflow. Answer: FalseLearning Objective: * Level of Learning: 1.. A decrease in cash dividends payable means that dividends declared were less than dividends paid. Answer: $rueLearning Objective: % Level of Learning: 1/. 0hen one enters a 1*/#/// credit entry to the Land account in a spreadsheet for the statement of cash flows# it represents a negative change in that account and probably is due to selling such assets. Answer: $rueLearning Objective: ( Level of Learning: Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 113Chapter 21The Statement of Cash FlowsMatching Pair Questions2se the following to answer questions 1131*:1131*. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. 'ndicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.Terms:A.Operating cash inflow4.Operating cash outflow,.'nvesting cash inflow5.'nvesting cash outflow6.Financing cash inflowF.Financing cash outflow!.7oncash financing and investing activity8.7ot reported on the statement of cash flowsPhrases: 11. 9999 !ain from the sale of a cash equivalent. 1. 9999 ,ash purchase of inventory. 1&. 9999 ,ash dividends received under the equity method. 1%. 9999 :rincipal payment on a note. 1*. 9999 5istribution of a stoc" dividend. Answer: 113A; 134; 1&3,; 1%3F; 1*382se the following to answer questions 1)3/:1)3/. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. 'ndicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.Terms:A.Operating cash inflow4.Operating cash outflow,.'nvesting cash inflow5.'nvesting cash outflow6.Financing cash inflowF.Financing cash outflow!.7oncash financing and investing activity8.7ot reported on the statement of cash flowsPhrases: 1). 9999 ,ash collected on accounts receivable. 1+. 9999 ,ash collection of a nontrade note receivable. 1(. 9999 ,ash purchase of securities issued by another corporation. 1.. 9999 'ssuance of a long3term note payable for cash. /. 9999 :ayment of a property dividend. Answer: 1)3A; 1+3,; 1(35; 1.36; /3!114 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth EditionChapter 21The Statement of Cash Flows2se the following to answer questions 13*:13*. Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. 'ndicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.Terms:A.Operating activity# no adjustment to net income4.Operating activity# negative adjustment to net income,.Operating activity# positive adjustment to net income5.'nvesting cash inflow6.'nvesting cash outflowF.Financing cash inflow!.Financing cash outflow8.7oncash financing and investing activityPhrases: 1. 9999 'ncrease in inventory account. . 9999 :ayment of cash dividends. &. 9999 ,ash sales. %. 9999 :repayment of an insurance premium for si- months. *. 9999 ,ash proceeds from sale of equipment. Answer: 134; 3!; &3A; %34; *352se the following to answer questions )3&/:)3&/. Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. 'ndicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.Terms:A.Operating activity# no adjustment to net income4.Operating activity# negative adjustment to net income,.Operating activity# positive adjustment to net income5.'nvesting cash inflow6.'nvesting cash outflowF.Financing cash inflow!.Financing cash outflow8.7oncash financing and investing activityPhrases: ). 9999 :ayment of semi3annual interest on bonds payable. +. 9999 Acquisition of a building for cash. (. 9999 5epreciation e-pense. .. 9999 'ssuance of bonds at a discount for cash. &/. 9999 5ecrease in account payable. Answer: )3A; +36; (3,; .3F; &/34Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 115Chapter 21The Statement of Cash Flows2se the following to answer questions &13&*:&13&*. Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. 'ndicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.Terms:A.Operating cash inflow4.Operating cash outflow,.'nvesting cash inflow5.'nvesting cash outflow6.Financing cash inflowF.Financing cash outflow!.7oncash financing and investing activity8.7ot reported on the statement of cash flowsPhrases: &1. 9999 Acquisition of equipment by issuing bonds payable. &. 9999 A? 'ncome statement. 4? 4alance sheet. ,? @tatement of cash flows. 5? @tatement of shareholdersA equity. Answer: ,Learning Objective: 1 Level of Learning: 1%&. 0hich of the following is not required by generally accepted accounting principles> A? ,ash flow per share. 4? 6arnings per share. ,? @tatement of cash flows. 5? 5isclosure notes. Answer: ALearning Objective: 1 Level of Learning: 1%%. 0hich of the following is always reported as an outflow of cash> A? $he accrual of warranty e-pense. 4? $he declaration of a cash dividend. ,? $he purchase of equipment for cash. 5? AmortiBation e-pense. Answer: ,Learning Objective: * Level of Learning: 1%*. 0hich of the following causes a change in cash> A? Accrual of interest payable. 4? A? $he receipt of dividend revenue. 4? $he payment of cash dividends. ,? $he payment of interest on bonds. 5? $he sale of machinery. Answer: 5Learning Objective: * Level of Learning: *1. 0hich of the following is reported as an operating activity on the statement of cash flows> A? $he payment of dividends. 4? $he sale of office equipment. ,? $he payment of interest on long3term notes. 5? $he issuance of a stoc" dividend. Answer: ,Learning Objective: & Level of Learning: *. 0hich of the following is reported as an operating activity on the statement of cash flows> A? $he purchase of operating assets. 4? $he acquisition of treasury stoc". ,? $he retirement of bonds. 5? $he payment of prepaid insurance. Answer: 5Learning Objective: & Level of Learning: 11 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth EditionChapter 21The Statement of Cash Flows*&. 0hich of the following is reported as a financing activity on the statement of cash flows> A? $he sale of securities classified as available for sale. 4? $he acquisition of stoc" for the purpose of retiring it. ,? $he payment of interest on bonds payable. 5? $he receipt of dividend revenue. Answer: 4Learning Objective: ) Level of Learning: *%. 0hich of the following is reported as a financing activity on the statement of cash flows> A? $he amortiBation of a patent. 4? $he e-change of common stoc" for a building. ,? $he acquisition of long3term investments. 5? $he repayment of bonds issued at par. Answer: 5Learning Objective: ) Level of Learning: **. 0hen preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities# depreciation is added to net income because: A? 't was deducted as an e-pense on the income statement# but does not require cash. 4? 't was deducted as an e-pense on the income statement and affects the amount of cash. ,? 't is a significant portion of the yearAs e-penses. 5? 't represents a source or inflow of cash. Answer: ALearning Objective: % Level of Learning: *). 0hich of the following is not classified as an operating activity> A? 'nterest paid on long3term debt. 4? 5ividends received on common stoc". ,? 5ividends paid on common stoc". 5? :ayments on accounts payable. Answer: ,Learning Objective: ) Level of Learning: *+. 0hen a company purchases a security it considers a cash equivalent# the cash outflow is: A? A? ,ash from issuing common stoc". 4? ,ash from issuing bonds. ,? ,ash from issuing preferred stoc". 5? ,ash from the sale of stoc" of a supplier. Answer: 5Learning Objective: ) Level of Learning: +%. 0hich of the following would be reported as a cash outflow from investing activities> A? 'ssuance of bonds. 4? :urchase of land. ,? :ayment of dividends. 5? A? 11%#///. 4? 1(.#///. ,? 1)%#///. 5? 1&.#///. Answer: ,Learning Objective: & Level of Learning: & A? 1%++. 4? 1%*+. ,? 1%.+. 5? 7one of the above is correct. Answer: 4Learning Objective: * Level of Learning: & A? 11#+*/. 4? 11(//. ,? 11#.//. 5? 11//. Answer: 5Learning Objective: ) Level of Learning: & Answer: Da.? ,ash payments to suppliers and employees increased from 1+#*/ million to 11*1 million. Db.? Accounts :ayable and 0agesL@alaries :ayable probably are the accounts that would have changed. Learning Objective: & Level of Learning: & 1&%. 0hat was most responsible for the negative cash flow from financing activities during //%> 0hat amount was paid> Answer: :rincipal payments on long3term debt and capital leases were 1%(* million. Learning Objective: ) Level of Learning: & 1&*. 0hat was most responsible for the positive cash flow from financing activities during //*> 0hat amount was received> Answer: :roceeds from issuance of long3term debt were 11#%.1 million. Learning Objective: ) Level of Learning: & Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 151Chapter 21The Statement of Cash Flows2se the following to answer questions 1&)31&.:'n its //* Annual Answer: $he FA@4 in statement 7o. .* requires the statement of cash flows in direct response to FA@4 ,oncept @tatement 7o. 1# which states as the primary objective of financial reporting to Nprovide information to help investors and creditors# and others assess the amounts# timing# and uncertainty of prospective net cash inflows to the related enterprise.N Learning Objective: 1 Level of Learning: 1%&. 0hy are Ncash equivalentsN included as part of cash on the statement of cash flows> Answer: @"illed managers will invest temporarily idle cash in short3term investments to earn a return on those funds# rather than maintaining an unnecessarily large chec"ing account. $he FA@4 views short3term# highly liquid investments that can be easily converted into cash# with little ris" of loss# to be the equivalent of cash. Learning Objective:Level of Learning: 1%%. 0hat are the general guidelines for an investment to be considered a cash equivalent> Answer: $o be classified as a cash equivalent# an investment must have a maturity date not longer than three months from the date of purchase. $he investment must be easily convertible into cash# with little ris" of loss on the conversion. 8owever# fle-ibility is permitted in designating cash equivalents. 6ach company must establish a policy regarding which short3term# highly liquid investments it classifies as cash equivalents. $he policy should be consistent with the companyAs customary motivation for acquiring various investments and should be disclosed in the notes accompanying the financial statements. Learning Objective:Level of Learning: 11%*. 0hat activities are included on the statement of cash flows under the sectionentitled N,ash flows from investing activitiesN> Answer: ,ash flows from investing activities include the sale or purchase of operating assets# the sale or purchase of nontrading investments# and the collection or ma"ing of loans to others. Learning Objective: * Level of Learning: 1Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 155Chapter 21The Statement of Cash Flows1%). 0hat activities are included on the statement of cash flows under the sectionentitled N,ash flows from financing activitiesN> Answer: ,ash flows from financing activities include the issuance and repurchase of stoc"# the issuance and repayment of bonds and notes# and the payment of cash dividends. Learning Objective: ) Level of Learning: 11%+. 5o Ncash flows from operating activitiesN report all the elements of the income statement on a cash basis> 6-plain. Answer: Although the cash flows from operating activities section of a statement of cash flows reports income statement elements on a cash basis# not all the elements from the income statement are necessarily reported on a cash basis. 7o cash effects are reported for depreciation and amortiBation. Further# no cash effect is reported for gains or losses from the sale of operational assets. 0hen these operational assets are bought and sold# the effect is reported under Ncash flows from investing activities.N Learning Objective: 1 Level of Learning: 1%(. 5oes the statement of cash flows report only transactions that cause an increase or decrease in cash> 6-plain. Answer: A statement of cash flows reports transactions that cause an increase or decrease in cash. 8owever# some transactions that do not increase or decrease cash# but which result in significant investing and financing activities# must be reported in related disclosure notes. 6-amples of noncash transactions that are important or significant enough to be reported include:1? Acquiring an asset by incurring debt or issuing stoc"#? Acquiring an asset by entering into a capital lease#&? ,onverting debt into common stoc"#%? 6-changing noncash assets or liabilities for other noncash assets or liabilities. Learning Objective: 1 Level of Learning: 156 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth EditionChapter 21The Statement of Cash Flows2se the following to answer questions 1%.31*/:'n its //* Annual; Answer: $he accounts receivable balance decreased during //*.$his is apparent because adjustments for current assets are inversely related to the direction of the change in balance. 4ecause the adjustment for accounts receivable was positive# its balance must have decreased. Learning Objective: % Level of Learning: &Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 157