Question

A.

Baltic Company issued a long-term mortgage note to pay for the purchase of a building. This event must be disclosed to stockholders even though it did not involve the exchange of cash. This statement is

True

False

B.

A negative net cash flow (a net cash outflow) in the investing activities section of the statement of cash flows is an indication that a business is shrinking. This statement is

True

False

Answer 1

• Answer ‘A’

The statement is TRUE.

As per accounting standards, any material information must be communicated and disclosed to stockholders in the financial statement.

Purchase of Building through issue of Long Term mortgage note is a NON Cash activity. But the same is disclosed.

This is usually disclosed as “Non Cash flows from investing & Financing activities.”

• Answer ‘B’

The statement is FALSE.

A negative net cash flow in investing activities does not mean that Business is shrinking.

It means that more cash has been invested in assets, through purchase of Equipments, assets, investments, etc and cash received from sale of investments of assets are less than cash paid on purchase.

This by no means states that business is shrinking.

Growth in Investment means that the business if financially strong.