Chapter 16

Chapter 016 Reporting the Statement of Cash Flows
Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/False
Item
DL
LO
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DL
LO
Item
DL
LO
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
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19.
Easy
Easy
Med
Med
Med
Hard
Easy
Med
Med
Med
Hard
Hard
Med
Med
Med
Med
Hard
Hard
Easy
C1
C1
C1
C1
C1
C1
C2
C2
C2
C2
C2
C2
C3
C3
C3
C3
C3
C3
C4
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
Easy
Easy
Med
Easy
Easy
Easy
Med
Med
Hard
Hard
Easy
Easy
Easy
Med
Med
Med
Med
Med
C4
A1
A1
A2
A2
A2
A2
A2
A2
A2
P1
P1
P1
P1
P1
P1
P1
P1
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
Med
Med
Hard
Hard
Hard
Easy
Med
Med
Hard
Hard
Easy
Med
Hard
Med
Hard
Hard
P1
P2
P2
P2
P2
P3
P3
P3
P3
P3
P4
P4
P4
P5
P5
P5
16-1

Multiple Choice
Item
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
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72.
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75.
DL
LO
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DL
LO
Item
DL
LO
Easy
Easy
Easy
Med
Med
Easy
Med
Med
Med
Med
Med
Med
Med
Med
Med
Med
Hard
Hard
Hard
Easy
Med
Med
C1
C1
C1
C1
C1
C2
C2
C2
C2
C2
C2
C2
C2
C2
C2
C2
C2
C2
C2
C3
C3
C3
76.
77.
78.
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81.
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83.
84.
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86.
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90.
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92.
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96.
97.
Med
Hard
Med
Med
Med
Med
Med
Med
Med
Easy
Easy
Easy
Med
Med
Med
Med
Med
Med
Med
Med
Hard
Hard
C3
C3
C4
A1
A1
A2
A2
A2
A2
P1
P1
P1
P1
P1
P1
P1
P2
P2
P2
P2
P2
P2
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
Hard
Hard
Hard
Hard
Hard
Easy
Med
Med
Hard
Hard
Hard
Hard
Hard
Hard
Hard
Med
Med
Med
Easy
Hard
P2
P2
P2
P2
P2
P3
P3
P3
P3
P3
P3
P3
P3
P3
P3
P4
P4
P4
P5
P5
DL
LO
Item
DL
LO
Item
DL
LO
Med
C1,P1
119.
Med
C2,C3
120.
Med
C2,C3
Matching
Item
118.
16-2
Short Essay
Item
121.
122.
123.
124.
DL
LO
Item
DL
LO
Item
DL
LO
Med
Med
Med
Med
C1
C2
C3
C4
125.
126.
127.
128.
Hard
Hard
Med
Med
A1
A1
A2
P1
129.
130.
131.
132.
Hard
Med
Hard
Hard
P2
P3
P4
P5
16-3

Problems
Item
133.
134.
135.
136.
137.
138.
139.
140.
DL
LO
Item
DL
LO
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DL
LO
Med
Med
Med
Med
Hard
Hard
Hard
Med
C3
P2
P2
P2
P2
P2,P3
P2,P3
P3
141.
142.
143.
144.
145.
146.
147.
148.
Med
Med
Med
Med
Med
Med
Hard
Med
P3
P4
P5
P5
P5
P5,C3
P5
P5
149.
150.
151.
152.
153.
154.
155.
Med
Easy
Med
Med
Hard
Hard
Hard
P5
A2
A2
A2
A2
A2
A2
Completion Problems
Item
156.
157.
158.
159,
160.
DL
LO
Item
DL
LO
Item
DL
LO
Easy
Med
Easy
Med
Med
C1
C1
C2
C2
C2
161.
162.
163.
164.
165.
Med
Easy
Hard
Med
Med
C3
C4
A1
A2
P1
166.
167.
168.
169.
170.
Hard
Med
Easy
Med
Hard
P1
P2
P3
P4
P5
16-4
True / False Questions

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.
TRUE
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: C1
2. The statement of cash flows reports the total change in cash.

TRUE
AACSB: Analytic
Difficulty: Easy
3. To be classified as a cash equivalent an investment must be readily convertible to an

unknown amount of cash, because the market value may be affected by interest rate changes.
FALSE
AACSB: Analytic
Difficulty: Medium
4. The statement of cash flows explains the difference between the beginning and ending
balances of cash and cash equivalents.
TRUE
AACSB: Analytic
Difficulty: Medium
16-5
5. Internal users of the statement of cash flows often use cash flow information to plan day-today operating activities and make long-term investment and financing decisions.
TRUE
AACSB: Analytic
Difficulty: Medium
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.
TRUE
AACSB: Analytic
Difficulty: Hard
7. Business activities that generate or use cash are classified as operating, investing, or
financing activities on the statement of cash flows.
TRUE
AACSB: Analytic
Difficulty: Easy
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.
FALSE
AACSB: Analytic
Difficulty: Medium
16-6
9. Cash paid for merchandise is an operating activity.

TRUE
AACSB: Analytic
Difficulty: Medium
10. The purchase of stock in another company is classified as a financing activity.

FALSE
AACSB: Analytic
Difficulty: Medium
11. Cash dividends received and interest received are investing inflows.
FALSE
AACSB: Analytic
Difficulty: Hard
12. The payment of cash dividends to shareholders is classified as a financing activity.

TRUE
AACSB: Analytic
Difficulty: Hard
16-7
13. The full disclosure principle requires that noncash investing and financing activities be
disclosed as part of the statement of cash flows.
TRUE
AACSB: Communications
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
14. Conversion of preferred stock to common stock is disclosed in the financing section of the
statement of cash flows.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
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.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
16. A noncash investing transaction should be disclosed as either a footnote or small schedule
attached to the statement of cash flows.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
16-8
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 its notes.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
18. A purchase of land in exchange for shares of stock is disclosed on the statement of cash
flows or in a note to the statement.
TRUE
AICPA FN: Reporting
Difficulty: Hard
19. Accounting standards require companies to include a statement of cash flows in a

complete set of financial statements.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
20. The statement of cash flows explains how transactions and events impact the end-ofperiod cash balance to produce the end-of-period net income balance.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
16-9
21. Most managers stress the importance of understanding and predicting cash flows for
business decisions.
TRUE
AACSB: Analytic
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: A1
22. Managers only use the cash flow statement to evaluate the net cash increase or decrease,
and do not pay much attention to the details of cash flows from operating activities, cash
flows from investing activities, and cash flows from financing activities.
FALSE
AACSB: Analytic
Difficulty: Medium
23. A cash-based measure to help business decision makers estimate the amount and timing of
cash flows is the cash flow on total assets ratio.
TRUE
AACSB: Analytic
Difficulty: Easy
24. The cash flow on total assets ratio can be used as an indicator of earnings quality.
TRUE
AACSB: Analytic
Difficulty: Easy
16-10
25. Cash flow amounts and their timing should be considered when planning and analyzing
operating activities.
TRUE
AACSB: Analytic
Difficulty: Easy
26. The cash flow on total assets ratio is defined as cash flows from operations divided by
average total assets.
TRUE
AACSB: Analytic
Difficulty: Medium
27. The cash flow on total assets ratio is defined as average total assets divided by operating
income.
FALSE
AACSB: Analytic
Difficulty: Medium
28. The cash flow on total assets ratio reflects actual cash flows and is therefore affected by
the accounting constraints of recognition and measurement for net income.
FALSE
AACSB: Analytic
Difficulty: Hard
16-11
29. A cash coverage ratio of less than 1 indicates cash inadequacy to meet asset growth.
TRUE
AACSB: Analytic
Difficulty: Hard
30. The usual first step in preparing the statement of cash flows is computing the net increase
or net decrease in cash.
TRUE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P1
31. Both the direct and indirect methods yield the identical net cash flow amount provided or
used by operating activities.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
32. The reporting of financing activities is identical under either the direct and indirect
methods for preparing the statement of cash flows.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
16-12

33. The FASB recommends that the operating section of the statement of cash flows be
reported using the direct method.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
34. Since it is recommended by the FASB, the direct method of preparing the statement of
cash flows is most frequently used.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
35. Information to prepare the statement of cash flows usually comes from (a) comparative
balance sheets, (b) current income statement, and (c) additional information.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
36. The direct method for preparing and reporting the statement of cash flows reports net
income and then adjusts it for items necessary to calculate net cash provided or used by
operating activities.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
16-13
37. The indirect method reports individual operating cash outflows and cash inflows by
activity.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
38. Companies have the option of using either the direct or indirect method to prepare the
operating section of the statement of cash flows.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
39. When preparing the operating section of the statement of cash flows using the indirect
method, noncash operating expenses are added back to net income.
TRUE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
method, nonoperating gains are added to net income.
FALSE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-14
method, a decrease in accounts receivable is subtracted from net income.
FALSE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
method, an increase in income taxes payable is added to net income.
TRUE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
43. Financing activities include receiving cash dividends from investments in other
companies' stocks.
FALSE
AACSB: Analytic
Difficulty: Easy
44. Investing activities include: (a) the purchase and sale of long-term assets, (b) lending and
collecting on notes receivable, (c) the purchase and sale of short-term investments other than
cash equivalents.
TRUE
AACSB: Analytic
Difficulty: Medium
16-15
45. Financing activities include receiving cash from issuing debt and receiving cash dividends
from investments in other companies' stocks.
FALSE
AACSB: Analytic
Difficulty: Medium
46. The payment of cash dividends never changes the balance of retained earnings.
FALSE
AACSB: Analytic
Difficulty: Hard
47. Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of
$10,000. This implies that $40,000 cash was received from the sale.
FALSE
AACSB: Analytic
Difficulty: Hard
16-16
48. A spreadsheet can help organize the information needed to prepare a statement of cash
flows.
TRUE
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Difficulty: Easy
49. On a spreadsheet used to prepare the operating section of the statement of cash flows,
depreciation expense does not require an entry in the Analysis of Changes columns because it
is a noncash item.
FALSE
AACSB: Technology
Difficulty: Medium
50. When using a spreadsheet to prepare the statement of cash flows, a decrease in accounts
payable is entered in the Analysis of Changes columns with a debit in the statement of cash
flows section and a credit in the balance sheet section.
FALSE
AACSB: Technology
Difficulty: Hard
51. Depreciation expense is not reported on the statement of cash flows when prepared using
the direct method.
TRUE
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-17
52. The FASB requires a reconciliation of net income to net cash provided or used by
operating activities when the direct method is used.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
53. The gain or loss from retirement of debt is reported under cash flows from operations on
the statement of cash flows using the direct method.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
Multiple Choice Questions

54. The statement of cash flows reports:
A. Assets, liabilities, and equity.
B. Revenues, gains, expenses, and losses.
C. Cash inflows and cash outflows for an accounting period.
D. Equity, net income, and dividends.
E. Changes in equity.
AICPA FN: Reporting
Difficulty: Easy
16-18
55. The statement of cash flows reports:

A. Cash flows from operating activities.
B. Cash flows from financing activities.
C. Cash flows from investing activities.
D. Significant noncash financing and investing activities.
E. All of these.
AICPA FN: Reporting
Difficulty: Easy
56. The statement of cash flows is:

A. Another name for the statement of financial position.
B. A financial statement that presents information about changes in equity during a period.
C. A financial statement that reports the cash inflows and cash outflows for an accounting
period, and that classifies those cash flows as operating activities, investing activities, or
financing activities.
D. A financial statement that lists the types and amounts of assets, liabilities, and equity of a
business on a specific date.
E. A financial statement that lists the types and amounts of the revenues and expenses of a
business for an accounting period.
AICPA FN: Reporting
Difficulty: Easy
16-19
57. A cash equivalent is an investment that:

A. Is readily convertible to a known amount of cash.
B. Is sufficiently close to its maturity date so its market value is unaffected by interest rate
changes.
C. Generally is within 3 months of its maturity date.
D. Is highly liquid.
E. All of these.
AACSB: Analytic
Difficulty: Medium
58. An investment that is readily convertible to a known amount of cash and that is
sufficiently close to its maturity date so that its market value is relatively insensitive to
interest rate changes is a(n):
A. Short-term marketable equity security.
B. Operating activity.
C. Common stock.
D. Cash equivalent.
E. Financing activity.
AACSB: Analytic
Difficulty: Medium
16-20
59. 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
classified as:
A. Financing activities.
B. Investing activities.
C. Operating activities.
D. Direct activities.
E. Indirect activities.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
60. The appropriate section in the statement of cash flows for reporting the purchase of
equipment for cash is:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Schedule of noncash investing or financing activity.
E. None of these. This is not reported on the statement of cash flows.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
61. Which of the following items is reported on the statement of cash flows under financing
activities?
A. Declaration of a cash dividend.
B. Payment of a cash dividend.
C. Declaration of a stock dividend.
D. Payment of a stock dividend.
E. Stock split.
AACSB: Analytic
Difficulty: Medium
16-21
62. Investing activities include the:

A. Purchase of plant assets.
B. Lending and collecting on notes receivable.
C. Sale of short-term investments other than cash equivalents.
D. Sale of plant assets.
E. All of these.
AACSB: Analytic
Difficulty: Medium
63. The appropriate section in the statement of cash flows for reporting the cash payment of
wages is:
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
64. The appropriate section in the statement of cash flows for reporting the issuance of
common stock for cash is:
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-22
65. A company's transactions with its creditors to borrow money and/or to repay the principal
amounts of loans are reported as cash flows from:
B. Investing activities.
C. Financing activities.
D. Direct activities.
E. Indirect activities.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
66. The appropriate section in the statement of cash flows for reporting the receipt of cash
dividends from investments in securities is:
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
67. Which one of the following is representative of typical cash flows from operating
activities?
A. Proceeds from collecting the principal amount of loans.
B. Repayment of principal on loans.
C. Proceeds from the issuance of bonds and notes payable.
D. Payments by a merchandiser to acquire equity securities of other companies.
E. Receipts of cash sales.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-23
68. Typical cash flows from investing activities include:

A. Payments to purchase property, plant and equipment or other productive assets (excluding
inventory).
B. Proceeds from the sale (discounting) of notes receivable made by the company.
C. Proceeds from collecting the principal amount of notes receivable.
D. Payments to acquire held-to maturity securities of other entities, except cash equivalents.
E. All of these.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
69. If a company borrows money from a bank, the interest paid on this loan should be
reported on the statement of cash flows as a(n):
A. Operating activity.
B. Investing activity.
C. Financing activity.
D. Noncash investing and financing activity.
E. None of these. This is not reported in the statement of cash flows.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
70. Cash flows from selling trading securities are usually reported in the statement of cash
flows as part of:
D. Noncash activities.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-24
71. Which of the following is included in the cash flows from financing activities section of
the statement of cash flows?
A. Interest revenue.
B. Sale of equipment.
C. Interest expense.
D. Purchase of treasury stock.
E. Purchase of stock in another company.
AACSB: Analytic
Difficulty: Hard
72. Cash flows from interest received are reported in the statement of cash flows as part of:
D. Noncash activities.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
73. The accounting principle that requires significant noncash financing and investing
activities be reported on the statement of cash flows is the:
A. Historical cost principle.
B. Materiality principle.
C. Full disclosure principle.
D. Going concern principle.
E. Business entity principle.
AICPA FN: Reporting
Difficulty: Easy
16-25
74. The appropriate section in the statement of cash flows for reporting the purchase of land in
exchange for common stock is:
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
75. The purchase of long-term assets by issuing a note payable for the entire amount is
reported on the statement of cash flows in the:
D. Schedule of noncash financing and investing activities.
AICPA FN: Reporting
Difficulty: Medium
76. An example of a transaction that must be disclosed as a noncash investing and financing
activity includes:
A. The retirement of debt by issuance of equity.
B. The purchase of long-term assets financed by a cash down payment and a note payable to
the seller for the balance.
C. The leasing of assets in a transaction that qualifies as a capital lease.
D. The purchase of noncash assets in exchange for equity or debt securities.
E. All of these.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-26
77. Noncash investing and financing activities may be disclosed in:

A. A note to the statement of cash flows.
B. A separate schedule attached to the statement of cash flows.
C. The investing activities section of the statement of cash flows.
D. The financing activities section of the statement of cash flows.
E. Both a and b.
AICPA FN: Reporting
Difficulty: Hard
78. Accounting standards:

A. Allow companies to omit the statement of cash flows from a complete set of financial
statements if cash is an insignificant asset.
B. Require that companies omit the statement of cash flows from a complete set of financial
statements if the company has no investing activities.
C. Require that companies include a statement of cash flows in a complete set of financial
statements.
D. Allow companies to include the statement of cash flows in a complete set of financial
statements if the cash balance makes up more than 50% of the current assets.
E. Allow companies to omit the statement of cash flows from a complete set of financial
statements if the company has no financing activities.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
16-27
79. The statement of cash flows helps analysts evaluate the:

A. Source of cash for debt repayments.
B. Source of cash for plant expansion.
C. Differences between net income and net operating cash flow.
D. Means used to finance investing activities.
E. All of these.
AACSB: Analytic
Difficulty: Medium
80. The statement of cash flows helps address questions such as

A. How is the increase in investments financed?
B. What is the source of cash for new plant assets?
C. How much cash is generated from or used in operations?
D. Why is cash flow from operations different from income?
E. All of these.
AACSB: Analytic
Difficulty: Medium
81. The cash flow on total assets ratio:

A. Is the same as return on assets.
B. Is the same as profit margin.
C. Can be an indicator of earnings quality.
D. Is highly affected by accounting principles of income recognition and measurement.
E. Is average net assets divided by cash flows from operations.
AACSB: Analytic
Difficulty: Medium
16-28
82. The cash flow on total assets ratio is calculated by:

A. Dividing cash flows from operations by average total assets.
B. Dividing total cash flows by average total assets.
C. Dividing average total assets by cash flows from investing activities.
D. Dividing average total assets by total cash flows.
E. Total cash flows divided by average total assets times 365.
AACSB: Analytic
Difficulty: Medium
83. A company had net cash flows from operations of $120,000, total cash flows of $500,000,
and average total assets of $2,500,000. The cash flow on total assets ratio equals:
A. 4.8%.
B. 5.0%.
C. 20.0%.
D. 20.8%.
E. 24.0%.
$120,000/$2,500,000 = 4.8%
AACSB: Analytic
Difficulty: Medium
16-29
84. A company had total assets of $1,760,000, total cash flows of $1,320,000, and cash flows
from operations of $205,000. This implies its cash flow on total assets ratio equals:
A. 1.33%.
B. 8.58%.
C. 11.65%.
D. 15.5%.
E. 75%.
$205,000/$1,760,000 = 11.65%
AACSB: Analytic
Difficulty: Medium
85. Preparation of the statement of cash flows involves:

A. Computing the net increase or decrease in cash.
B. Computing and reporting net cash provided or used by operations.
C. Computing and reporting net cash provided or used by investing activities.
D. Computing and reporting net cash provided or used by financing activities.
E. All of these.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
16-30
86. The reporting of net cash provided or used by operating activities that lists the major items
of operating cash receipts, such as receipts from customers, and subtracts the major items of
operating cash disbursements, such as cash paid for merchandise, is referred to as the:
A. Direct method of reporting net cash provided or used by operating activities.
B. Cash basis of accounting.
C. Classified statement of cash flows.
D. Indirect method of reporting net cash provided or used by operating activities.
E. Net method of reporting cash flows from operating activities.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
87. A statement of cash flows should reconcile the differences between the beginning and
ending balances of:
A. Net income.
B. Equity.
C. Cash and cash equivalents.
D. Working capital.
E. Cash, cash equivalents, and short-term investments.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
16-31
88. The direct method for the preparation of the operating activities section of the statement of
cash flows:
A. Separately lists each major item of operating cash receipts and cash payments.
B. Reports adjustments to reconcile net income to net cash provided or used by operating
activities in the statement.
C. Reports a different amount of cash flows from operations than if the indirect method is
used.
D. Is required if the company is a merchandiser.
E. Is required by the FASB.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
89. The indirect method for the preparation of the operating activities section of the statement
of cash flows:
A. Separately lists each major item of operating cash receipts.
B. Separately lists each major item of operating cash payments.
C. Reports net income and then adjusts it for items necessary to determine net cash provided
or used by operating activities.
D. Is required if the company is a merchandiser.
E. Must not be used in all circumstances.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-32
90. The direct method of reporting operating cash flows:

A. Is recommended but not required by the FASB.
B. Must be used by all companies.
C. Is used by most companies.
D. Is considered supplementary disclosure.
E. Is not recommended by the FASB, but is commonly used.
AICPA FN: Reporting
Difficulty: Medium
91. Of the following, which one affects cash during a period?

A. The declaration of a stock dividend.
B. Writing off an uncollectible account receivable.
C. The declaration of a cash dividend.
D. An adjusting entry recognizing the expiration of prepaid insurance.
E. The payment of interest expense accrued in a previous accounting period.
AACSB: Analytic
Difficulty: Medium
92. When using the indirect method to calculate and report the net cash provided or used by
operating activities, net income is adjusted for:
A. Gains and losses from nonoperating items.
B. Revenues and expenses that did not provide or use cash.
C. Changes in noncash current assets and current liabilities related to operating activities.
D. Changes in current liabilities related to operating activities.
E. All of these.
AACSB: Analytic
Difficulty: Medium
16-33
93. When using the indirect method to calculate and report net cash provided or used by
operating activities, which of the following is subtracted from net income?
A. Decrease in income taxes payable.
B. Depreciation expense.
C. Amortization of intangible assets.
D. Bad debts expense.
E. Decrease in merchandise inventory.
AACSB: Analytic
Difficulty: Medium
94. The first line item in the operating activities section of a spreadsheet for a statement of
cash flows prepared using the indirect method is:
A. Cash.
B. Cash received from customers.
C. Increase (decrease) in accounts receivable.
D. Net income.
E. Adjustments to net income.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
95. When preparing a statement of cash flows on the indirect method, each of the following
should be classified as an operating activity cash flow except:
A. An increase in accounts receivable.
B. A decrease in accounts payable.
C. A gain from disposal of a long-term asset
D. An increase in prepaid expenses.
E. A decrease in accrued expenses payable.
AACSB: Analytic
Difficulty: Medium
16-34
96. A company's Inventory balance at 12/31/09 was $200,000 and was $188,000 at 12/31/08.
Its Accounts Payable balance at 12/31/09 was $80,000 and was $84,000 at 12/31/08, and its
cost of goods sold for 2010 was $720,000. The company's total amount of cash payments for
merchandise in 2010 equals:
A. $704,000.
B. $712,000.
C. $720,000.
D. $728,000.
E. $736,000.
Decrease in merchandise = $200,000 - $188,000 = $12,000
Purchases = $720,000 - $12,000 = $708,000
Increase in Accounts Payable = $84,000 - $80,000 = $4,000
Cash paid for merchandise = $708,000 - $4,000 = $704,000
AACSB: Analytic
Difficulty: Hard
97. Use the following information to calculate cash paid for wages and salaries:
A. $157,400.
B. $163,800.
C. $168,000.
D. $172,200.
E. $174,400.
Increase in Salaries Payable = $10,600 - $6,400 = $4,200
Cash paid for salaries = $168,000 - $4,200 = $163,800
AACSB: Analytic
Difficulty: Hard
16-35
98. Use the following information about the current year's operations of a company to
calculate the cash paid for merchandise.
A. $218,000.
B. $223,200.
C. $220,000.
D. $228,800.
E. $234,000.
Increase in inventory = $57,400 - $54,800 = $2,600
Purchases = $226,000 + $2,600 = $228,600
Increase in Accounts payable = $59,800 - $54,400 = $5,400
Cash paid for Merchandise = $228,600 - $5,400 = $223,200
AACSB: Analytic
Difficulty: Hard
99. When preparing a statement of cash flows on the indirect method, which of the following
is correct?
A. Proceeds from the sale of equipment should be added to net income in the operating
activities section.
B. A loss on the sale of land should be added to net income in the operating activities section.
C. The declaration of a cash dividend should be a use of cash in the financing activities
section.
D. The issuance of a stock dividend should be a use of cash in the financing activities section.
E. The purchase of land and a building by issuing a long-term note payable should be a source
of cash in the financing activities section.
AACSB: Analytic
Difficulty: Hard
16-36
100. A company's income statement showed the following: net income, $124,000;
depreciation expense, $30,000; and gain on sale of plant assets, $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.
AACSB: Analytic
Difficulty: Hard
16-37
101. Use the following information and the indirect method to calculate the net cash provided
or used by operating activities:
A. $12,700.
B. $13,900.
C. $20,900.
D. $28,400.
E. $35,900.
AACSB: Analytic
Difficulty: Hard
16-38
102. In preparing a company's statement of cash flows for the most recent year on the indirect
method, the following information is available:
Net cash provided by operating activities was:

A. $120,000.
B. $44,000.
C. $70,000.
D. $84,000.
E. $30,000.
AACSB: Analytic
Difficulty: Hard
16-39
103. 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.
AACSB: Analytic
Difficulty: Easy
104. A company reported that its bonds with a par value of $50,000 and a carrying value 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.
AACSB: Analytic
Difficulty: Medium
16-40
105. Becker Corporation paid cash dividends totaling $75,000 during its most recent fiscal
year. How should this information be reported on Becker's statement of cash flows?
A. In operating activities as a source of funds.
B. In investing activities as a source of funds.
C. In investing activities as a use of funds.
D. In financing activities as a source of funds.
E. In financing activities as a use of funds.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
106. Use the following information to calculate cash received from dividends:
A. $26,400.
B. $29,000.
C. $29,800.
D. $30,600.
E. $32,400.
Increase in Dividends Receivable = $3,400 - $2,600 = $800
Cash received from dividends = $29,800 - $800 = $29,000
AACSB: Analytic
Difficulty: Hard
16-41
107. Analysis reveals that a company had a net decrease in cash of $4,000 for the current year.
Net cash provided by operating activities was $18,000; net cash used in investing activities
was $10,000 and net cash used in financing activities was $12,000. If the year-end cash
balance is $21,000, the beginning cash balance was:
A. $ 3,000.
B. $ 7,000.
C. $17,000.
D. $25,000.
E. $39,000.
AACSB: Analytic
Difficulty: Hard
108. Stojko Corporation had a net decrease in cash of $10,000 for the current year. Net cash
used in investing activities was $52,000 and net cash used in financing activities was $38,000.
What amount of cash was provided (used) in operating activities?
A. $ 100,000 provided.
B. $(100,000) used.
C. $ 80,000 provided.
D. $ (80,000) used.
E. $ (10,000) used.
$10,000 - $52,000 - $38,000 = $80,000
AACSB: Analytic
Difficulty: Hard
16-42
109. The accountant for Robinson Company is preparing the company's statement of cash
flows for the fiscal year just ended. The following information is available:
What is the ending balance for retained earnings?

A. $276,000.
B. $202,000.
C. $254,000.
D. $248,000.
E. $174,000.
AACSB: Analytic
Difficulty: Hard
16-43
110. The accountant for Robinson Company is preparing the company's statement of cash
flows for the fiscal year just ended. The following information is available:
The amount of cash dividends paid during the year would be:
A. $70,000.
B. $46,000.
C. $22,000.
D. $39,000.
E. $24,000.
AACSB: Analytic
Difficulty: Hard
16-44
111. In preparing a company's statement of cash flows for the most recent year, the following
information is available:
Net cash flows from investing activities for the year were:
A. $134,000 of net cash used by investing activities.
B. $134,000 of net cash provided by investing activities.
C. $120,000 of net cash used by investing activities.
D. $252,000 of net cash used by investing activities.
E. $221,000 of net cash provided by investing activities.
AACSB: Analytic
Difficulty: Hard
16-45
112. In preparing a company's statement of cash flows for the year just ended, the following
information is available:
Net cash flows from financing activities for the year were:
A. $130,000 of net cash used by financing activities.
B. $165,000 of net cash used by financing activities.
C. $222,000 of net cash used by financing activities.
D. $88,000 of net cash used by financing activities.
E. $206,000 of net cash used by financing activities.
AACSB: Analytic
Difficulty: Hard
16-46
113. When analyzing the changes on a spreadsheet used to prepare a statement of cash flows,
the cash flows from operating activities generally affect:
A. Net income, current assets, and current liabilities.
B. Noncurrent assets.
C. Noncurrent liability and the equity accounts.
D. Both noncurrent assets and noncurrent liabilities.
E. Equity accounts only.
AACSB: Technology
Difficulty: Medium
the cash flows from investing activities generally affect:
AACSB: Technology
Difficulty: Medium
the cash flows from financing activities generally affect
AACSB: Technology
Difficulty: Medium
16-47
116. Which of the following transactions or events should be reported as a source of cash
from operating activities when using the direct method?
A. Credit sales.
B. Cash collections from customers.
C. Depreciation expense.
D. Cash received from the sale of a building.
E. Cash received from the sale of treasury stock.
AACSB: Analytic
Difficulty: Easy
117. When the operating activities section of the statement of cash flows is reported using the
direct method, the FASB requires:
A. The preparation of the statement of cash flows under the indirect method be completed and
reported with the statement of cash flows prepared using the direct method.
B. A reconciliation of net income to net cash provided or used by operating activities.
C. Footnotes to the financial statements disclosing the difference between net income and the
cash provided or used by financing activities.
D. The income statement to be prepared under the cash basis of accounting.
E. Noncash investing and financing activities be included in the statement of cash flows.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-48
Matching Questions
118. Match each of the following items with the appropriate definitions.
1. Indirect
method
2. Statement of
cash flows
3. Direct
method
4. Investing
activities
5. Operating
activities
6. Financing
activities
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 (used) by operating
activities.
Activities that involve the production or purchase of
merchandise and the sale of goods or services to customers,
including expenditures related to administering the business.
A financial statement that reports the cash inflows and cash
outflows for an accounting period, and classifies those cash
flows as operating, investing, or financing activities.
Transactions with a company's owners and creditors that
include obtaining cash from issuing debt and repaying the
amounts borrowed, and obtaining cash from or distributing
cash to owners.
A calculation of the net cash provided (used) by operating
activities that lists the major items of operating cash receipts,
and then subtracts the major items of operating cash
payments.
Transactions that include making and collecting notes
receivable or purchasing and selling plant assets, or
investments in other than cash equivalents and trading
securities.
AICPA BB: Industry
Difficulty: Medium
16-49
1
5
2
119. For each of the following items, indicate whether it would be classified as an (O)
operating activity, an (I) investing activity, a (F) financing activity, or a significant (N)
noncash financing and investing activity.
1. Issued bonds payable for cash.
2. Purchases of land for cash.
3. Collected accounts receivable from customers.
4. Paid wages to employees.
5. Purchased land in exchange for a note payable.
6. Paid cash dividends.
7. Issued stock for cash.
8. Received cash dividends from investments in trading securities.
9. Sold equipment for cash.
10. Received interest from investments in trading securities.
O
O
F
O
F
I
N
F
O
I
8
3
1
4
7
9
5
6
10
2
AACSB: Analytic
Difficulty: Medium
120. For each of the following items, indicate whether it would be classified as either an (O)
operating activity, an (I) investing activity, a (F) financial activity, or a significant (N) noncash
financing and investing activity.
1. Signed a note payable in exchange for cash.
2. Paid cash to settle an account payable.
3. Reissued its own treasury stock.
4. Purchased supplies for cash.
5. Sale of land for cash.
6. Purchased a warehouse in exchange for shares of its stock.
7. Purchased equipment in exchange for a 6-month note payable.
8. Purchased equipment for cash.
9. Cash sales of merchandise.
10. Paid interest on a note payable.
AACSB: Analytic
Difficulty: Medium
16-50
O
I
F
O
O
N
O
F
I
N
9
5
1
4
2
6
10
3
8
7
Short Answer Questions

121. Explain the purpose and format of the statement of cash flows. Also describe its
relevance to decision makers.
The purpose of the statement of cash flows is to report the cash inflows and cash outflows for
an accounting period. The cash flows are classified as either operating, financing or investing
activities. Decisions using the evaluation of cash flows include those by both internal and
external decision makers. External decision makers decide whether to invest in or lend money
to a company. Internal decision makers evaluate the impact of cash flows for decisions such
as keeping or ending a product line, outsourcing a product, or downsizing a division.
AACSB: Analytic
Difficulty: Medium
122. Define and discuss the differences between operating, investing, and financing activities.
Operating activities involve the day-to-day business activities that generate operating income.
Examples are production and purchase of merchandise, the sale of goods to customers, and
the expenditures to administer the business. Investing activities generally include those
transactions that affect long-term assets. They also include the purchase and sale of short-term
investments other than cash equivalents and trading securities, and lending and collecting
from notes receivable. Financing activities include those transactions and events that affect
long-term liabilities and equity. They also include borrowing and repaying principle amounts
of both long- and short-term notes.
AACSB: Analytic
Difficulty: Medium
16-51
123. Define and explain significant noncash investing and financing activities and the method
of reporting them on the statement of cash flows.
Noncash investing and financing activities involve the purchase or sale of assets which are
financed via noncash sources, such as borrowing funds or exchanging stock for assets. These
activities are disclosed in either a note to the statement of cash flows or in a separate schedule
reported with the statement of cash flows.
AACSB: Analytic
Difficulty: Medium
124. Describe the format of the statement of cash flows, including the reporting of significant
noncash investing and financing activities.
The statement of cash flows involves reporting cash receipts and cash payments organized
into three categories: operating, financing, and investing. Noncash financing and investing
items are reported in a note or in a separate schedule with the statement. The statement
reconciles the beginning and ending cash and cash equivalents balances and explains the
amount of net increase or decrease in this balance.
AACSB: Analytic
Difficulty: Medium
16-52
125. Explain the value of separating cash flows into operating activities, investing activities,
and financing activities to financial statement users in analyzing cash flows and the
company's financial performance and condition.
By separating cash flows into three categories, the statement of cash flows allows users to
focus their analysis on specific areas of importance. The operating section of the statement
reveals the net effect of cash inflows and cash outflows from the core activities of a business
which directly affect its operating income. Operating cash flows indicate the health of a
business. A business with a declining or negative amount of cash from operating activities
may be in financial difficulty. Analysis of the financing section reveals to financial statement
users how a business raises funds from the outside. Analysis of the investing activity section
reveals whether or not a firm is acquiring new assets and disposing of existing assets and thus
investing in the future of the company.
AACSB: Analytic
Difficulty: Hard
126. An analysis of Hamilton Company's cash flows revealed that net cash used in investing
activities was $52,000 and net cash used in financing activities was $38,000. These uses led to
an overall decrease in the company's cash position of $10,000. Provide an analysis of this
company's overall cash performance.
At first glance, the net decrease in the cash position may seem to indicate negative
performance. However, the use of cash in investing activities and financing activities could
actually indicate strong performance. The cash used in investing activities could have been
used for the purchase of newer, more efficient plant assets which will in turn increase the
company's production efficiency. The cash used in investing activities might also indicate that
excess cash has been placed in higher-yield investments. The cash used in financing activities
was most likely used to reduce debt thus reducing the company's debt risk.
AACSB: Analytic
Difficulty: Hard
16-53
127. Define the cash flow on total assets ratio and explain how it is used to evaluate cash
flows and to assess company performance.
The cash flow on total assets ratio is defined as cash flows from operations divided by
average total assets. The ratio can be used as a measure of the quality of earnings. The
analysis of this ratio is commonly performed over time to determine trends in operating cash
flows, especially as compared with operating income.
AACSB: Analytic
Difficulty: Medium
128. What are the five usual steps involved in the preparation of the statement of cash flows?
The preparation of the statement of cash flows involves five common steps: (1) compute the
net increase or decrease in cash; (2) compute the net cash used or provided by operating
activities; (3) compute the net cash provided or used by investing activities (4) compute net
cash provided or used by financing activities; (5) prove and report beginning and ending cash
balance.
AACSB: Analytic
Difficulty: Medium
129. Explain how the cash flows from operating activities section of the statement of cash
flows is prepared using the indirect method.
The indirect method for preparing the operating section of the statement of cash flows is the
most widely used method. The indirect method starts with net income and then adjusts net
income for (1) changes in non-cash current assets and current liabilities, (2) operating items
not providing or using cash, (3) nonoperating gains and losses.
AACSB: Analytic
Difficulty: Hard
16-54
130. Explain how cash flows from investing and financing activities are determined.
Cash flows from investing activities are determined by identifying changes in all noncurrent
asset accounts, the current accounts for both notes receivable and investments in securities
(excluding trading securities). Cash flows from financing activities are determined by
identifying changes in all noncurrent liability accounts and the equity accounts.
AACSB: Analytic
Difficulty: Medium
131. Explain the use of a spreadsheet in the preparation of the statement of cash flows.
The spreadsheet provides an analytical framework for the preparation of the statement of cash
flows. The upper portion of the spreadsheet is used to analyze the changes in balance sheet
accounts for the accounting period. The lower portion of the spreadsheet is organized into the
statement of cash flows activities of operating, financing, investing, and noncash. Changes in
the balances analyzed in the top section are then entered into the appropriate section of the
cash flows in the lower section of the spreadsheet.
AACSB: Technology
Difficulty: Hard
16-55
132. Explain how the cash flows from operating activities section of the statement of cash
flows is prepared using the direct method.
The direct method for reporting cash flows provided or used by operations (which is
recommended by the FASB) involves listing separately the major items of operating cash
inflows and cash outflows. The operating cash outflows are then subtracted from operating
cash inflows to obtain the net inflow or net outflow of cash. A separate schedule reporting the
reconciliation between net income and net cash provided or used by operating activities is
required.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
Problems
133. Use the following company information to prepare a schedule of significant noncash
investing and financing activities:
(a) Sold a building with a book value of $125,000 for $195,000 cash and land with a book
value of $32,000 for $65,000 cash.
(b) Issued 10,000 shares of $10 par value common stock in exchange for equipment with a
market value of $135,000.
(c) Retired a $100,000, 10% bond by issuing another $100,000, 12% bond issue.
(d) Acquired land by issuing a ten-year, 9%, $44,000 note payable.
AACSB: Analytic
Difficulty: Medium
16-56
134. Based on the following information provided about a company's operations, calculate its
cost of goods purchased and its cash paid for merchandise.
AACSB: Analytic
Difficulty: Medium
16-57

135. Use the following income statement and information about selected current assets and
current liabilities to calculate the net cash provided or used by operating activities using the
direct method.
Selected beginning and ending balances of current asset and current liability accounts, all of
which relate to operating activities, are as follows:
16-58
AACSB: Analytic
Difficulty: Medium
16-59

136. Based on the following income statement and balance sheet for Rashid Corporation,
determine the cash flows from operating activities using the indirect method.
16-60
AACSB: Analytic
Difficulty: Medium
16-61

137. Martin, Inc.'s, income statement is shown below. Based on this income statement and the
other information provided, calculate the net cash provided by operations using the indirect
method.
16-62
AACSB: Analytic
Difficulty: Hard
16-63

138. The following information is available for the Ehrens Corporation:
Additional information:
(1) There was no gain or loss on the sales of the long-term investments, nor on the bonds
retired.
16-64

(2) Old equipment with an original cost of $37,550 was sold for $2,100 cash.
(3) New equipment was purchased for $67,550 cash.
(4) Cash dividends of $33,600 were paid.
(5) Additional shares of stock were issued for cash.
Prepare a complete statement of cash flows for calendar-year 2009 using the indirect method.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-65

139. The following information is available for the Eldridge Company:
Additional information:
(1) There was no gain or loss on the sales of the long-term investments, nor on the bonds
retired.
16-66

(2) Old machinery with an original cost of $45,060 was sold for $2,520 cash.
(3) New machinery was purchased for $81,060 cash.
(4) Cash dividends of $40,320 were paid.
(5) Additional shares of stock were issued for cash.
Prepare a complete statement of cash flows for calendar-year 2009 using the indirect method.
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-67
140. Use the following company information to calculate its net cash provided or used by
investing activities:
(a) Equipment with a book value of $125,000 and an original cost of $220,000 was sold at a
gain of $22,000.
(b) Paid $49,000 cash for a new truck.
(c) Sold land costing $30,000 for $26,000 cash, realizing a $4,000 loss.
(d) Purchased treasury stock for $53,000 cash.
(e) Long-term investments in stock are sold for $41,000 cash, realizing a gain of $3,500.
AACSB: Analytic
Difficulty: Medium
141. Use the following information to calculate the net cash provided or used by financing
activities for the Brooks Corporation:
(a) Net income, $10,000
(b) Sold common stock for $4,000 cash
(c) Paid cash dividend of $3,000
(d) Paid bond payable, $8,000
(e) Purchased equipment for $12,000 cash
AACSB: Analytic
Difficulty: Medium
16-68

142. Based on the information provided below, complete the following worksheet to be used
to prepare the statement of cash flows.
(a) Net income for the year was $30,000.
(b) Dividends of $10,000 were declared and paid.
(c) Stylish's only noncash expense was depreciation which totaled $50,000.
(d) The company purchased plant assets for $70,000.
(e) Notes payable in the amount of $40,000 were issued during the year for cash.
16-69
16-70
AACSB: Analytic
Difficulty: Medium
16-71
143. The following selected account balances are taken from a merchandising company's
records:
(a) Calculate the cash payments made during 2010 for merchandise. Assume all of the
company's accounts payable balances result from merchandise purchases.
(b) Calculate the cash receipts from customer sales during 2010.
(c) Calculate the cash payments for salaries during 2010.
AACSB: Analytic
Difficulty: Medium
16-72

144. Use the following calendar-year information to prepare David Company's statement of
cash flows using the direct method:
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-73

145. For each of the following separate cases, use the information provided to calculate the
missing cash inflow or cash outflow:
16-74
AACSB: Analytic
Difficulty: Medium
16-75

146. Use the following information about the calendar-year cash flows of MacArthur
Company to prepare a statement of cash flows (direct method) and a schedule of noncash
investing and financing activities.
16-76
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-77

147. For each of the following independent cases, use the information provided to calculate
the missing cash inflow or cash outflow:
16-78
AACSB: Analytic
Difficulty: Hard
16-79

148. Water Girl Corp.'s 2009 income statement follows:
Required:
Calculate the company's net cash provided or used by operating activities using the direct
method.
16-80
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
16-81

149. Based on the following income statement and balance sheet for Montego Bay
Corporation, determine the cash flows from operating activities using the direct method.
16-82
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Medium
150. A company reported operating cash flows of $57,000 and average total assets of
$962,000. Calculate its cash flow on total assets ratio.
$57,000/$962,000 = 5.9%.
AACSB: Analytic
Difficulty: Easy
151. Polaroid reported net cash provided by operating activities of $131.4 million. Assets at
the beginning of the year totaled $2,197.7 million and totaled $2,040.0 million at the end of
the year. Calculate the cash flow on total assets ratio for Polaroid.
$131.4/[($2,197.7 + $2,040.0)/2] = 6.2%
AACSB: Analytic
Difficulty: Medium
16-83
152. Kodak reported assets of $13,362 million at January 1 and $13,369 million as of
December 31 of the current year. Kodak's net cash flows from operations were $2,204
million. Calculate the cash flow on total assets ratio for Kodak.
$2,204/[($13,362 + $13,369)/2] = 16.5%
AACSB: Analytic
Difficulty: Medium
153. A company reported operating cash flows in Year 1 of $23,400 and $26,220 in Year 2. Its
average total assets in Year 1 were $262,000 and $285,000 in Year 2. Calculate the cash flow
on total assets ratio for both years. Comment on the results.
AACSB: Analytic
Difficulty: Hard
154. A corporation reported average total assets in Year 1 of $397,350 and $440,800 in Year 2.
Its net operating cash flow for Year 1 was $35,667 and $35,790 for Year 2. Calculate the cash
flow on total assets ratio for both years. Comment on the results.
AACSB: Analytic
Difficulty: Hard
16-84
155. A company reported average total assets of $496,000 in Year 1 and $604,000 in Year 2.
Its net operating cash flow in Year 1 was $41,150 and $55,500 in Year 2. Calculate its cash
flow on total assets ratio for both years. Comment on the results.
AACSB: Analytic
Difficulty: Hard
Fill in the Blank Questions

156. A main purpose of the statement of cash flows is to report all the major cash ________
and cash _______________.
Receipts (or inflows); payments (or outflows).
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
157. Investments that are readily convertible to a known amount of cash and are sufficiently
close to their maturity so that the market value is unaffected by interest rate changes are
______________________________.
Cash equivalents
AACSB: Analytic
Difficulty: Medium
16-85
158. _____________ activities include the cash effects of transactions and events that
determine net income.
Operating
AACSB: Analytic
Difficulty: Easy
159. ___________________ activities generally include those transactions and events that
affect long-term assets.
Investing
AACSB: Analytic
Difficulty: Medium
160. ___________________ activities include those transactions that affect long-term

liabilities and equity.
Financing
AACSB: Analytic
Difficulty: Medium
161. Noncash financing and investing activities are disclosed in the ____________ or in a
separate ______________________________.
Notes; schedule included with the statement of cash flows.
AACSB: Analytic
Difficulty: Medium
16-86
162. The statement of cash flows is divided into three sections called the _____________,
_____________, and _______________ sections.
Operating, investing, financing
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Easy
163. Probably the most important section of the statement of cash flows in analyzing the
financial performance of a company's ongoing business is the ____________ section.
Operating activities
AACSB: Analytic
Difficulty: Hard
164. The cash flow on total assets ratio is computed by dividing _____________ by
____________.
Cash flows from operations; average total assets
AACSB: Analytic
Difficulty: Medium
165. Information to prepare the statement of cash flows usually comes from three sources: (1)
__________________________, (2) _______________________, and (3)
____________________.
Comparative balance sheets; current income statement; additional information
AACSB: Analytic
Difficulty: Medium
16-87
166. All cash transactions eventually affect noncash ___________ accounts.

Balance sheet
AACSB: Analytic
Difficulty: Hard
method, noncash expenses are _____________ net income.
Added to
AACSB: Analytic
Difficulty: Medium
168. The reporting of investing and financing activities is _________________ under the
direct and indirect methods of preparing the statement of cash flows.
Identical
AACSB: Analytic
Difficulty: Easy
169. The use of a spreadsheet for analysis is especially useful when preparing the statement of
cash flows using the _____________ method.
Indirect
AACSB: Technology
Difficulty: Medium
16-88
170. The FASB requires a reconciliation of net income to net cash provided or used by
operating activities when the ______________ method is used.
Direct
AACSB: Analytic
AICPA FN: Reporting
Difficulty: Hard
16-89

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Chapter 016 Reporting the Statement of Cash Flows

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

True / False Questions

2. The statement of cash flows reports the total change in cash.

3. To be classified as a cash equivalent an investment must be readily convertible to an

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

9. Cash paid for merchandise is an operating activity.

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

12. The payment of cash dividends to shareholders is classified as a financing activity.

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

19. Accounting standards require companies to include a statement of cash flows in a

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Multiple Choice Questions

Chapter 016 Reporting the Statement of Cash Flows

55. The statement of cash flows reports:

56. The statement of cash flows is:

Chapter 016 Reporting the Statement of Cash Flows

57. A cash equivalent is an investment that:

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

62. Investing activities include the:

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

68. Typical cash flows from investing activities include:

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

77. Noncash investing and financing activities may be disclosed in:

78. Accounting standards:

Chapter 016 Reporting the Statement of Cash Flows

79. The statement of cash flows helps analysts evaluate the:

80. The statement of cash flows helps address questions such as

81. The cash flow on total assets ratio:

Chapter 016 Reporting the Statement of Cash Flows

82. The cash flow on total assets ratio is calculated by:

Chapter 016 Reporting the Statement of Cash Flows

85. Preparation of the statement of cash flows involves:

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

90. The direct method of reporting operating cash flows:

91. Of the following, which one affects cash during a period?

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Chapter 016 Reporting the Statement of Cash Flows

Net cash provided by operating activities was:

Chapter 016 Reporting the Statement of Cash Flows